US embassy cable - 05BAGHDAD3092

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003092 
 
SIPDIS 
 
E.O. 12958: DECL: 07/26/2015 
TAGS: EFIN, PGOV, EAID, PREF, PHUM, ECIN, ECON, IZ, Petrolium, Energy Sector, ECON Development 
SUBJECT: NORTHERN OIL COMPANY MOVING FORWARD DESPITE 
PIPELINE ATTACKS 
 
Classified By: Political Counselor Robert Ford for Reasons 1.4 (B) and 
(D) 
 
1.  (C) SUMMARY: On 13 July, Charge d'Affaires David 
Satterfield and Emboffs met with North Oil Company (NOC) 
Director General (DG) Adil Al-Qazzaz to discuss pipeline 
security and plans for expanding oil production in Northern 
Iraq.  Pipeline attacks and dilapidated infrastructure 
continue to hamper northern oil production.  The NOC is 
aggressively reconfiguring its pipeline network to deliver as 
much oil as possible.  If security obstacles can be overcome, 
the NOC expects rapid oil production increases and as much as 
500,000 barrels per day that Iraq could export from northern 
Iraq by the beginning of next year.  DG Qazzaz also commented 
on problems hindering NOC such as difficulties in 
procurement, escalating wages, and weak middle and lower 
management, as well as NOC's need for foreign investment to 
reach its full potential. END SUMMARY 
 
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Oil Flows Hampered by Insurgents and Infrastructure 
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2.  (SBU) Responding to Charge's questions regarding attacks 
against the oil pipelines running from the Kirkuk oilfields 
to the Bayji refinery and the Iraq-Turkey (IT) export 
pipeline, NOC DG expressed dismay over the frequency of 
attacks and its effect on oil production.  He said that oil 
production on 13 July was 380,000 b/d, but the NOC could only 
move 220,000 b/d because only the smallest of the four 
existing pipelines is useable.  Moreover, that pipeline is 
badly corroded and can only operate at 300 pounds per square 
inch (PSI) of pressure vice its designed 1200 PSI rating.  He 
stated that recently the insurgents were using heavy 
artillery shells to penetrate into the earth to breach buried 
pipelines.  While his company can do little about insurgent 
attacks, the NOC has built redundancy into the pipeline 
network by rigging an elaborate series of loops and 
connections so oil can be quickly diverted from one pipeline 
to another as attacks occur. 
 
3. (C) One such workaround, scheduled to be completed in 
about three weeks, will allow the NOC to send crude oil to 
Baghdad using the existing Strategic Pipeline, which can 
transport oil from southern Iraq to northern Iraq and vice 
versa.  By doing so, Iraq can avoid using the oft-targeted 
lines running south from Bayji to Baghdad and near the towns 
of Tikrit and Samarra.  The NOC has modified one of two key 
pump stations on the Iraq side of the IT pipeline so that it 
can pump oil south through the Strategic Pipeline.  The oil 
will be transported via a 10-inch pipeline spur directly to 
Baghdad's Ad Dawrah Refinery.  The modifications would allow 
the pump station to move as much 250,000 b/d. 
 
4. (SBU) DG Qazzaz hoped that the pipeline security would 
improve soon because he foresees great oil potential in 
Northern Iraq.  He estimates current production capability at 
about 600,000 barrels per day, roughly equivalent to the 
current pipeline capacity, though actual production was much 
less due to pipeline sabotage.  He anticipates that if 
planned reconstruction projects were finished on time, NOC 
could produce 780,000 b/d by the first quarter of next year 
and export as much as 500,000 b/d after domestic demand was 
met.  Moreover, once Iraq's oil development policy is 
established, NOC could begin to develop four eastern fields, 
Kormor, Qamar, Palkaneh and another small field, with the 
help of foreign investors.  Once fully developed, he 
estimated that the NOC could produce in excess of one million 
b/d, although it will take several years to complete all the 
necessary work. 
 
5. (SBU) DG Qazzaz stated that NOC would need the help of 
foreign companies because it was so difficult to purchase 
equipment from outside of Iraq, and he had limited resources 
to dedicate to costly investment.  While he could authorize 
domestic expenditures up to 200 million Iraqi Dinar (ID) (USD 
134,000), he lacked the ability to execute even small 
international contracts.  Another problem cited by DG Qazzaz 
was the high cost of paying his employees.  He noted that 
while his annual operating budget had risen from a 2003 level 
of 10 billion ID (USD 6,700,000) to 50 billion ID (USD 
33,500,000), most of that increase was due to escalating wage 
costs.  This left little room for NOC to make new investments 
and the DG expected that foreign investment would be 
necessary for Iraq's northern fields to reach their full 
potential.  Finally, the NOC DG expressed some concerns over 
the lack of management depth in his organization, stating 
that there were 10 crucial people who ran the company -- if 
they left the NOC would grind to a halt. 
 
6. (C) COMMENT: NOC DG Qazzaz seems to be running the 
northern oil fields competently within its current 
limitations.  Securing oil pipelines is the first step to 
increasing oil production in northern Iraq, but additional 
investment will be needed to surpass 780,000 barrels per day. 
He recognizes the importance of modernizing and 
rehabilitating existing infrastructure, increasing system 
robustness, and developing new sources of oil and gas.  He 
anticipates a large role for foreign companies in this 
process, but needs the Iraqi Government to lead this effort. 
END COMMENT 
Khalilzad 
 
 
 
 
 
 
 
Khalilzad