VZCZCXRO9391
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3129/01 2601419
ZNR UUUUU ZZH
R 171419Z SEP 07
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 3419
INFO RUCNRAQ/IRAQ COLLECTIVE
RUEKJCS/JOINT STAFF WASHDC
RHEHAAA/WHITE HOUSE WASHINGTON DC//NSC//
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 03 BAGHDAD 003129 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EPET ENRG ECON EFIN EINV PGOV PREL IZ
SUBJECT: STATUS REPORT ON THE ENERGY FUSION CELL 
 
¶1. SUMMARY: The Energy Fusion Cell has revised its original 
strategy on infrastructure integrity in Iraq, and is helping 
Iraq maximize its petroleum export revenue; meet domestic 
fuel needs; meet domestic power needs; transition to 
market-based energy policy decisions; and transition to 
self-capacity.  END SUMMARY 
 
¶2.  The Energy Fusion Cell (EFC) was established in March 
2007 under DCS STRATOPS and works alongside the Gulf Regional 
Division of the Army Corps of Engineers.  The EFC provides a 
focus within HQ MNF-I for the conduct of all oil and 
electricity infrastructure related activities.  It has both 
planning and operational capacity.  The EFC includes 
representatives from all relevant elements of MNF-I and the 
Embassy, as well as from the Iraqi Ministries of Oil, 
Electricity and Defense.  In addition, the EFC when necessary 
can call on the resources of the Ministries that may be 
involved in the planning, support, funding, repair, security 
or delivery of strategic infrastructure, e.g., Planning and 
Finance.  The EFC staff focuses on planning, coordination, 
de-confliction and execution.  Key to achieving this function 
is the link established with the MoD Infrastructure 
Coordination Centre.  The EFC has recently revised its 
strategy along four separate but related lines of operation: 
-- Developing Capability 
-- Increasing Energy Capacity 
-- Increasing Security 
-- National Engagement 
 
¶3.  Over the past four months, Iraq has taken important steps 
toward improving the level of energy infrastructure stability 
needed to provide for the basic needs of the Iraqi people. 
The EFC has engaged the Ministry of Electricity (MoE) and 
Ministry of Oil (MoO) to develop their capacity, capability 
and ability to coordinate with other Coalition and Iraqi 
agencies.  The Joint Staff directed the work of the EFC along 
five areas: maximizing export revenue; meet domestic fuel 
needs; meet domestic power needs; transition to market-based 
energy policy decisions; and transition to self-capacity. 
 
Maximize Export Revenue 
----------------------- 
¶4.  The largest success with an imminent impact on Iraq is 
the repair and operation of the 46" crude oil export line to 
Turkey.  Coupled with the repair and sustained operation of 
the pipelines that make up the Kirkuk to Bayji corridor, this 
has allowed for a 20 percent increase in export capacity of 
crude oil.  Over ninety percent of the GoI budget is from 
crude oil exports, and any increase in exports translates 
into a significant increase to gross domestic product (GDP). 
 
¶5.  The Northern Oil Company (NOC), part of the Ministry of 
Oil, has maintained the ability to repair pipelines in the 
region.  The EFC has recognized that the greatest challenge 
to the NOC for both the Kirkuk to Bayji corridor and the 46" 
export line has been maintaining the line once repaired.  In 
consultation with the EFC, the NOC began placing Oil 
Protection Force (OPF) personnel along the 46" pipeline in 
August of 2007.  These protection forces decreased the number 
and effectiveness of attacks against the line.   Prior to the 
emplacement of security, the severity of interdictions 
routinely required one to two weeks to repair.  With the 
addition of the OPF to the 46" crude oil pipeline repairs 
typically require only one to two days to complete. 
 
¶6.  The success of the 46" export line is principally a NOC 
and GoI success.  The EFC did not create the security nor did 
it identify to the NOC that scrutiny was a problem on the 
line.  The NOC was already well aware that security was the 
lynch pin for successful exporting.  The EFC's success in 
this project came in crafting a timeline for securing the 
pipeline and facilitating the placement of those assets.  The 
Ministries appear to understand the challenges they face. 
Their two greatest challenges are their inability to 
coordinate and expedite projects.  Without constant pressure 
being placed on the NOC by the EFC to implement a security 
plan, weeks and months of exporting would have been lost, at 
a cost of approximately 200 million dollars per day to the 
Iraqi people. 
 
¶7.  The recent successes by the NOC are in addition to the 
continued success of the Southern Oil Company (SOC) exports 
out of the Al Basra Oil Terminal (ABOT).  ABOT continues to 
export about 1.5 million barrels per day (MBPD), accounting 
for over 85% of national exports. 
 
Meet Minimum Fuel Needs 
----------------------- 
¶8.  While Iraq is able to use its abundance of crude oil to 
support the nation financially, it must also satisfy its own 
 
BAGHDAD 00003129  002 OF 003 
 
 
fuel needs.  The most basic is providing fuel to its 
electrical generation capacity.  Roughly 250 MW of generation 
are idle due to fuel shortages.  The long term solution to 
this problem is to modernize Iraq's refining technologies to 
international standards.  In the interim, the EFC is 
facilitating the importation of fuel from Kuwait. 
 
¶9.  Because the GoI understands recognizes its short-term 
inability to refine enough product to meet its generation 
demand, the MoO identified and began contract negotiations 
for fuel sources to augment national fuel stores.  One major 
source was identified in Kuwait.  This contract met with 
delays when the Governments of Iraq and Kuwait suffered 
repeated impasses over details of the contract and rules 
concerning border crossings.  The EFC is assisting both the 
GoI and the MoO to overcome the obstacles of the contract, 
for example by obtaining proper security for the movement of 
fuel and negotiating with United States Central Command for 
use of an alternate border crossing.  In this case, the EFC 
is serving as the catalyst to free Iraq and Kuwait from 
contract mire, and expedite the movement of fuel for power 
generation to Iraq.  In doing so, the EFC is developing a 
sustainable capacity for the MoO to import large quantities 
of fuel from its neighbors. 
 
¶10.  The EFC continues to recommend to the GoI that Iraq 
needs to modernize its refining capabilities to be able to 
fuel domestic power generators, provide strategic reserves, 
and maintain sufficient quantities for public consumption. 
This type of strategic planning is a key capacity that the 
EFC is attempting to develop throughout the Iraqi energy 
sector. 
 
Meet Minimum Power Needs 
------------------------ 
¶11.  The three greatest challenges to electrical stability in 
Iraq are maintaining current generation, adding new 
generation and maintaining the stability of the electrical 
grid.  The greatest successes in maintaining current 
generation have come through the Gulf Region Division (GRD), 
United States Army Corps of Engineers, which is a member of 
the EFC.  GRD trains electrical generation operators to 
better maintain and care for their equipment.  This 
maintenance and correct operation of current generating 
capacity has lead to an Iraqi electrical grid that has 
succeeded in putting out more power in megawatt-hours than at 
any point in Iraqi history. 
 
¶12.  While generation is at its highest point, the demand on 
the system has nearly doubled since 2003.  To balance this 
demand challenge, the Government of Iraq has begun purchasing 
new generation.  Every step of this process, from contracting 
to security planning for delivery, has been aided by the 
Iraqi Transition Assistance Office (a State Department 
organization which has membership in the EFC) and the EFC. 
Currently there are 450 MW of generation in Mussaib that are 
in various stages of commissioning and another 350 MW of 
generation in Jordon awaiting finalization of delivery plans. 
 
 
¶13.  Equally important to meeting demand is equitably 
distributing the generation throughout Iraq.  The EFC is in 
daily contact with the MoE in an effort to expedite repair of 
400KV transmission lines.  Not only has the EFC coordinated 
the repair of these lines, but it has also developed a 
process through which the MoE creates its repair plans in 
coordination with Iraqi Army security. 
 
¶14.  Electrical repair and development are Iraqi successes 
which have been facilitated by the EFC and its member 
organizations.  In all of these projects the EFC has been the 
single point of coordination for the US State Department, 
Coalition Forces and the Government of Iraq. 
 
Transition to Market Based Energy Decisions 
------------------------------------------- 
¶15.  The Iraq energy sector remains state controlled, with 
the government fixing prices for oil and electricity.  The 
decision to release the state's control over the energy 
sector is one that is solely in the hands of the Government 
of Iraq.  While that decision is being made, the EFC has been 
able to monitor and aid in the development of the tools 
needed for a market-based economy. 
 
¶16.  The Al Basra Oil Terminal recently received metering 
upgrades that elevate its operations to international 
standards, allowing for more accurate sales of Iraqi crude 
oil on the open market.  Other metering upgrades planned 
throughout the country will allow the MoO to accurately 
account for the oil from Iraqi crude fields. 
 
BAGHDAD 00003129  003 OF 003 
 
 
 
¶17.  A similar project is being discussed in the electrical 
sector.  Currently the MoE charges residents and businesses 
that have working meters an approximate collection rate of 
fifty percent.  The EFC and ITAO have been working to assist 
the GoI improve both metering and collection processes.  The 
first step to qualifying the electrical sector to be 
market-based is to update its ability meter and collect 
revenue from the sale of its product. 
 
¶18.  An important indicator that the MoO is willing to move 
toward free market principals was identified when the EFC 
presented the Minister with a pricing scheme to reduce the 
purchase price of heavy fuel oil (a refinery byproduct which 
Iraq's outdated refineries overproduce and do not have enough 
space to store, causing refinery shutdown).  Although the 
Ministry did not ultimately accept the dynamic pricing model, 
it did agree to lower the price, and did witness as a result 
a reduction of its heavy fuel oil stocks.  The repeated 
efforts by the EFC to introduce market principles to both the 
Ministers of Oil and Electricity are beginning to receive 
increased interest. 
 
Transition to Self-Capacity 
--------------------------- 
¶19.  The Energy Fusion Cell does not consider that the 
measure of its long-term success will be found in its ability 
to expedite projects or create lines of communication. 
Success is and will be defined by its ability to assist the 
GoI and its Ministries in creating enduring processes that 
the Ministries of Oil and Electricity can manage and execute 
without the aid of Coalition Forces or USM-I. 
 
¶20.  The Ministries of Oil and Electricity must develop the 
critical capability to formulate and engage in long-term 
integrated strategic planning.  Currently, both the 
Ministries of Oil and Electricity spend much of their time 
and effort reacting to line interdictions and infrastructure 
outages.  The ministries have demonstrated some capacity to 
conduct mid-term planning, but much of this planning is 
limited to prioritizing repair projects in isolation from 
other projects 
 
¶21.  The Energy Fusion Cell has recognized that the Iraqi oil 
and electrical sectors are inextricably linked and require 
collaborative planning for both to achieve success.  To 
facilitate this effort the EFC is developing a strategic 
framework for a national energy plan that includes recovery, 
development and optimization of the energy sector.  It is 
hoped that this effort will attract the participation of 
representatives of the Ministries of Oil and Electricity and 
lead to complete Iraqi ownership of the resulting plan. 
 
BUTENIS