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UNCLAS SECTION 01 OF 06 BAGHDAD 003562 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR NEA/I, EB/EX WAYNE, D STAFF 
 
E.O. 12958: N/A 
TAGS: ETRD ECON ENRG EPET SOCI IZ ECON
SUBJECT:  JCRED REVIEWS IRAQ ENERGY ISSUES 
 
This cable is sensitive but unclassified.  For government 
use only.  Not for internet distribution. 
 
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Summary 
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¶1.  (SBU)  U.S. and Iraqi delegations discussed Iraq 
energy issues in Amman during an energy bilateral on July 
10, and during the Joint Commission on Reconstruction and 
Economic Development (JCRED) on July 11.  The Ministry of 
Oil plans to expand oil production to 2.5 million 
barrels/day by year end, reestablish the Iraq National 
Oil Company, and improve the transparency of oil 
revenues.  The Minister of Electricity stressed the need 
to re-build base-load capacity through the use of thermal 
power plants instead of additional gas turbines; 
highlighted several projects that are critical to 
increasing electricity production; and reported on 
efforts to reduce electricity demand growth through a 
public relations campaign.  The Minister of Water 
Resources discussed efforts to increase hydropower during 
the peak summer season - including through agreements 
with Turkey and Syria to increase water flows on the 
Euphrates River - and highlighted the potential for 
additional hydropower projects. 
 
¶2.  (SBU)  In addition to security concerns, a lack of 
capital investment is a major impediment to achieving 
these goals.  The Minister of Finance acknowledged that 
he has been forced to cut the Ministry of Oil's capital 
budget to finance Iraq's projected budget deficit, and is 
looking for other ways to address the country's financing 
gap.  Deputy Secretary of State Robert Zoellick urged the 
Iraqi delegation to address subsidies on refined products 
and electricity, and to identify areas appropriate for 
donor and private sector financing.  DOE DAS John Brodman 
also emphasized the need for tariff reform to rationalize 
decision-making in the energy sector. 
 
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OIL AND NATURAL GAS 
------------------- 
 
¶3.  (SBU)  Deputy Secretary Zoellick and Iraq's Finance 
Minister, Ali Allawi, co-chaired meetings of the U.S.- 
Iraq Joint Commission on Reconstruction and Economic 
Development (JCRED) July 11, in Amman.  In addition to a 
plenary session focusing on the energy sector, DOE DAS 
John Brodman led a USG team in energy discussions on July 
10, and hosted several meetings with individual ministers 
on the margins of the JCRED.  In addition to 
representatives from State, DOE, and Embassy Baghdad, 
other participating agencies included USTDA, Ex-Im Bank 
and Treasury.  The Iraqi side was represented by Minister 
of Oil Ibrahim Bahr Al-Uloum, Minister of Electricity 
Mohsen Shlash, and Minister of Water Resources Latif 
Rahid.  The following summarizes discussions at the JCRED 
plenary, with additional details gathered from the 
various other meetings. 
 
¶4.  (SBU)  Oil Minister Bahr Al-Uloum said that Iraq is 
currently producing 2.1 million barrels per day (MBD), a 
figure that is expected to rise to 2.5 MBD by year's end. 
The target production rate for the end of 2006 is 3.0 MBD 
and the Minister said that production could be restored 
to 3.5 MBD within several years with an additional 
investment of USD 4-5 billion.  In the refining sector, 
Iraq has a current capacity of 500-550,000 barrels per 
day (B/D) in its large refineries and an additional 
capacity of 150,000 B/D in several smaller ones. 
Refinery utilization rate is only 70 percent, however, 
and the short-term goal will be to increase utilization. 
Over the longer term, Iraq needs to add conversion 
capacity to existing refineries to enable them to produce 
more gasoline and diesel, a project which the Minister 
estimates will cost USD 1 billion.  Ultimately, Iraq 
needs to build a new refinery at an estimated cost of USD 
3 billion. 
 
¶5.  (SBU)  A significant portion of the discussions 
focused on natural gas and its use in generating more 
electricity.  Dr. Radwan Al-Saadi, Director General for 
Economics and Finance for the Ministry of Oil, said that 
Iraq was currently producing an estimated 1200 million 
cubic feet of gas per day (MMCFPD), but that only 40 
percent of this was being utilized (i.e., 60 percent, or 
720 MMCFPD, is being flared).  The near term objective is 
the full utilization of existing production, and Al-Saadi 
estimated that Iraq's gas production would rise to 1600- 
2000 MMCFPD by 2007-2008.  Over the longer term, Iraq 
could go beyond the production of "associated gas" - 
produced with its oil - to exploit some of its 
discovered, but undeveloped, natural gas fields.  In 
addition to satisfying its own internal needs, the 
country intends to renew gas exports to Kuwait, which 
reached 200 MMCFPD before the Gulf War.  The Ministry has 
also studied the feasibility of pipeline exports to 
Turkey, according to Al-Saadi.  Eventually, it is likely 
Iraq will contribute some gas from its northern fields 
into a proposed Arab gas grid linking Egypt and Syria. 
 
¶6.  (SBU)  Bahr Al-Uloum detailed concerns and plans 
regarding fuel subsidies.  He noted that the consumption 
of fuel in Iraq has risen from 21 million liters/day 
(132,000 B/D) in April to 23.5 million liters/day 
(148,000 B/D) currently.  The rise, which he attributed 
in part to increased use of fuel to power privately-owned 
generators, could drive the total cost of importing 
refined products to USD 3 billion this year, he noted. 
To address this issue, the Ministry has drafted a decree 
for cabinet approval to allow the private sector 
importation and sale of refined products.  Bahr Al-Uloum 
said that the Ministry hopes to turn over importation of 
product entirely to the private sector within the next 
six to twelve months.  The Minister also noted that a 
series of gradual steps to raise the price of 
domestically-refined product (which he referred to as the 
"Iran model") would be useful.  The Ministry has held a 
series of conferences to prepare the public for these 
steps.  The Minister acknowledged that price rises would 
be an unpopular move, but promised that the Ministry was 
moving forward. 
 
¶7.  (SBU)  Bahr Al-Uloum stressed the importance of 
security to maintaining and increasing oil production. 
He stated that there had been 75 attacks on pipelines in 
Iraq over the previous five months, costing an estimated 
USD 1.5 billion in lost revenues.  The Kirkuk Field, in 
northern Iraq, is capable of producing 250,000, but has 
been shut in due to lack of a secure pipeline outlet to 
Ceyhan, Turkey.  Bahr Al-Uloum noted, however, that 
recent efforts to improve security may be bearing fruit. 
Over the last seven weeks, the National Energy Committee 
has been working with the Ministry of Defense and with 
MNF-I to upgrade security forces, and from June 24 to 
July 4, there had been no attacks on northern pipelines. 
"We depend heavily on this operation," he told the JCRED, 
pointing out that exports through Ceyhan could generate 
an additional USD 12 million/day, exceeding the total 
cost of product imports. 
 
¶8.  (SBU)  Noting that Iraq was the only major oil 
producing country without its own oil company, Bahr Al- 
Uloum stated that a principal objective will be the re- 
establishment of the Iraq National Oil Company (INOC), by 
year's end.  In response to questions from DAS Brodman, 
Al-Uloum clarified that the INOC would be in charge of 
implementation of oil field development in Iraq, while 
the Ministry of Oil would be restricted to strategic 
planning for the sector.  He added that INOC would focus 
on production activities in existing fields, but could 
and should compete with international oil companies in 
development of new fields. 
 
¶9.  (SBU) The Minister told the plenary session that 
Iraq's petroleum law has not yet been finalized, though a 
number of suggested provisions had been reviewed.  He 
said that the petroleum law would govern how Iraq dealt 
with foreign company investment in its oil sector, and 
emphasized that foreign investment would be essential to 
expanding the sector.  Bahr Al-Uloum noted that no less 
than USD 25-30 billion would be needed to raise Iraq's 
oil production to 5 MBD, and that private sector 
investment would be needed to reach this goal.  According 
to the Minister, the goal of the petroleum law will be to 
prepare the investment climate. 
 
¶10.  (SBU)  Bahr Al-Uloum told the JCRED that the 
Ministry is reviewing the status of five to six contracts 
for oil fields that were signed by the previous regime. 
The contracts that were ratified by the Cabinet have a 
legal status, he noted, but in recognition of the 
political context under which they were signed, would be 
reviewed to determine their legality and competitiveness. 
If the contracts are found not to be competitive (Note: 
We assume "competitiveness" to be according to current 
industry standards.  End Note.), they should be revised 
to maximize the benefit for the Iraqi people.  Bahr Al- 
Uloum further noted that the Ministry of Oil had 
expressed its opinion regarding contracts signed by 
Kurdish authorities: that under the TAL, management of 
natural resources falls under the jurisdiction of the 
central government, and the Ministry of Oil is the 
competent authority to address oil contracts. 
 
¶11.  (SBU)  Bahr Al-Uloum reviewed for the JCRED his 
ministry's efforts to improve transparency of oil 
revenues, and Radwan Al-Saadi provided greater details 
during energy bilaterals.  The Ministry has decided to 
sell primarily to major refiners, rather than oil trading 
companies, due to their greater reliability for lifting 
petroleum shipments.  The Ministry is working to install 
metering equipment at loading ports, and is looking to 
hire a third-party to audit sales volumes.  In the energy 
bilaterals, Radwan Al-Saadi detailed the Ministry's 
efforts to find the highest net-back prices, and 
solicited DOE's assistance in evaluating market options 
for Iraqi crude.  Bahr Al-Uloum noted that, with the 
exception of 14,000 B/D of production that is being 
swapped with Syria for electricity, all oil revenues go 
through the Development Fund for Iraq (DFI), held by the 
New York Federal Reserve Bank. 
 
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ELECTRICITY 
----------- 
 
¶12.  (SBU) Iraq's Minister of Electricity, Mohsen Shlash, 
noted that wars, sanctions and limited investment have 
degraded Iraq's generating capacity over the last 25 
years, from a peak generating capacity of 12,000 
megawatts (MW) in 1980.  Iraq's current peak-load 
capacity is 5132 MW, significantly short of the country's 
estimated peak-load demand of 8250 MW.  Moreover, this 
understates what should be the real demand, he said, 
since many of the country's factories are closed.  Based 
on the experience of other countries, Shlash estimates 
that peak-load demand could rise to 15-20,000 MW by 2010. 
 
¶13.  (SBU) The Ministry has taken a number of steps to 
try to address the shortfall over the short-term.  Shlash 
said that Iraq is extracting 500 MW more than normal (a 
total of 1200 MW) from existing hydropower sites, in part 
because Turkey had agreed to release more water into the 
Euphrates River.  (According to Iraq's Minister of Water 
Resources, Latif Rashid, this measure also required the 
cooperation of Syria to pass along these greater volumes 
of water.)  The Ministry of Electricity has also 
increased its imports of diesel fuel to 7 million 
liters/day (44,000 B/D) to get more electricity generated 
out of gas turbines during the summer peak.  Other short- 
term measures include using 15 MMCPPD of natural gas that 
normally goes to a fertilizer plant in Baiji and 
connecting several gas turbines used for operations in 
the Rumaila oilfield to the national grid.  The Minister 
hoped that these measures would provide 6000 MW next 
month, enough to provide electricity on a 3 hours-on/3 
hours-off schedule for the entire country. 
 
¶14.  (SBU)  Over the next year, the Ministry hopes to get 
more electricity from its neighbors.  Iraq is interested 
in discussing possible interconnections with Kuwait, 
since the Kuwaiti high-voltage grid is only 100 
kilometers from Iraq's.  Shlash is not interested, 
however, in a proposal from a consortium of Kuwaiti 
businessmen because the price is extremely high.  Iraq 
also hopes to increase imports from Iran from 95 MW to 
145 MW within the next several weeks.  Shlash noted that 
there should be enough differences in peak power demand 
among the region's countries to allow Iraq to acquire 
some surplus power generated by neighboring countries. 
He expressed hope that he could negotiate country-to- 
country agreements to get surplus power for free or at 
low prices, or perhaps in exchange for Iraqi promises to 
reciprocate in future years. 
 
¶15.  (SBU)  Another priority for the Ministry of 
Electricity is the greater use of natural gas for power 
generation.  Shlash pointed out three natural gas 
projects that are a priority for his Ministry: 
-- Repair of the strategic gas pipeline between Southern 
Iraq and Baghdad; 
-- Repair of gas compressor station number 2 at Kirkuk, 
which could provide an additional 120-130 MMCFPD of gas 
for power generation; and 
-- Installation of a gas-oil separation unit in the East 
Baghdad Field to provide fuel for power generation in a 
strategic location in the country. 
 
¶16.  (SBU)  Over the longer term, Shlash indicated that 
his priority would be to restore baseload generation 
capacity through the use of thermal (steam) power plants. 
He told his interlocutors he does not want to see any 
more gas turbines.  While gas turbines can be more 
efficient under ideal conditions, thermal plants are 
simpler to operate and maintain and can use practically 
any fuel (natural gas, residual fuel oil, or crude oil) 
without problems.  The Ministry has identified four 
specific sites for power plants in the 1200-1400 MW 
range.  He said that one project, the Al-Shimal plant, 
could produce 1400 MW with an investment of USD 850 
million, with first production within 2 years.  He is 
also talking to one potential donor about rehabilitation 
and expansion of another project, the Al-Musaib plant, 
which could provide an additional 1200 MW. 
 
¶17.  (SBU)  In addition to new supplies, Shlash believes 
that a demand management strategy for electricity is 
critical.   He noted that Iraqis are buying 
refrigerators, microwaves and air conditioners at a rapid 
pace, and he has appeared on Iraqi television on several 
occasions to urge Iraqis not to waste electricity. 
Ultimately, however, the solution has to include the end 
of heavily-subsidized electricity tariffs.  Shlash 
indicated that the Ministry is considering a plan to 
provide a small amount of electricity (perhaps 400-500 
kWh/month) to each household at current low prices, but 
to charge significantly higher prices ("almost market 
rates") for all power used beyond this level.  The 
objective would be to protect poorer Iraqi households 
while charging higher prices for incremental volumes. 
 
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Hydropower 
---------- 
 
¶18.  (SBU) Iraq's Minister of Water Resources, Latif 
Rashid, stressed the potential for additional hydropower 
developments in Iraq.  Iraq currently has a maximum 
installed hydropower capacity of 2500 MW, located at 
eight dams, with 1200 MW now available (Note: We assume 
this is due to seasonal factors.  End note.)  He said 
that there are ten additional sites where large-scale 
hydropower projects could be constructed in Iraq.  The 
most promising of these is the Bekma dam site, which the 
Minister said could add 1800 MW of generating capacity 
for an estimated investment of USD 1.5 billion.  All 
together, the ten sites could add 4000-5000 MW of power, 
with an estimated investment of USD 6.0 billion.  Rashid 
asserted that hydropower was one of the cheapest, 
cleanest alternatives for Iraq, but noted that 
electricity was simply "too cheap" to fund future 
developments.  "No one pays," he lamented. 
 
--------------------------- 
Financing the Energy Sector 
--------------------------- 
 
¶19.  (SBU)  All three Ministers highlighted the problems 
associated with a lack of funds.  Minister of Oil Bahr 
Al-Uloum said that, out of the USD 3.0 billion budgeted 
for capital projects for the Ministry, only USD 200 
million had been disbursed so far in the year.  Minister 
of Electricity Shlash noted that most of his budget was 
absorbed by the costs of importing fuel for power plants. 
Minister of Water Resources Rashid noted that much of the 
USG's budget had been absorbed by extra security 
expenditures, but that of the USD 4.7 billion that was to 
be spent by 2006, only USD 300 million had been disbursed 
so far.  Rashid added that, of the USD 37 billion 
promised by other donor countries, only USD 4 billion had 
been disbursed. 
 
¶20.  (SBU)  In his opening remarks at the JCRED plenary, 
Minister of Finance Ali Allawi confirmed that he had been 
forced to cut the capital budget for oil projects to 
cover the financing gap in Iraq's budget.  He noted that 
Iraq's limited domestic banking sector could not finance 
the deficit and said that he was looking for other 
alternatives, including the possibility of issuing USD 5 
billion in government bonds.  For energy projects, Allawi 
said that the government needed to create an 
institutional framework for private sector investment.  A 
number of investors, for example, had proposed private 
power stations for Iraq, and the Minister believes that 
there is potential to use private sector financing 
similar to programs done in Pakistan and Malaysia. 
--------------------------------------- 
USG Pushes Subsidy Reform, Transparency 
--------------------------------------- 
 
¶21.  (SBU)  Deputy Secretary Zoellick praised the Iraqi 
participants for their efforts to work together through 
the National Energy Committee (NEC) to meet summer 
electricity demands.  Over the longer term, however, more 
must be done on the demand side.  He noted that it is 
difficult to justify putting billions of dollars into 
Iraq's energy sector to support heavily subsidized 
prices.  Zoellick acknowledged the political difficulties 
inherent in subsidy reform, but stressed the need for the 
Iraqi side to move forward on a plan.  Zoellick told the 
Iraqis that the energy sector should be a rich area for 
private sector investment and that there needs to be 
greater clarity regarding the roles of donors versus 
private sector capital.  Finally, Zoellick emphasized the 
importance of transparency to combat the huge 
opportunities for corruption in the energy sector. 
 
¶22.  (SBU)  DOE DAS John Brodman also congratulated the 
Iraqi Ministries on their collaboration, and reiterated 
USG concerns over energy subsidies.  High energy prices 
create a "catch-22" situation for Iraq, he said, with 
higher oil revenues being offset by higher costs for 
imported fuels.  The lack of real prices creates 
distortions and inefficient behavior throughout the 
energy sector, Brodman noted.  He accepted that tariff 
reform would never be easy from a political standpoint, 
but urged the ITG to set the stage for eventual 
implementation of reforms.  He stated that one key 
element of any strategy will be a public relations 
campaign to explain the need for reform to the Iraqi 
people. 
 
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Comment 
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¶23.  (SBU)  There was a lot of good news at the JCRED 
energy discussions.  The three energy sector ministers 
all appear to have a good grasp of the challenges facing 
them, and they offered pragmatic solutions for most of 
them.  More importantly, there now seems to be much 
closer coordination among the ministries to address 
Iraq's electricity crisis.  There also seemed to be a 
clear understanding, across the board, of the need for 
greater security along the northern pipelines.  Finally, 
all the participants appear to recognize the importance 
of establishing an investment climate that will attract 
private sector financing. 
 
¶24.  (SBU)  On the downside, energy subsidy reform is 
moving at a glacial pace.  Bahr Al-Uloum's proposal, to 
allow the private importation of refined product, has 
been kicking around since January, and even if 
implemented, would have a limited impact on the overall 
cost of fuel subsidies.  Similarly, while the Minister of 
Electricity's ideas to increase rates are sound, any plan 
will be difficult to implement until widespread theft of 
power is addressed.  Overall, the transitional government 
has a lot on its plate - including finalizing a 
constitution - and there appears to be little appetite 
for taking painful steps to reduce subsidies before the 
next election. 
 
¶25. (SBU)  The use of the Ministry of Oil's capital 
budget to fund Iraq's budget financing gap  even as a 
stop-gap measure  is also troubling.  At the very least, 
, 
it will delay the expansion of Iraq's oil production and 
related revenue.  Given the dilapidated state of some of 
the country's fields, the budget cuts could even threaten 
current levels of production.  While high oil prices have 
made up for lower-than-anticipated production levels this 
year, the failure to invest in 2005, particularly if 
combined with a downturn in oil prices, could spell real 
budgetary problems in the coming years.  End Comment. 
 
¶26.  (U) This cable was cleared by Ross Wilson in D. 
 
Khalilzad