US embassy cable - 05BAGHDAD3550

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003550 
 
SIPDIS 
 
E.O. 12958: DECL: 08/30/2015 
TAGS: EFIN, EPET, ENRG, ETRD, PGOV, TU, IZ, Petrolium, Energy Sector, ECON Development 
SUBJECT: FUEL SHORTAGE REACHES BAGHDAD, ITG TAKES ACTION 
 
REF: A. BAGHDAD 3453 
     B. ANKARA 4880 
     C. MOSUL 0103 
 
Classified By: ACTING DCM DAVID C. LITT FOR REASONS 1.4 (b) AND (d) 
 
1.  (C) Summary: A series of events culminating in the August 
24 suspension of fuel shipments from Turkey to Iraq, due to 
the State Oil Marketing Company (SOMO)'s unpaid debt to 
Turkish firms, has caused a serious fuel shortage in northern 
Iraq that is cascading into Baghdad and points south.  A 
drastic decline in domestic production in August is due 
largely to attacks on pipelines and a nationwide blackout on 
August 22 that led to a week-long break in fuel production at 
Iraq's three main refineries.  As of August 28, none of these 
facilities is working at more than 50% capacity.  Ministry of 
Finance officials were in Ankara August 28 negotiating a 
payment plan to address SOMO'S $845 million in arrears. 
Minister Allawi allocated $300 million to purchase fuel the 
same day.  The Ministry of Oil (MOO) has requested an 
additional $1.7 billion to cover operating and import costs 
through the end of the year, and it will reportedly receive 
some - but not all - of its request.  These 11th hour actions 
by the Iraqis appear to have been sufficient to allow Turkey 
to resume limited exports of fuel to Iraq August 29.  End 
Summary. 
 
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Fuel Shortage Unfolds 
--------------------- 
 
2.  (C) A series of events in August has brought Iraq to the 
brink of a serious fuel shortage, cascading from north to 
south.  A steady stream of attacks targeting oil pipelines 
has resulted in almost all processed oil products being moved 
only by truck for the last several weeks.  Iraq's three 
refineries, working at capacity, only produce approximately 
60% of Iraq's domestic fuel needs. 
 
3.  (C) This precarious situation was further exacerbated 
when successful insurgent attacks on the 400 KV electricity 
lines induced a major blackout in the north August 20 and a 
second nationwide blackout August 22, causing the entire 
generation system to trip and the country to go dark.  While 
the distribution lines were quickly repaired, the generation 
plants required a gradual return to service over some 12-24 
hours.  Power was restored to essential services within about 
six hours, and to consumers over the next 36 hours.  Oil 
refineries, forced to shut down completely when the 
electricity went down, have not yet returned to full 
production due to the need for gradual ramping up of 
operations so that systems are not overloaded.  As of August 
29, no refinery is operating at more than 50% of capacity. 
The power outage, combined with backups in distribution, has 
left domestic production of fuel at a virtual standstill. 
 
4.  (SBU) On August 24, Turkey halted fuel exports into Iraq, 
demanding that Iraq make good on arrears owed by the State 
Oil Marketing Organization (SOMO) - by some estimates as high 
as $1 billion -  before shipments would resume.  MOF 
confirmed that, as of August 29, SOMO's debt to Turkish 
companies was $845 million. 
 
5.  (SBU) MOO estimated August 28 that Ninewa province has no 
more than a two-day supply of benzene on hand; Baghdad has 
four.  The shortage hit the north first, because Bayji and 
Doura refineries send their refined products south; the north 
is supplied exclusively by imported fuel, mostly from Turkey. 
 The lack of production, limited ability to transport what 
little is produced, and the dearth of imports mean that the 
shortage will continue to spread southwards.  The MOO is 
addressing the first two issues, but requires time, money, 
and sufficient security resources to protect work crews and 
the pipelines themselves.  The short-term answer is fuel 
imports, which - even with domestic production at full 
capacity - are still required to meet approximately 40% of 
Iraq's demand for fuel. 
 
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Iraq Paying Up? 
--------------- 
 
6.  (C) Following a contentious August 28 meeting of the 
National Energy Council (NEC) reported septel, MoF Allawi 
allocated  $300 million for payments to Turkey for fuel. 
This money addresses only a fraction of the outstanding 
arrears, about which an MOF team was reportedly still 
negotiating in Turkey.  MOF officials told us August 28 that 
MOF was negotiating with the Turks in good faith.  Our MOF 
interlocutors said they believe that an agreement and payment 
plan for the arrears will be reached and fuel exports will 
resume to Iraq.  On August 29, 892,700 liters of benzene and 
664,030 liters of diesel entered Iraq through Habur Gate, 
after five days of zero imports of benzene and three days of 
zero diesel imports. 
 
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Future Plans 
------------ 
7.  (C) MOO has requested an additional $1.7 billion budget 
request to MOF to finance operations and imports through 
year's end.  MOF officials tell us that, while the full 
request is unlikely to be met, MOO will receive additional 
financing.  Allawi has maintained a tough line with MOO 
because SOMO persists in signing contracts for imports for 
which it cannot pay, in a process that bypasses the 
government altogether.  Rather than requesting additional 
monies to supplement the $200 million per month allocated for 
fuel imports in the 2005 budget, SOMO has apparently been 
acting independently, signing contracts at will to meet 
ever-rising demand in Iraq (Note: SOMO is spending 
approximately double that.  End Note).  With the precarious 
state of Iraq's domestic production and the vulnerable state 
of its critical infrastructure, MOF appears to be working 
hard to ensure a steady stream of imports as an essential 
element of Iraq's fuel security. 
Khalilzad