VZCZCXRO2400
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #3085/01 3351310
ZNR UUUUU ZZH
P 301310Z NOV 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6253
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0687

UNCLAS SECTION 01 OF 05 KABUL 003085 
 
DEPT FOR SCA/RA, SCA/A, EEB, EEB/ESC/IEC (GRIFFIN) 
DEPT PASS AID/ASIA/AA ELLIS, AID/ASIA/SCA 
DEPT PASS USTR FOR LILIENFELD AND KLEIN 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
CENTCOM FOR CG CFC-A, CG CJTF-76, POLAD, JICENT 
NSC FOR JWOOD 
TREASURY FOR ABAUKOL, BDAHL, JCASAL, AND MNUGENT 
MANILA PLEASE PASS ADB/USED 
PARIS FOR USOECD/ENERGY ATTACHE 
OSD FOR SHIVERS, SHINN 
COMMERCE FOR DEES, HAMROCK, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ENRG EFIN ETRD KPWR EAID PGOV AF
SUBJECT: AFGHANISTAN: UPDATE ON ENERGY PROJECTS - FUEL SHORTAGE AND 
OTHER SETBACKS DOMINATE RECENT NEWS 
 
¶1. (SBU) Summary.  Lackluster progress and recent setbacks in the 
energy sector underscore the difficulties of working in Afghanistan. 
 In particular, critical lack of Afghan government planning and 
possible corruption, combined with very limited discretionary 
resources and competing demands, have hampered the acquisition of 
diesel fuel needed for operation of the country's 390 MW of thermal 
electric power generation facilities through the rapidly approaching 
winter.  Owing to non-performance of a civil works subcontractor, 
the US-financed 100 MW power plant in Kabul is delayed and is now 
scheduled to come online in stages in mid-January and end-February. 
Notable progress in the effort to attract Independent Power 
Producers to Afghanistan was tempered by implementation delays in 
existing rehabilitation, regulatory, and energy import initiatives. 
Several such projects are approaching their final stages.  Despite 
setbacks, Post maintains its focus on project execution with the aim 
of doubling electricity availability by June 2009 - energy which is 
needed to create jobs and improve standards of living.  End Summary. 
 
 
-------------------------------- 
FUEL SAGA AT FOREFRONT - CLOUDED 
BY LACK OF TRANSPARENCY 
-------------------------------- 
 
¶2. (SBU) After weeks of speculation and multiple informal pleas for 
fuel assistance, the Government of the Islamic Republic of 
Afghanistan on October 9 formally requested $97 million from the USG 
to purchase fuel for its diesel power plants this winter, including 
the USAID-funded 100 MW plant being built in Kabul.  Revised 
calculations provided by the USAID-funded Afghanistan Infrastructure 
Rehabilitation Program (AIRP) contractor Louis Berger Group/Black & 
Veatch Joint Venture (LBG/B&V JV) noted that real requirements were 
probably much lower, in the $20 to $30 million range.  The LBG/B&V 
JV estimate discounted the usage of older, inefficient, and smaller 
thermal generators. 
 
¶3.  (SBU) Rumors and misinformation circulated around the fuel 
issue.  Within the GIRoA, Minister of Economy Shams repeatedly 
"cried wolf", telling international donor agencies that Kabul would 
run out of fuel by mid-October.  Other officials said the GIRoA had 
"found" sufficient funds to power the Kabul Northwest power station, 
on a conservative generation schedule, until mid-December.  Then 
Minister of Energy and Water Khan told Parliament that Kabul 
electricity consumers would enjoy 24/7 electricity by the end of 
December - an impossible promise given the fuel shortages.  Similar 
uncertainty attended claims about fuel supplies in the South.  The 
most accurate barometer of the fuel situation in Afghanistan has 
been Minister of Finance Ahady.  In a mid-October meeting with A/S 
Boucher in Washington, the minister confirmed that $20 to $30 
million in additional fuel funding would be sufficient for the 
winter, corroborating the LBG/B&V JV estimate.  What's not in doubt 
is that rationing has already begun: Embassy local employees report 
that many Kabulis now enjoy only four hours of electricity in every 
72 hours. 
 
¶4. (SBU) In response to the GIRoA's formal request, the Ambassador 
approved up to $28 million to procure fuel, which covers the 
estimated cost of powering the USAID-funded 100 MW Kabul plant 
through the end of March.  (Note: Even less will now be needed in 
view of project start-up delay -- see below.)  The $28 million will 
be reduced from the USG's planned FY 09 contribution to the ARTF, in 
effect requiring the GIRoA to use this portion of its ARTF budget to 
purchase fuel, and ensuring they meet their operational commitments. 
 The fuel will be procured directly by USAID and delivered with the 
assistance of its contractors, circumventing reportedly corrupt 
 
KABUL 00003085  002 OF 005 
 
 
GIRoA fuel procurement practices.  At current fuel prices, the $28 
million fuel allotment will also help support the GIRoA's 45 MW 
Kabul Northwest plant in the event its fuel supply is exhausted 
prior to commissioning of the more efficient 100 MW plant. 
 
¶5.  (SBU) The GIRoA procures fuel for its power plants via the Fuel 
and Liquid Gas Enterprise (FLGE), a department of the Ministry of 
Commerce and Industry (MOCI).  In 2007, an International Monetary 
Fund mission recommended that the government withdraw from the 
petroleum sector and privatize the FLGE by March 2009.  The GIRoA 
responded by pledging to increase the transparency of FLGE's fee 
structure and operations.  Good intentions notwithstanding, press 
reports say the Central Audit and Oversight Committee of the Lower 
House of Parliament identified $10 million worth of fuel procurement 
contracts that "lack transparency."  Privatization of the FLGE, 
along with instituting proper fuel planning that takes into account 
oil price fluctuations, would help avoid another "fuel saga" next 
year. 
 
------------------------------ 
DELAYED LAUNCH OF USAID-FUNDED 
100MW KABUL POWER PLANT 
------------------------------ 
 
¶6. (SBU) Non-performance of a principal civil works subcontractor 
has necessitated delay in the commissioning of the USAID-funded 
100MW thermal electricity generating plant. Initial commercial 
operation of Blocks 1 and 2 (35 MW each) will not meet contractual 
milestone dates of December 2 and December 28, 2008, respectively. 
Nevertheless, all of the Block 1 equipment, including six diesel 
engines weighing over 80 metric tons each, and 80 percent of Block 2 
equipment have been delivered to the site.  Furthermore, much of the 
large-scale foundational and infrastructural work as well as camp 
accommodations for the 200+ expatriate construction management, 
security, and skilled labor personnel are finished or nearly 
complete. 
 
¶7. (SBU) Intensive work is underway to recover from the costly 
setbacks.  Testing and commissioning of the first block of six 
gensets are slated for early December.    LBG/B&V JV will soon 
submit a revised detailed master project schedule.  Interim dates 
for commercial operation of Blocks 1 and 2 totaling 70MW are January 
18, 2009, and February 28, 2009, respectively, though partial 
electricity generation to the grid may begin as early as 
mid-December. 
 
-------------------------------------------- 
NEW PRESIDENTIAL DECREE - PRIVATE ENTERPRISE 
IN ENERGY PRODUCTION ENCOURAGED 
-------------------------------------------- 
 
¶8. (SBU) The Ministry of Energy and Water (MEW), with assistance 
from USAID, has successfully lobbied the GIRoA to establish a power 
regulatory body in Afghanistan.  President Karzai signed a decree in 
late September, authorizing the issuance of operating licenses for 
investments in the power sector.  These licenses will cover the full 
spectrum of power supply operations, including but not limited to: 
power generation, transmission, distribution, power trading and 
other energy services. 
 
¶9.  (SBU) The operating licenses will be issued by a new Department 
of Regulatory Affairs (DRA) which will remain within the MEW until 
an independent regulator is established.  The DRA will aim to 
promote private sector investment in Afghanistan's energy industry, 
giving commercial businesses the opportunity to develop and manage 
 
KABUL 00003085  003 OF 005 
 
 
the country's energy services, make the energy sector more 
efficient, and share expertise.  The decree could smooth the entry 
of the Independent Power Producers (IPP) into the Afghanistan energy 
marketplace and legitimize entities currently operating as 
quasi-IPP's now. 
 
--------------------------------------------- --- 
SOUTH EAST POWER SYSTEM (SEPS) KAJAKI HYDROPOWER 
PROJECT ENCOUNTERS A CONTRACTUAL ISSUE 
--------------------------------------------- --- 
 
¶10. (SBU) The successful delivery of key components of a new turbine 
generator (18 MW capacity) to the Kajaki Dam site by a large 
military convoy in August was a major milestone.  However, 
rehabilitation work on the second of the two older turbines on the 
site (the first one is operational, delivering 16.5 MW) has been 
stalled.  In late October, China Machine-Building International 
Corp. (CMIC), the partially state-owned Chinese company performing 
the rehabilitation work under sub-contract to LBG, was reportedly 
directed by the Chinese government to evacuate its five personnel 
from the Kajaki jobsite because the Chinese government had 
information regarding a Taliban threat to kidnap them.  Despite 
LBG/B&V JV assurances to CMIC that all Kajaki site personnel are 
protected by a security force of some 150 private security and 250 
British military personnel, CMIC personnel left the site on November 
4, 2008.  The site has not recently come under attack, and security 
experts consider the kidnapping threat to be virtually nil. 
 
¶11. (SBU) Both LBG/B&V JV and Post are taking actions to effect a 
reversal of CMIC's decision.  Ambassador Wood recently met with 
Chinese Ambassador to Afghanistan Yang Houlan to urge the Chinese 
government to permit CMIC to return to the site.  Yang agreed to 
recommend to his government that CMIC be permitted to remobilize. 
More recently, Yang told Charge' Dell that Beijing supports 
restarting work, but the decision rests with CMIC.  Yang urged USAID 
to re-engage with CMIC, a process which has begun.  Alternative 
plans utilizing personnel from the U.S. vendor of the second turbine 
have been formulated in case CMIC does not return soon.  LBG/B&V JV 
is optimistic that CMIC will return in time to complete the 
installation of the new (third) turbine (for which CMIC is the 
vendor) on schedule by December 2009, but is making contingency 
plans to complete the work without CMIC if necessary. 
 
------------------------------------------ 
NORTH EAST POWER SYSTEM - UZBEK COMPONENT, 
DELAY IN IMPORTING POWER 
------------------------------------------ 
 
¶12. (U) Hopes for mitigating the winter fuel crunch were further 
dashed when recent developments pushed back the importation of 150 
MW of power from Uzbekistan from January 2009 to May 2009.  Popular 
conjecture attributes the delay to the historically difficult and 
uneasy working relationship between the two countries.  The GIRoA 
also failed to make its first payment ($10 million) for construction 
of the required 43 Km 220kV transmission line in Uzbekistan on time. 
 The payment has since been made and final payment of $5 million 
will be due upon completion and commissioning of the line.  The 
importation of Uzbek power under a Power Purchase Agreement will 
significantly increase low-cost electricity supply, thereby raising 
living standards and spurring economic growth. 
 
--------------------------- 
COMMERCIALIZATION OF DABM - 
DISAPPOINTING PROGRESS 
--------------------------- 
 
KABUL 00003085  004 OF 005 
 
 
 
¶13. (SBU) The effort to corporatize the public national electric 
utility DABM is inching forward.  For the past few months Minister 
of Economy and utility CEO Shams has been soliciting applications 
from suitable Afghan candidates to serve in a Transition Management 
Unit (TMU) which will oversee the corporatization of DABM.  In 
October the Minister remarked that corporatization attempts had been 
delayed by an internal GIRoA row over the control of $1.7 million of 
World Bank funds for initial operation of the TMU.  However, recent 
mediation by the MOF has brokered an arrangement between MEW and 
DABM under which the World Bank funds will be freed up to launch the 
TMU in the near future. 
 
¶14. (SBU) The slow pace of efforts to transform DABM is a source of 
frustration for the donor community as well as those GIRoA officials 
who support commercialization of electricity distribution.  A 
proposed USAID program will side-step the lack of progress by 
engaging an outside contractor to take over the operation and 
maintenance of the Kabul Electricity Department (KED) - DABM's 
largest division, serving the city of Kabul and distributing 
approximately 40 percent of DABM's total nationwide electricity 
generation to nearly one million consumers in the capital.  Strong 
support for the KED commercialization project from the Ministers of 
Economy and Energy and Water has been secured, and USAID plans to 
start the procurement process for an operating contractor by 
end-2008. 
 
---------------------------------------- 
SHEBERGHAN GAS FIELDS TESTING - DELAY IN 
MOBILIZATION; OPIC PROPOSAL UPDATE 
---------------------------------------- 
 
¶15. (SBU) ARAR, the Turkish/American contractor hired by USAID to 
test existing wells at Sheberghan, suffered additional delays in 
recent weeks.  Slow issuance of valid Afghan multi-entry visas for 
workers along with poorer than expected infrastructure for 
transporting heavy equipment caused the delays.  Full mobilization 
is now slated for early December with initial test results available 
by mid-January 2009 and final test results to be submitted by the 
end of April 2009. 
 
¶16.  (SBU) The test results are instrumental for an Overseas Private 
Investment Corporation (OPIC) proposal to develop an IPP (100 MW 
natural gas-fired power plant) at Sheberghan.  ECONOFF recently met 
with the Norwegian aid agency (NORAD), which is assisting the 
Ministry of Mines in the promotion of gas fields adjacent to 
Sheberghan.  They maintain that historical data (which will be 
confirmed by ARAR testing at Sheberghan) point to upwards of 3 
billion cubic meters of gas in the adjacent wells.  With few if any 
alternative uses of this gas, NORAD suggests that those gas 
resources be combined with Sheberghan to develop a larger IPP gas 
plant (600 MW vs. 100 MW). 
 
¶17.  (SBU) Minister Ahady met in mid-October with OPIC President 
Mosbacher in Washington to discuss the proposal for private 
investment in a 100 MW gas-fired plant at Sheberghan.  Until 
recently, Minister Ahady had been cool to the idea of an IPP 
utilizing this gas.  Minister Ahady requested the proposal be 
revised to reduce the proposed price of electricity from $.08 
per/KWH to $.06 per/KWH - to better compete with the $.04-$.05/per 
KWH cost of imported power.  Furthermore, he envisions a plant 
capable of 200-250MW vs. 100 MW.  Comment: Post hopes the momentum 
generated by this interaction will produce results, and will 
continue to facilitate communication between both parties.  Also, 
USAID is in the final stages of recruiting a senior energy advisor 
 
KABUL 00003085  005 OF 005 
 
 
to support the design and implementation of IPP agreements. 
 
WOOD