RRT ERBIL: NEW REFINERY AND CRUDE PRODUCTION COMES

UNCLAS SECTION 01 OF 02 BAGHDAD 002021

SENSITIVE
SIPDIS

DOE FOR GEORGE PERSON; STATE ALSO FOR EEB AND NEA/I

E.O. 12958: N/A
TAGS: ECON EPET ENRG EINV PGOV IZ
SUBJECT: RRT ERBIL: NEW REFINERY AND CRUDE PRODUCTION COMES
ON LINE

This is an Erbil Regional Reconstruction Team (RRT) cable.


1. (U) Summary: At a July 18 ceremony, attended by KRG Prime
Minister Nechirvan Barzani and former Ambassador to Iraq and
the UN Zalmay Khalilzad, oil from the Khurmala Dome began
flowing into the Erbil refinery, the only privately-owned
refinery in Iraq. The refinery's initial capacity is 20,000
bbl/d, with plans to expand to 75,000 bbl/d by 2010. The
Kurdistan Regional Government (KRG) intervened and privatized
the project after construction had stalled for two years, and
it was completed soon thereafter. Under an agreement between
the KRG and the GOI, crude oil from the field will also flow
to the pipeline from Kirkuk to Ceyhan in Turkey. The
refinery project also entailed a significant purchase of
U.S.-origin equipment. End Summary.


2. (U) On July 18, after a ceremony attended by Kurdistan
Regional Government (KRG) Prime Minister Nechirvan Barzani
and the former US Ambassador to Iraq and the UN, Zalmay
Khalilzad, oil from the Khurmala Dome began to flow to the
brand new Erbil refinery. This is the first large refinery
in the Kurdistan Region, and the first privately-owned
refinery in Iraq.


3. (U) The refinery is operated by KAR Oil and Gas Ltd., a
member of the Erbil-based KAR Group, a conglomerate that does
engineering and construction projects all over Iraq (over
3,000 to date) in addition to its work in the hydrocarbon
sector. KAR group grew quickly after 2003, mostly through
its civil engineering contracting work for the U.S.
Government around Iraq. It also worked on the rehabilitation
of the Kirkuk-Ceyhan pipeline, and claims to have a large
proportion of its Iraqi staff outside the Kurdistan Region.


4. (U) The refinery is connected to the Khurmala Dome by a
40-kilometer, 20-inch buried pipeline. The refinery has a
current capacity of 20,000 bbl/d, and will produce diesel and
kerosene, as well as fuel oil for cement and brick factories.
A project to expand capacity is already underway, with
production expected to double to 40,000 bbl/d by the end of

2009. The additional expansion will consist of a
distillation unit and process units capable of producing
gasoline up to 95 octane. Further plans exist to expand
refinery production to 75,000 bbl/d in 2010.


5. (SBU) KAR took over the refinery project in late 2008,
when it was 60% complete. According to Brad Camp (protect),
an American and KAR executive who helped develop the project,
the refinery project had actually begun in 2005 as a
partnership between the Iraqi Ministry of Oil and the Iraqi
Ministry of Industry and Minerals, and was scheduled to be
completed in 18 months. However, after the project bogged
down due to budgetary and technical problems, the KRG
intervened and privatized the project by selling the refinery
to KAR, which completed the refinery using its own funds.
The investment for all components of the project (see below)
totaled $670 million.

Processing Facility and Crude Production
--------------


6. (SBU) KAR also took over the completion of the Khurmala
Dome central processing facility. The KRG awarded a $140
million contract to KAR to complete the facility. Camp said
that the reason for the delay in the refinery project was
that the GOI-owned Northern Oil Company (NOC) took no action
during the two-year period to complete the Khurmala Dome
central processing facility that feeds the refinery. This
was not because of a standoff in the field, but reportedly
Qwas not because of a standoff in the field, but reportedly
because of the NOC's ineffectiveness. The equipment that had
been purchased sat in storage for two years, and the
warrantees were beginning to expire.


7. (U) The Khurmala Dome is located in the northern part of
the Kirkuk Structure and lies inside the Erbil Governorate.
It is approximately 20 kilometers long and 8 kilometers wide.
KAR rehabilitated 40 older, capped wells, and built the
necessary infrastructure to connect these wells to the
central processing facility, which should be able to process
150,000 bbl/d. Any excess oil production beyond that which
is needed to feed the Erbil refinery will be exported through
the Strategic Pipeline (Kirkuk-Ceyhan) under an agreement
reached between KRG Prime Minister Nechirvan Barzani and GOI
Oil Minister Shahristani in November 2008.

Significant U.S. Sales
--------------


BAGHDAD 00002021 002 OF 002



8. (SBU) The refinery project reportedly entailed a large
purchase from U.S. company Ventech Engineering, totaling over
$125 million. There may be additional follow-on purchases as
the project progresses.


9. (SBU) Comment: The completion of the Erbil refinery comes
less than two months after oil began to flow from the
privately-developed Tawke and Taq Taq fields to international
markets. The KRG - including PM Barzani in his speech at the
event - points to these events as evidence that working in
partnership with the private sector is the key to developing
the hydrocarbon sector. There are several elements to this
project that would appear to be positive for U.S. objectives:
development of hydrocarbon production, agreement between
Baghdad and Erbil to do so, and promotion of U.S. exports.
Thus far, the central government Ministry of Oil (MoO) has
not commented on the fact that the refinery is obtaining its
oil supply from the Khurmala Dome, which has been an object
of contention. The MoO argues that the KRG did not have the
right to operate on the field, which is under the geographic
responsibility of the North Oil Company but lies in Erbil
Province. Khurmala Dome is also geologically a part of the
Kirkuk oil field, which straddles the KRG boundary. End
Comment.
FORD