US embassy cable - 05BAGHDAD2517

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002517 
 
SIPDIS 
 
E.O. 12958: DECL: 06/15/2015 
TAGS: EPET, ECON, EFIN, ENRG, IZ, MASS, MOPS, Energy Sector, Petrolium 
SUBJECT: IRAQIS EXPECT NORTHERN OIL PRODUCTION TO INCREASE 
BY END OF YEAR 
 
REF: BAGHDAD 2298 AND PREVIOUS 
 
Classified By:  ACTING ECONOMIC COUNSELOR JAMES BOUGHNER FOR REASONS 1. 
 
4 B AND D. 
 
1.  (C) SUMMARY: Production capacity in the Northern Oil 
Company (NOC) fields will increase from 450,000 bpd to 
768,000 bpd by Dec 31, 2005 when NOC well workovers are 
completed, according to the Director General (DG) of the 
Northern Oil Company.  The constriction on oil exports will 
be the capacity of Al Fathah Crossing and the timing of the 
completion of the 42-inch pipeline from Kirkuk to the 
northern export pipeline to Turkey.  The DG does not think 
there will be sufficient natural gas produced in the north to 
support the installed electric power generators in the North 
by late 2005.  Northern Gas Company will have excess 
processing capacity for gas unless NOC produces gas from more 
wells, and additional infrastructure is repaired.  DGs of 
both the Northern Gas and Oil Companies complain the 
Infrastructure Security Battalions have so far not only 
proved ineffective in protecting oil and gas infrastructure, 
but may themselves be responsible for some attacks. END 
SUMMARY 
 
2. (U) ECONOFF traveled recently to Kirkuk and Al Fatah with 
PCO, IRMO, and JCCI to meet with the Directors General of the 
Northern Oil (Adil Al-Qazzaz) and Gas (Jabbar Al-liaebi) 
Companies and observed the ongoing activities for repairing 
the pipeline crossing and security operations at Al Fathah. 
Kirkuk-area oil and gas infrastructure, repairs and 
renovations undertaken by the PCO and its contractors were 
observed in the field locations and then briefed in detail to 
ECONOFF. 
 
--------------------------------------------- -- 
EXPECTED OIL EXPORT CAPACITY FROM NORTHERN IRAQ 
--------------------------------------------- -- 
 
3.  (SBU) Production in the oil sector is expected to 
increase according to the DG of the Northern Oil Company 
(NOC) as the US contracted work is completed on the oil field 
infrastructure.  The DG explained how the oil and gas 
production would increase with the completion of the oil well 
workovers, the connection and renovations of the gas-oil 
separation plants, compressor stations, pump stations and 
pipeline replacements over the next six months.  NOC is 
drilling five new wells and two additional wells are 
undergoing workovers by the Iraqi Drilling Company.  He said 
the new production would rise to 768,000 barrels per day 
(bpd) by the end of 2005.  He estimated this would provide 
500,000 bpd for export via the Northern Export Pipeline 
through Turkey to the terminal at Ceyhan. The DG stated the 
NOC has exported up to 1.35 mbpd in the past when daily 
production was 1.5 mbpd.  He proudly said, "NOC has a very 
good record of production."  The DG of NOC was concerned with 
the speed of the construction at the Al Fathah crossing, 
speculating that his production increases might exceed the 
capacity of the pipelines to carry crude oil over the 
crossing.  He said until the 42-inch pipeline is completed 
and secured, exports to the north are subject to stoppages 
from attacks, limited capacity in terms of through-put volume 
of pipelines, and maintenance failures. 
 
--------------------------------- 
MAINTENANCE OF OIL INFRASTRUCTURE 
--------------------------------- 
 
4.  (SBU) Maintenance and availability of spare parts are the 
greatest concern of the DG of NOC.  He said, "we have no 
spares and we have no preventative maintenance program".  The 
DG of NOC explained that he had "no O&M plan for NOC", 
primarily because he did not have the parts or budget to 
implement a maintenance operations plan.  NOC did originally 
host the Oil Training Institute for Iraq, however, all of the 
equipment in the laboratories had been looted after the most 
recent war.  He told us he would like to have new laboratory 
equipment provided by reconstruction funding to reestablish 
the Training Institute, and he thought that would greatly 
help his maintenance and training needs.  He will also 
forward his annual budget request which will include annual 
funding for the training institute to MOO, as well as to IRMO 
who are working with USAID to assess the need and available 
resources. 
 
-------------------------------------------- 
GAS PRODUCTION WILL NOT EXPAND FOR 2-3 YEARS 
-------------------------------------------- 
 
5.  (SBU) The NOC DG explained that gas production would not 
expand immediately, but rather he expected additional gas 
production in 2-3 years, when NOC tapped a gas field east of 
Kirkuk.  The DG said NOC would not provide sufficient 
increases in natural gas this year for the Northern Gas 
Company to process with their second train of gas processing 
capacity.  The DG stated, "We cannot produce more than 300 
mmscf of associated gas, and we need to develop more oil 
fields" to produce sufficient associated gas to fully utilize 
the capacity of the plant. 
 
------------------------------- 
NATURAL GAS PROCESSING CAPACITY 
------------------------------- 
 
6.  (SBU) The DG of the Northern Gas Company (NGC) provided a 
briefing on the NGC production and ongoing renovations in the 
Kirkuk area.  Primarily he provided the information that when 
the second gas train (Natural gas processing facility) is 
repaired in Kirkuk, this will increase the capacity to over 
500 mmscf per day.  The PCO had planned this repair, but it 
would provide excess capacity for processing natural gas, 
beyond the 300 mmscf, which the DG for NOC said he could 
produce in the NOC oil fields. The DG for the NGC said he 
knew there was insufficient capacity of current gas 
production, and that there was a great need to tap additional 
oil and gas fields and repair the remainder of the gas-oil 
separation plants in the northern oil fields to provide 
sufficient natural gas to meet the demands of the electric 
power sector and the fertilizer plant. 
 
----------------------- 
INFRASTRUCTURE SECURITY 
----------------------- 
 
7.  (C) The DG of NOC was very concerned about pipeline 
security deficiencies, especially at the Al Fathah crossing 
over the Tigris.  He made multiple negative comments about 
the Oil Security Battalions and thought that these units were 
responsible for many of the attacks against the pipelines, 
valves, and other oil infrastructure targets.  He thought the 
$100 million spent on hiring tribal forces to protect the 
pipeline was a resort to blackmail and extortion from the 
tribes along the pipeline from Kirkuk to Al-Fathah.  "We need 
a reliable military guard force with 24 hour-guards, 200-300 
meters apart along the entire pipeline" if we want to keep 
exporting oil, stated the DG of NOC.  He said, "NOC can 
produce the oil, but cannot guarantee its export." 
 
------------------------------- 
AL-FATHAH SECURITY OBSERVATIONS 
------------------------------- 
 
8.  (C) The Al-Fathah oil pipeline-crossing site is currently 
guarded by newly recruited members of the infrastructure 
security forces.  There were five observable guard sites near 
the crossing; two tent sites on either bank of the Tigris 
with approximately five guards each, and one tent with five 
guards on the highway bridge next to the three pipelines, 
which are laid across the surface of the bridge.  These 
guards each have one AK-47 and two magazines of ammunition. 
There are no communications at or between the sites, nor is 
there any visible command and control presence.  There are no 
defensive structures, and the guards appear to have had no 
training and incomplete uniforms. Their families provide the 
guards meals.  There are additional forces guarding the 
checkpoints approaching the crossing on the two main roads. 
Concertina wire is laid near the pipelines on the east side 
of the river. 
 
------- 
COMMENT 
------- 
 
9. (C) COMMENT:  The Northern Oil Company Director General 
is very upbeat about increased oil production from the Kirkuk 
oil fields.  The estimates of the Director General of NOC are 
in line with the PCO projections. The security situation and 
the inability to export oil due to lack of finished and 
secured pipelines reduces income from the northern Iraqi oil 
fields.  If the production does reach 768,000 bpd by December 
2005, and 500,000 bpd is available for export, this Kirkuk 
crude, currently selling at $44.30 per barrel at Ceyhan FOB, 
would earn Iraq $1.886 billion per quarter, or  $7.545 
billion per year.  This amount of additional income for Iraq, 
if actualized, could buy a lot more than just oil 
infrastructure security.  END COMMENTS 
 
 
 
Jeffrey