US embassy cable - 05BAGHDAD3988

UNCLAS SECTION 01 OF 02 BAGHDAD 003988 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: ENRG, ECON, EPET, ETRD, PGOV, IZ, Petrolium, Energy Sector 
SUBJECT: DRAFT LAW LIBERALIZING FUEL IMPORTS AND 
DISTRIBUTION 
 
REF: BAGHDAD 03939 
 
1.  (SBU) Summary: Post has obtained a draft of a proposed 
GOI law to liberalize the import and distribution of refined 
fuel products (text in para 4).  If adopted and implemented, 
the draft law will END the State Oil Marketing Company's 
monopoly on fuel imports.  The law is ambiguous, however, as 
to whether the state will retain at least some price 
regulating authority.  End Summary. 
 
------------------------ 
Breaking SOMO's Monopoly 
------------------------ 
 
2.  (SBU) The Embassy informally has translated a draft law 
to liberalize the import and distribution of fuel in Iraq. 
If adopted and implemented, this law will break up the State 
Oil Marketing Organization (SOMO)'s current monopoly on the 
import of some fuel products.  Specifically the law will: 
     - Allow private companies to import and sell premium 
grade fuel (92 octane or higher), low-sulphur diesel, and 
lubricants; 
     - Exempt these companies from paying taxes on the 
imported products for two years; 
     - Allow private companies to distribute their product 
via gas stations, which they may either lease or build. 
 
The Ministry of Justice is currently examining the draft 
law.  Minister of Oil Ibrahim Bahr al-`Ulum told us 
September 17 (reftel) that he expects it to be presented to 
the TNA in October.  (Comment: The chapeau of this law 
suggests that it would be issued as a decision with the 
force of law by the Ministries Council, but Post's 
understanding is that this authority expired with the stand- 
up of the ITG.  Post will clarify with the Ministry the 
process by which it intends this draft to become law.  End 
comment.) 
 
--------------------------- 
Some Price Controls Remain? 
--------------------------- 
 
3.  (SBU) Whether or how far the law will liberalize the 
price at which these new firms may sell the products they 
import, however, is not clear.  Article 4 provides that 
importing companies have the right "to determine the sale 
prices for the refined petroleum products, without regard 
for prices issued by the Ministry of Oil."  In a cover memo 
to the Council of Ministers, however, Minister of Oil 
Ibrahim Bahr al-`Ulum states that, although one of the law's 
goals is to increase involvement of the private sector, the 
Ministry of Oil intends to "gradually amend the price of 
fuel products and reduce subsidies."  Moreover, Article 8 of 
the draft law reserves the right of the GOI Economic 
Committee (whose members include the ministries of Trade, 
Finance, Oil, and the Central Bank of Iraq [CBI]) to 
"determine the prices of the refined petroleum products 
mentioned in a manner that will rationalize the cost 
elements of production, refining, and importation, as well 
as improving the level of services provided to the 
citizens."  This article does not differentiate between 
imported and domestically produced products, thereby causing 
tension, if not a direct conflict, with Article 4's grant of 
authority to companies to set their own sales prices. 
 
4.  (SBU) Comment: Earlier discussions with the GOI and MO 
in particular had indicated that the price of imported fuel 
would be unregulated, with the GOI only gradually 
relinquishing control over the price of domestically 
produced products.  While this may still be the GOI intent, 
Article 8 does not specify.  Oil Minister al-`Ulum's 
confidence that this order will be adopted "easily" in 
October may be based upon in part upon this ambiguity. 
Embassy will clarify this critical point as soon as 
possible.  End Comment. 
 
5.  (SBU) BEGIN TEXT OF EMBASSY INFORMAL TRANSLATION: 
 
Order Number: 
Date: 
 
Based on the rules of Article 2 (B-1) from the Iraqi State 
Law for the transitional period (TAL), and the second 
section of its addition, and based on the authorization of 
the President's Assembly, the Council of Ministers decided 
the following: 
 
Number (   ) 
Exemptions from the rules of benefits of Petroleum Law 
Number (49) for the year 1970, and its amendments. 
Article 1: Private sector companies have the right to 
import, store and sell for domestic consumption, directly or 
through authorized agents, the refined products mentioned 
below: 
      - Automobile gasoline with 92 octane or higher; 
      - GasOil under the condition that its sulphur content 
does not exceed 1 percent; 
      - Motor oil and all types of lubricating agents. 
 
Article 2: Refined Petroleum Products are exempt for two 
years from the date the issue of this order from taxes, 
import fees, max-fees (sic) and the tax for the 
Reconstruction of Iraq.  Review of this exemption shall 
continue in light of market developments. 
 
Article 3: In addition to the right to import fuel, 
companies also have the right to build (as governed by 
existing laws and Ministry of Oil regulations) or lease gas 
stations for the sale of imported or domestically produced 
fuel.  Companies may construct storage facilities only if 
they are not involved in the sale of fuel products. 
 
Article 4: The importing companies have the right to 
determine the sale prices for the refined petroleum 
products, without regard for prices issued by the Ministry 
of Oil. 
 
Article 5: The owners of the gas stations that currently 
have contracts with the Ministry of Oil or SOMO are allowed 
to terminate their existing operating and preparation 
contracts and enter into new contracts with importing 
companies. 
 
Article 6: The Ministry and the Central Apparatus of Control 
and Measurements, in addition to other ministries as 
necessary, have the responsibility to monitor companies' 
compliance with relevant safety and environmental 
regulations. 
 
Article 7: Companies or their authorized agents found guilty 
of selling domestically produced refined petroleum products 
shall be fined 10 million Iraqi dinar.  Should the activity 
continue, the fine will increase to 50 million Iraqi dinar 
and the company's operations may be suspended. 
 
Article 8: The Economic Committee, based on a suggestion 
from the Ministry of Oil, is authorized to determine the 
prices of the refined petroleum products mentioned below in 
a manner that will rationalize the cost elements of 
production, refining, and importation, as well as improving 
the level of services provided to the citizens. 
      - Benzene (both regular and premium) 
      - GasOil (diesel) 
      - White gas (kerosene) 
      - Liquid propane gas (LPG) 
 
Article 9:  Ministry of Oil is to issue orders to execute 
the rules of this decision. 
 
With respect to the increase in demand on refined petroleum 
products, and the limitations of production capacities of 
the refineries currently, which require securing additional 
amounts to facilitate the ability for the citizens to 
acquire these refined products, and improvement of services, 
and opening the way to the private sector to support this 
activity...Issuing of this order has been decided. 
END TEXT OF EMBASSY INFORMAL TRANSLATION. 
 
Satterfield