• Crude production and exports:
• Security and smuggling:
• Distribution:
• Refining:
• Gasoline:
• Liquid Petroleum Gas (LPG):
• The Supply Picture: Total Demand Estimated at 4200 tonnes per day
• Kerosene:
• Diesel:
• Natural Gas:
• Aviation fuel:

Crude production and exports:

National crude production and exports have continued to grow over recent weeks. Ample crude exists within Iraq to provide all the feedstock that the country’s refineries can process.

Northern production provides about three-quarters of the crude refined into light products. It has probably fallen from levels pumped throughout the summer but may increase once export pipelines through Turkey are operational. This should improve LPG domestic supply; presently, overproducing crude simply to extract gas means that a greater proportion of crude is wastefully reinjected into the ground. Southern production is providing all export stocks, with plentiful supplies for the major Basrah refinery and other smaller refineries in the south.

Crude oil transfers to refineries, especially in the north, continue to be constrained by the effects of well-targeted pipeline sabotage. Volumes successfully received by refineries have probably not quite yet recovered to the levels prior to the major August 29th sabotage of the Kirkuk-Baiji pipelines. Feed to refineries is thought to stand at about 75% of the system’s nominal processing capacity. Sabotage of this nature, combined with damage to the electricity grid, is also limiting the capacity to export.

Gasoline, LPG and, more recently, diesel, continues to be imported for humanitarian purposes, principally by the Coalition but also in greater volumes by Iraq’s State Oil Marketing Organization (SOMO). However, it is understood that SOMO is experiencing less than ideal buying conditions in the international market. As it can only pay for its imports by exporting heavy fuel oil for barter, it may be paying a penalty premium on its purchases. Aggravating this situation for SOMO may be unintentional competition provided by Coalition imports, paid for in cash.

Quantities of heavy fuel oil (HFO) available for barter by SOMO are probably less than 30 million litres. However, with a combined shortfall in gasoline and diesel supplies from domestic production of at least seven million litres per day before re-establishing reserves, requirements for winter kerosene stockpiling in excess of five million litres per day, and transport costs, HFO volumes available for barter export are probably insufficient to pay for the necessary imports. Diesel, for example, is generally worth about 80% more per tonne than HFO, but transport costs into Iraq add up to a further 25% to the cost of the imports, whereas transport costs out of Iraq take a further 40% off the value of the HFO. Thus, the imported cost of a unit of diesel is about four times the net value received on export. The barter value from HFO is therefore sufficient for no more than seven million litres of light fuels per day, less if gasoline is included. This does not consider LPG imports.

UNJLC is working with the authorities on an initiative involving a neighbouring country that may increase the economic effectiveness of this barter trade for SOMO in the medium term, and thus help alleviate the shortages.

Fuel oil is also being exported to Syria and Turkey to pay for imported electrical power. Through this, and as a fuel for Iraq’s own power stations, it is forming an increasingly important part of the overall energy equation.

In the meantime, the Coalition now appears committed to continuing imports perhaps into 2004 (but at a reduced rate once winter stocks are established). Nevertheless, SOMO will have to take full responsibility for imports of light products as soon as practicable.

Security and smuggling:

Oil security continues to be a challenge that is receiving attention from the Coalition at the highest levels. The risk is generally three-fold: sabotage by groups intent on disrupting production, refining and distribution, and through this the level of stability and security; ad hoc, opportunistic and organized criminal activity, from tapping into or breaking pipelines to steal fuel, protection rackets on fuel truck drivers, or attacks on Ministry inspectors to prevent them identifying corruption in the distribution system; and smuggling of fuels out of Iraq, thus depriving the populace of much needed supplies.

An increasingly active approach is being taken against smuggling by sea, although the limited control exercised by the Coalition over the southern part of the Shatt Al-Arab Waterway bordering Iran continues to be a problem. This campaign has been supported by the implementation of a legal framework, through CPA Order Number 12 of August 31st, 2003, allowing the confiscation of property such as trucks or ships used in the theft of natural resources or state property. The Coalition has even gone to the extent of transporting Iraqi investigating judges to impounded vessels in Iraqi waters to hold confiscation hearings.

Elsewhere, it is impracticable to extend effective control over the thousands of kilometers of Iraq’s land borders. Even the large numbers of private and commercial vehicles entering Iraq to take advantage of cheaper Iraqi fuel – which, even at black market prices, is still much cheaper than in other regional countries - is adding to shortages. Some countries, notably Kuwait and Saudi Arabia, appear to be discouraging private vehicles from entering Iraq from their territories unless bringing in humanitarian supplies but this has not yet led to a noticeable improvement in the south. Smuggling will remain a problem until local prices relative to those elsewhere in the region render it uneconomic, but this is a medium to long-term issue.

As for sabotage and damage to facilities, the most vulnerable elements of infrastructure are the many hundreds of kilometers of crude and product pipelines. These are difficult to guard effectively. More importantly, damage in key locations can cause massive disruption. One part of the strategy being pursued in response to this is a much faster damage reporting and pipeline repair capability, in order to get inside the cycle of the saboteurs and limit the effect of attacks.

The Coalition is presently restructuring the organizations that provide infrastructure security in order to allow better communications, centralized control, a more integrated approach, and improved response time. The effects of this are already apparent in some areas but will become more evident once the new arrangements are fully implemented. A key element of this is an essential services security office within the CPA (probably covering electricity and water, as well as the oil industry). Initial staffing is necessarily by Coalition military personnel but it is intended to have this under Iraqi civilian control as soon as possible.

At present, in the field, much reliance is placed on the Iraqi oil police and tribal guards in remote areas. These solutions have been less effective than expected, given the organised nature of criminal and guerilla groups, and the lack of weapons, vehicles, communications and even uniforms for those charged with guarding the infrastructure. Nevertheless, a facilities protection contract awarded to an international security firm should be operational within the next two months, placing a 7000-man force around 140 key oil industry sites and providing further protection for the pipelines.

Distribution:

Equitable and effective distribution of fuel products continues to be a challenge on several fronts. With imports greatly assisting in improving overall supplies, the need to successfully move those volumes to the populace is not only a humanitarian imperative but is seen as vital to security and stability. The Coalition appears committed to ensuring that fuel shortages are not a factor in any future unrest, and that adequate fuel supplies are available during the Holy month of Ramadan, commencing late October.

Throughout Iraq, pipelines are generally the preferred means of distribution at the wholesale level, but the ease with which these may be sabotaged or stolen from, and the corroded state of many pipelines, limits their carrying capacity. Road tankers and trucks and rail cars are being used to compensate for this, but these are also in short supply. This applies particularly to LPG tankers with their pressure vessels. Trucking and rail capacity is further limited by mechanical state of the uploading and downloading facilities, the intermittent supply of electrical power necessary for pumping at these sites, and even security around the depots.

Beyond means of physical transport, effective management of the distribution system is less than ideal. This has improved over recent weeks with the installation by Coalition contractors of voice communications systems between critical locations and much closer co-ordination and control between elements of the Ministry of Oil responsible for distribution and the Coalition. Much room for improvement remains but progress is being made.

A key factor in the distribution equation is the establishment of reserve stocks – both central and regional - adequate to provide a buffer for unexpected major disruptions in supply or surges in demand. This applies particularly to kerosene with seasonal winter stocks. It is unclear what stockpiling targets have been set but it is thought the Ministry has in mind reserves of between 15 and 30 days future consumption, depending on fuel type. Local production will be insufficient to build up the necessary reserves; it can only be done so through imports.

Refining:

Major and well-placed sabotage to the network of crude oil pipelines from Kirkuk to Baiji in late August appear to have restrained growth in refinery production for most of September by limiting volumes of crude that could be transferred from the Kirkuk fields to two of Iraq’s three major refineries, Baiji and Daura. Iraqi and Coalition engineers mitigated the effect with several innovative workarounds, but overall production levels have probably not yet returned to those established in August.

Further sabotage, especially in strategic locations which can have a disproportionate effect on refinery production, cannot be ruled out. In any event, once the Kirkuk-Baiji crude feed is fully reinstated, it appears that the refineries may be unable to achieve further increases in production without major maintenance and, in the longer term, significant refurbishment and investment. They can probably meet next summer’s demand for refined products but not the higher levels of upcoming winter needs.

All three major refineries continue to operate in a very fragile condition with little or no spare parts. Sustained production cannot be taken for granted, making establishment of reserve stocks all the more necessary. On the other hand, the power supply to the refineries has been generally stable, resulting is relatively efficient production runs. This has been mainly due to the installation of independent power-generating capacity at the major refineries. The refineries use the generators as their primary power source, with the national grid as back-up.

One of the most important factors in the domestic supply of refined fuels in the coming months will be the much-needed and deferred major maintenance work on the Baiji Refinery. This complex of three units provides more than half of the country’s refined products. Taking it offline at a time when there are very low reserve stocks would have a very serious effect on supply. According to Ministry of Oil sources, current plans appear to be to start the most necessary maintenance in December, with one of the three units taken out of service at a time, and defer major work until the spring. There may also be focus on the gasoline equipment, whilst keeping the diesel and kerosene plants working throughout the winter as much as possible.

Progress continues to be made – often with direct involvement from Coalition forces – in bringing more of the country’s small “topping” refineries onstream. Although in total, if operating at full capacity, they would add no more than 10% or 15% to supplies from the major refineries, this might be sufficient to make a difference between a shortage and balanced supplies, especially outside Baghdad. As importantly, given that these plants generally feed local needs, they eliminate the need to transport products long distances by pipeline, truck or rail. It is still necessary to provide them with crude feedstock from a distance, but the output serves local communities. The larger of these small refineries – of which at least three are now operating – can produce a respectable 750,000 to 1 million litres of light products (gasoline, kerosene and diesel) each day, and a similar volume of heavy fuel oil.

Delays in the delivery of spare parts, equipment, supplies and chemicals for refineries purchased under the oil-for-food programme may have an adverse effect on refinery productivity if these are not expedited.

Gasoline:

Despite reduced locally-produced gasoline supplies as a result of the August 29th Kirkuk-Baiji pipeline sabotage, overall gasoline supplies have been good throughout the second half of September, principally due to a unprecedented high level of imports. The effect has been reflected in a continued fall of black market prices to as low as 150% of the official price in some areas, although the premium is up to 300% elsewhere. This is a marked improvement on mid-summer when black market prices were 10 to 20 times the official rate, or even more. Significantly, recent weeks have seen a combination of reduced queues at petrol stations (they still exist, but this is normal in Iraq, with its low number of petrol stations) and subdued prices, suggesting the highest level of confidence in gasoline supply since the cessation of hostilities.
The surplus in supply may have allowed some modest build-up of reserves, perhaps at a rate of one day’s reserves for every week. Accurate figures are hard to come by but it is clear that the distribution system does have stocks to draw on where it had none previously. There is no room for complacency as the situation could change rapidly if refinery production falls suddenly or imports are interrupted, but there is clearly improvement.

The influx of second-hand vehicles into Iraq to take advantage of the prevailing tax-free regime continues to add to demand (with some reports suggesting 500 vehicles per day now coming in from Kuwait), but the cooling of the weather, combined with marginal improvements in the stability of power in major population centres, may have reduced demand for gasoline small household generators.

Liquid Petroleum Gas (LPG):

The overall supply of LPG cooking gas continues to be much-improved from the desperate situation that characterised most of the summer. Then, acute shortages in the south were a factor in major civil unrest. However, although in some recent weeks the national supply has probably come close to demand, the improvements have been intermittent. Distribution problems ranging from insufficient numbers of LPG bottles to pipelines leaks and shortages of suitable trucks and rail cars have meant that available supplies have not necessarily been equitably distributed. With few alternatives for cooking fuel, especially in urban areas, the LPG situation continues to be a cause for humanitarian concern.

Nevertheless, black market prices have eased back noticeably, especially in Baghdad and the south, from about ID3500 per 8kg bottle to ID2500. With an official price of ID250, this is still a significant premium. Prices in the north are higher, up to ID4000 in places.

One major problem that is hampering efficiency of distribution is the centralized nature of distribution control, combined with communications difficulties. This applies particularly to the supply of LPG bottles, necessary for domestic storage of the gas in homes. Iraq probably has adequate supplies of these, but not enough of them have been distributed from central stores in Baghdad to other areas. Besides limiting the distribution system’s ability to get the available supplies to the populace, this is causing wastage as many of the bottles in circulation are old and below standard, and leak.

Three factors appear to have contributed to the improvement in LPG supply: sustained production from the country’s only operating major gas plant at Kirkuk; markedly increased production from the major refineries; and what appears to be a doubling in the level of imports, particularly from the south. The increase in refinery production is marginal – perhaps only several hundred tonnes per day- but important nevertheless. The key to stability in the LPG situation in the short to medium term, will be a continued (and even increased) level of imports throughout the winter, to both meet the gap between demand and supply, and to establish reserve stocks.

Most of the LPG bottles in circulation in Iraq are old and damaged. These leak so waste gas, and are unsafe. Insufficient quantities of new bottles (bottom row on truck), of which many are available in central stores, have yet to be distributed throughout the country.

The Supply Picture: Total Demand Estimated at 4200 tonnes per day

(1) From all sources, including trucked imports into the north, and trucked and barged imports into the south;
(2) Eventual production expected to be 1200 tonnes per day, but not before late October, and may take some time to ramp up to 1200 tonnes. Rate is estimated average over second half of month.

Supply is expected to improve in late October with the long-delayed start-up of the Southern Gas Plant (SGP) for the first time since the cessation of hostilities. One of three production trains will be brought online with an expected 1200 tonnes per day.

The North Gas Plant at Kirkuk is unlikely to be able to increase production any further from the existing level as it is presently running at full capacity with very few spare parts; any further increase in production from the refineries will be marginal; and it does not appear that the second train from SGP will be operational before next year. The third train at the Southern Gas Plant is believed to have been cannibalized for spares.

As with other fuels, the pipeline system for LPG requires further work before it can be fully used as an effective distribution mechanism. This is especially so for gas as it can leak more dangerously from corroded or damaged lines more easily than liquids. The key pipeline of concern is the one carrying LPG from Basra in the south, through the major population centres of the southern Tigris-Euphrates Valley, and to Baghdad. UNJLC understands that the Iraqi Ministry of Oil is checking and repairing any leaks to this pipeline as a matter of urgency so that it is ready to carry the SGP production when available.

Kerosene:

Of all fuels, kerosene is the most likely cause for concern in the coming months. Although kerosene production within Iraq is probably enough to meet current needs, there is insufficient surplus beyond this to build up the necessary half-billion litre reserves for winter. No known significant imports of kerosene have been made to date by either the Coalition or SOMO.
A significant increase in black market prices of kerosene is evident throughout Iraq, especially in the north. This may not reflect a shortage for current consumption; it is more likely to suggest that the populace has recognized the very real risks of a winter shortage and are stocking up themselves. With an official price of ID10 per litre, prices of ID50 are being reported in Basra (where winter temperatures are generally mild), ID150 in Baghdad, and up to ID 160, perhaps even more, in the cooler north.

At present, according to historical figures provided by the Ministry of Oil, kerosene consumption is probably about seven million litres per day, up from about three million litres per day at the annual low-point in mid-June. Demand will probably continue at this level, or slightly increased, until mid-November. Thereafter, consumption will increase rapidly until it peaks at about 18 million litres per day in late December and early January. Consumption will not return to current levels until mid-March.

Prior to the August 29th sabotage of the Kirkuk-Baiji which caused a major drop in production of all fuels, the refineries were producing a kerosene surplus of - according to UNJLC estimates – no more than two million litres per day. This dated from mid-July and was a belated start to the annual stockpiling programme. Kerosene volumes have largely recovered since that August sabotage, but have probably been matched by the seasonal rise in demand usually seen in the September pre-winter period. Clearly, the refineries will be unable to produce enough kerosene to meet winter demand or to build the required reserves. Imports will be required in large quantities in the coming weeks and throughout winter if the humanitarian effects of a kerosene shortage are to be avoided.

Kerosene and diesel are produced from the same “fraction” of refined petroleum, so that production of one can be increased, to a limited extent, by reducing production of the other. Curiously, although the kerosene situation is recognized as critical, there appears to have been no sustained reduction in diesel production in favour of kerosene. It is unclear whether this is because the limit has been reached, but it does appear that there is room for a further shift in the product mix. The recent commencement of diesel imports this month may allow greater refining capacity to be devoted to kerosene but even this will not be sufficient to catch up with the stockpiling programme.

Diesel:

The overall supply of diesel has improved significantly with the commencement of imports by both the Coalition and SOMO. UNJLC estimates that diesel supplies stood at around 90% of demand for most of the month. Although a substantial improvement from the levels of August, this has been insufficient to drive down black market prices. There has been a slight easing to about ID75 per litre in the south (where diesel is in plentiful supply) and parts of the north where much of the imports are directed, and to about ID150 in Baghdad and other parts of the country, against an official price of ID10 per litre. It is expected that, as with gasoline, it will require several weeks where supply matches demand before black market prices retreat further.

UNJLC had not expected the Coalition to import diesel, and for all of the imports to be handled by SOMO. The fact that the Coalition itself has commenced imports suggests a high level of commitment to ensuring that the humanitarian needs of the populace are met. This in turn should provide confidence in the security of supply.

In addition to new supplies from imports, several other factors are probably conspiring to enhance the balance between supply and demand. The slightly cooler weather of recent weeks and marginally more steady power supplies from the national grid may have decreased the need for neighbourhood diesel power generators and thus overall demand. Coalition successes against smuggling may also have made more supplies available to the market. The generally increased supplies may have reduced hoarding and discouraged panic buying.

On the other hand, it is expected, as the rehabilitation of Iraq’s power infrastructure gathers pace, that the needs of Iraq’s dozen or so major thermal power stations will increase the demand for diesel. Although much of the fuel burned in these is heavy fuel oil or crude, there will be a further need for diesel. These thermal power plants account for slightly more than half of Iraq’s installed power generating capacity and probably about two-thirds of power actually generated today. In some cases, plants that currently burn diesel are being converted to use more abundant heavy fuel oil or crude oil, but this will take time. This increased demand will be offset, however, by reduced demand for local generator fuel as more secure supplies from the national grid render generator power less essential.

Natural Gas:

This fuel, along with diesel, is vital for power generation in Iraq’s twenty or so gas turbine power plants that provide slightly less than a quarter of the country’s installed power capacity.

It is thought that these stations are working at about 30% of their capacity. Whilst much of this shortfall may be due to the same mechanical and maintenance problems that afflict the refineries, part of it may be due to insufficient volumes of natural gas reaching the plants, under sufficient pressure.

Aviation fuel:

The security situation in Baghdad in particular, including the threat of surface-to-air missile attacks on aircraft, continues to dictate against the opening of Baghdad International Airport. It is still uncertain when other airports will open for regular commercial services, but it is unlikely to be in the next few weeks. Aviation fuel is not presently a major humanitarian issue.

Fuel Supply for UN facilities: Following the events of August 19th, UN agencies in Baghdad have restructured their operations. At present, they rely heavily on generator power. Although most UNJLC personnel have been withdrawn from Iraq, they have, through existing connections and with the assistance of locally-employed staff still in Iraq, facilitated arrangements through the Ministry of Oil for the supply of adequate quantities of diesel fuel to the U.N. compound in Baghdad to enable continued operations.

With much reduced operations elsewhere in Iraq, the need for assistance in arranging fuel supplies to U.N. operations is limited. UNJLC stands ready to reactivate this role when required, with the assistance of UNOPS personnel.