US embassy cable - 05BAGHDAD2990

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 002990 
 
SIPDIS 
 
E.O. 12958: DECL: 07/19/2025 
TAGS: PGOV, PREL, EPET, ECON, KCOR, IZ, OVIP (ZOELLICK ROBERT), KCRS, Security, ECON Development 
SUBJECT: DEPUTY SECRETARY DISCUSSES INFRASTRUCTURE SECURITY 
AND ECONOMIC/FINANCIAL ISSUES WITH DPM CHALABI 
 
Classified By: Charge d' Affaires David M. Satterfield for reasons 1.4 
(b) and (d) 
 
1.  (C) SUMMARY.  Iraqi Deputy Prime Minister Ahmed Chalabi 
told the Deputy Secretary on July 12 that Iraq has exported 
for the first time in recent months oil from the Northern 
pipeline to Turkey. He expects a sustainable increase to 
240,000 b/d in the northern oil fields.  An electric power 
crisis appears increasingly unlikely this summer, with power 
generation above 5,000 MW and nearing 6,000 MW by August. 
Chalabi admitted, though, that these gains in the oil and 
electric power sectors remain overshadowed by the insanity of 
Iraq's current pricing and subsidy policies.  He acknowledged 
that corruption in the Iraqi government's financial and 
contracting practices was a major problem.  END SUMMARY. 
 
2.  (SBU) Deputy Secretary Zoellick met on July 12 with 
Deputy Prime Minister Ahmed Chalabi.  A separate cable 
reports Chalabi's comments on political issues. 
 
3.(SBU)  Participants: 
For the U.S. Government: 
Deputy Secretary Zoellick 
D Executive Assistant Ambassador Ross Wilson, 
S/I Deputy Director Robert Deutsch 
Adam Ereli, PA 
NSC Senior Director Meghan O'Sullivan 
Charge d'Affaires David Satterfield 
Economic Minister-Counselor Anne Derse 
Econoff (notetaker) 
 
For Iraq: 
Deputy Prime Minister Ahmed Chalabi 
 
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Good News, Bad News Stories on Energy 
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4.  (C) Chalabi announced that Iraq had exported 4 million 
barrels of crude--3 million from the south plus 1 million 
from the north--on July 10, and that for two weeks there had 
been no significant attacks on Iraq's oil infrastructure.  He 
said this was in large part because he had persuaded General 
Casey that exporting oil from the northern pipeline was a 
"major security issue," as important as re-taking Fallujah. 
The Deputy Prime Minister said he expected a sustained 
increase in production and exports from the northern fields 
of about 240,000 b/d, and noted that maintaining this level 
for four days would repay in full the $35 million set aside 
for three months of security enhancements along the northern 
oil pipeline.  Chalabi attributed the increased output to the 
effective performance of the 4th Division of the Iraqi 
National Army, working with the 42nd US division and air 
surveillance, which has been deployed to protect oil 
facilities.  Looking ahead to the longer run, he expressed 
the hope that repairs to the 14-inch Bayji-West and other 
pipelines will make it possible to boost northern output to 
500,000 b/d. 
 
5.  (C) Turning to oil production in the southern fields, 
Chalabi noted that the issue there was theft, not sabotage. 
The ITG had discovered seven taps into the export lines in 
the South.  The National Energy Council would address this, 
he said. 
 
6.  (C) On electricity, the DPM said he believed Iraq can 
avoid a crisis this summer.  Electric power production is 
nearing the record level of 5,200 MW reached in mid-2002, and 
load-sharing is bearable for most Iraqis, with a pattern of 
three hours on/three hours off.  Noting that Iraq has an 
installed capacity for producing 8,100 MW of electric power, 
Chalabi expressed the hope that output will exceed 6,000 MW 
by August. 
 
7.  (C) Chalabi admitted, though, that these gains in the oil 
and electric power sectors remain overshadowed by the 
insanity of Iraq's current pricing and subsidy policies. 
Refined fuel products are sold for $.015 a liter, and diesel 
is imported at the price of $.50 a liter to generate 
electricity that is effectively given away for free.  The DPM 
estimated that removing electricity subsidies could save $1 
billion over the rest of this year. 
 
8.  (C) Looking ahead, Chalabi said the best short-term fix 
for electric power in Iraq would be imports from neighboring 
states.  They can sell power for $.06/kwh, which is about 
half the cost of power generation in Iraq.  Over the 
longer-term, the solution will involve harnessing domestic 
hydro-power resources, such as at the site of the proposed 
Bekhmaa dam, as well as generating thermal power from the 
natural gas that currently is flared. 
 
------------------------- 
Corruption in Contracting 
------------------------- 
9.  (C) In response to the Deputy Secretary's query about how 
the government is functioning, Chalabi noted that financing 
and contracting--and by implication corruption--represented a 
key issue.  He said that contracting practices under the CPA 
and the IIG were terrible because no one followed the law or 
regulations.  Valuable contracts were paid in advance with no 
performance guarantees or bonds.  Goods were signed for as 
delivered when they were not; when they were delivered, they 
were not accounted for.  Chalabi said the ITG's Contracting 
Committee (which he chairs) has made a decision to cut Iraqi 
middlemen out of the food distribution system and deal only 
with major international companies for food procurement, 
especially those from the US, and Australia.  Iraq has just 
purchased 300 million tons of wheat from the US. 
 
10.  (C) Electricity Ministry contracts were not properly 
managed, he said, in a veiled reference to allegations of 
corruption against the former Electricity Minister.  The 
Ministry of Defense was the "worst offender" with $ 100 
million in contracts unaccounted for. The Contracting 
Committee had therefore decided that no ministries other than 
the Ministry of Finance may hold bank accounts; ITG 
obligations over 300 million Iraqi dinars must be paid by 
L/C, certified check, or bank transfer.  Although Iraq 
welcomes foreign banks, they have been slow to come.  Chalabi 
discounted foreign banks' presence as an engine for 
restructuring the moribund Iraqi banking sector, another 
major disaster. 
 
11. (U) REO HILLAH, REO BASRAH, REO MOSUL, REO KIRKUK 
minimize considered. 
Satterfield