US embassy cable - 05BAGHDAD3939

C O N F I D E N T I A L SECTION 01 OF 02 BAGHDAD 003939 
 
SIPDIS 
 
E.O. 12958: DECL: 09/23/2015 
TAGS: ECON, ENRG, EPET, KCRM, MOPS, MARR, PGOV, PINR, PINS, PREL, IZ, Security, Petrolium, Energy Sector 
SUBJECT: OIL MINISTER QUIETLY TAKING STEPS ON FUEL PRICES, 
RAILS AGAINST OIL PIPELINE SECURITY 
 
REF: BAGHDAD 3876 
 
Classified By: Deputy Chief of Mission David M. Satterfield for reasons 
 1.4 (b) and (d). 
 
1. (C) Summary: Minister of Oil Ibrahim Bahr al-'Ulum told 
the Embassy September 21 that there is no ministerial support 
for fuel price reform prior to the December elections, but 
"quieter" efforts are underway to "condition" the Iraqi 
public to new prices.  These include sale of fuel for private 
generators at mobile fuel stations at double the normal price 
and barring commercial enterprises from purchasing kerosene 
and liquid propane gas at subsidized prices this winter. 
Despite repeated prodding, the Minister would not officially 
confirm observed gasoline price hikes in Baghdad and 
elsewhere.  Al-'Ulum also blamed the recent series of 
pipeline interdictions in the north on the Strategic 
Infrastructure Battalions (SIBs), which he alleged are 
perpetrating at least some of the attacks -- described as 
very intelligent efforts to isolate the capital from fuel 
supplies.  He pleaded for Iraqi Army and MNF-I protection of 
the 100 most vulnerable kilometers of pipeline.  End Summary. 
 
--------------------------------------------- ------------ 
Too Soon for Official Reforms, But Quiet Efforts Underway 
--------------------------------------------- ------------ 
 
2.  (C) In a September 21 discussion, Oil Minister Ibrahim 
Bahr al-'Ulum told Economic Minister Counselor, IRMO Senior 
Advisors and Econoff that he readily agreed that the GOI 
needed to reduce fuel subsidies. EcMinCouns stressed the need 
for the GOI to move as soon as possible on this issue, owing 
to the disinclination of the American public and Congress to 
provide substantial sums of aid when they were being hit with 
historically high gasoline pump prices.  Al-'Ulum replied 
that the GOI knows it must raise prices -- but when and how 
are at issue.  Evading repeated prompting, al-'Ulum would 
not/not confirm an official price rise from 20 ID/liter to 50 
ID/liter for regular octane fuel, despite reports that it 
went into effect in Baghdad September 17 (Comment: This price 
hike was reportedly introduced on the sole authority of the 
MO Director General for Distribution.  End Comment).  No one 
in the GOI, "not even me," he said, supports making price 
changes under the current government.  He claimed that "no 
one will vote for (him)," if he pushes the government on this. 
 
3.  (C) However, the Minister said he is introducing more 
realistic pricing on a number of fronts.  First, he noted 
that he had initiated fuel sales from "mobile stations" 
(container sales for generator use) at a cost of 100 
ID/liter.  Over fifty such stations are operating in Baghdad, 
five each in Hillah, Basrah, Kut, and Najaf, and the Minister 
said he is encouraging them elsewhere. In addition to 
"conditioning" Iraqis to paying more for fuel, these mobile 
stations address the overall shortage of points of sale, a 
factor contributing to long lines at the pumps.  He 
eventually hopes that mobile fuel stations will serve 8%-10% 
of the market. 
 
4.  (C) Al-'Ulum also was enthusiastic about winter 
distribution plans for kerosene and liquid propane gas (LPG) 
used for heating and cooking.  As in previous years, private 
citizens will be entitled, based upon family size, to a 
certain number of liters of kerosene and bottles of LPG at 
subsidized prices; but purchases beyond that ration will be 
higher priced.  In addition, commercial enterprises such as 
restaurants and shops will pay "five to seven times" the 
price set for household consumers.  Al-'Ulum said that people 
already have accepted a higher price for home delivery, and 
he expected the small commercial enterprises to acquiesce - 
more or less quietly - as well. 
 
--------------------------------------------- ----- 
Garnering Public Support for Market Liberalization 
--------------------------------------------- ----- 
 
5.  (C) Asked about a draft law to liberalize fuel retailing, 
al-'Ulum said that it is currently being examined by the 
Ministry of Justice (MoJ) and discussed in the press.  (Note: 
The object is to increase private sector participation, not 
free prices at this point.  End Note) He expects the TNA to 
adopt the law with little trouble in October.   With the goal 
of improving the odds of acceptance by the Iraqi public, 
al-'Ulum told us that he has carefully crafted several polls. 
 He claimed, for example, to have gotten Iraqis to request 
the return of the odd/even driving scheme to reduce fuel 
demand, on the basis of survey dissatisfaction with the 
status quo. The Minister added that he expects to introduce 
successfully limited market liberalization, with favorable 
polling information to bolster his case. 
 
--------------------------- 
Minister Demands Protection 
--------------------------- 
 
6.  (C) Despite increases in production over the summer, 
al-'Ulum maintained that Iraq has lost 250,000 barrels per 
day (BPD) in northern exports in the last three weeks owing 
to pipeline interdictions.  He claimed that since the 
Strategic Infrastructure Battalions (SIBs) were assigned to 
guard the pipeline, there have been a constant series of 
interdictions, often recurring within hours of a line being 
repaired.  The minister vehemently denied Iraqi Army and 
Ministry of Defense (MoD) assertions that the breaks are a 
result of "normal" circumstances or leaks. 
 
7.  (C) The National Energy Council (NEC) has been discussing 
the problem for the last 45 days, al-'Ulum said, but he 
predicted no positive results unless MNF-I and regular Iraqi 
Army (IA) units become engaged. Stressing that the area he 
has in mind for intensive attention is not vast (some "100 
kilometers"), al-'Ulum insisted that the problem is local. 
The SIBs are from the area, know all the repair crews' 
movements, and are likely the perpetrators in many case, he 
alleged. 
 
8.  (C) The Oil Minister said that there is a "clear plan" to 
isolate Baghdad.  Both the Daura and the Bayji refineries are 
shut down because pipeline interdictions have blocked crude 
oil supplies, although refined products are still moving by 
truck.  Al-'Ulum complained that there are "no clear 
punishments" for perpetrators, so people view carrying out 
interdictions as "good business."  Al-'Ulum said that the 
Kurdish Republic Government (KRG) recently had offered 
Peshmurga to assist in protecting both the pipelines from 
attack and the repair crews from the threats, kidnappings, 
and killings to which they are increasingly subject. 
 
 
---------------------------- 
Iraqis Need to Study Abroad! 
---------------------------- 
 
9.  (C) The Minister made a case for scholarships at 
undergraduate and graduate levels, as well as what he called 
"training positions" at U.S. petroleum firms.  Claiming that 
LukOil had provided Iraqis with 1,500 trainee positions over 
three years and 150 scholarships at the masters and doctoral 
level over the next two years, al-'Ulum urged the U.S. to 
follow suit.  He said that the current crop of deputy 
ministers and director generals had been able to study and 
train abroad in the 70's and 80's.  They are all approaching 
retirement age, however, and the "next generation" has had no 
such opportunities. 
 
------- 
Comment 
------- 
 
10.  (C) Neither the ITG nor Minister himself are ready to 
publicly take on fuel subsidy reform.  That said, al-'Ulum is 
taking - publicly acknowledged or not - a series of quiet 
steps to "condition" the Iraqi people to paying more for 
fuel.  He hopes this will pave the way for action by the next 
government in 2006.  Given the lack of public opposition to 
his initiatives to date, his strategy appears to be sound, 
but not as aggressive as we have advocated. 
 
11.  (C) Comment cont'd: On security, al-'Ulum was not 
inclined to accept the KRG offer of assistance from the 
Peshmurga, although he was adamant that there will be little 
improvement in pipeline security unless both the IA and MNF-I 
become even more actively engaged in protecting the most 
vulnerable "100 kilometers" of the pipeline.  We note that 
despite the Minister's strong views, the issue of 
responsibility for pipeline interdiction remains extremely 
contentious.  End comment. 
Khalilzad