• HIGHLIGHTS
• PRODUCTION , EXPORTS AND IMPORTS
• SECURITY, SMUGGLING and CORRUPTION IN DISTRIBUTION
• REFINING
• GASOLINE
• DIESEL
• LIQUIFIED PETROLEUM GAS
• KEROSENE
• AVIATION FUEL
• FUEL SUPPLY FOR UN AND NGO VEHICLES

HIGHLIGHTS

The supply of domestically produced fuels in Iraq has deteriorated in recent weeks. The situation is unlikely to improve in the short term. The country is increasingly reliant on imported fuels, a situation which is unsustainable. The black market price of diesel in Baghdad has doubled in recent days, indicating that shortages are now acute and more entrenched across Iraq

Disruption of electrical power supplies to crude oil operations, refineries and LPG production facilities during the past fortnight has significantly reduced the supply of domestically produced fuels. Overall gasoline supplies have not been as seriously affected as the Coalition and the State Oil Marketing Organization (SOMO) together continue to import about 7 to 8 million litres per day. Today, an estimated 7 of every 10 litres of gasoline consumed in Iraq is imported, much of it paid for by the Coalition. However, an almost total lack of diesel imports means that there are no alternative supplies to domestic production. The lead time required to bring in substantial imports, should a decision be made to so do, means that shortages of diesel will continue for the foreseeable future.

LPG supply is well below half – perhaps one-third - of national demand. This is because of a lower level of imports and disruption to production from power grid problems, particularly at the country's only functioning major gas plant in Kirkuk. Earlier expectations of supply from the country's only other major LPG source, the Southern Gas Plant, and imports through the Khor Zubayr export terminal by mid-July, have proved to be unrealistic. An LPG supply and distribution crisis is likely to continue well into August, if not beyond.

Significantly, crude exports commenced on June 28th through Mina Al-Bakr in the Arabian Gulf, initially from crude held in storage. This has already allowed marginally more southern production. This should increase significantly in the coming weeks, with consequent greater LPG production, with further exports in the latter half of July.

Production, refining and distribution capacity continues to be limited by shortages of spares and supplies and the aged state of the industry's infrastructure.

PRODUCTION , EXPORTS AND IMPORTS

Total national crude oil production continues to decline from a postwar peak of over 850,000 barrels per day (bpd) to now less than 700,000 bpd. Northern production in particular has been constrained by the combined effects of sabotage to pipelines and installations, disrupted power supplies, storage capacity, and limited ability to export crude to Turkey or Syria.

Significantly, perhaps no more than 40% of crude production is being transferred to refineries. This is due in part to the limited capacity of the refineries to absorb and process the crude into products, pipeline problems and sabotage, and a deliberate strategy to maximize northern LPG production, given that the country's only functioning major gas plant is located there. Northern wells with high associated gas content are being produced and others shut in. After stripping out the gas, the crude is reinjected into the reservoirs, perhaps to be lost forever. This unusual practice was also followed in the south until recently to a lesser extent, but exports from there have reduced the need for this. Produced crude can now be stored, ready for export.

With first post-war crude exports in recent weeks and expected further exports of about 8 million barrels for the remainder of July, south production is likely to increase. This should assist the LPG supply. However, emerging labour problems may cause a reversal.

In effect, although crude production appears to be sufficient to provide for most of the fuel needs of the country, the fact that the pipeline and refinery systems cannot cope with the volumes of crude available means that domestically produced fuels are unlikely to be sufficient to meet demand for at least several months.

SECURITY, SMUGGLING and CORRUPTION IN DISTRIBUTION

The lack of security and law-and-order continue to be one of the greatest impediments to restoring the oil industry to a level where the country can at least provide for its own needs. Active sabotage operations and even direct attacks on contractors and U.S. military personnel working to restore capacity are becoming more widespread, even in northern areas previously considered safe.

On the positive side, it does now appear that more aggressive efforts are being made to interdict smugglers, especially in the south. Coalition forces are now in evidence at the Kuwait border and on the Shatt Al-Arab waterway. Nevertheless, it will be impossible to stop the trade entirely until law and order is restored and market prices of fuel products in Iraq rise to levels seen in neighbouring countries. Smuggling operations are large and sophisticated. One single operation in the south identified by UNJLC exported an estimated 250,000 litres of diesel in one day.

The problem is compounded by corruption throughout the distribution chain and a lack of effective control by the authorities. Meters are not functioning at most depots and petrol stations, but distributors are able to account for the value of products distributed at official prices, whilst selling them at significant premiums. Most fuel types are diverted to the black market with relative ease.

REFINING

Stability of electrical power supply continues to be a major concern at all three refineries. Basra refinery was offline for at least three days early this month. Baiji refinery was unable to produce for at least three days in the last week of June. Daura, near Baghdad, is operating under less than optimal conditions. Risk of serious damage to refineries is possible – and may have occurred – with unstable power supplies. Coalition contractors and the Ministry of Oil are endeavouring to solve power availability issues at all three major refineries. One part of the strategy is back-up power generators but this will take time and is not an ideal solution. UNJLC has facilitated the expedited entry of at least one major generator into Iraq to Daura refinery under the oil-for-food programme and continues to investigate the availability of others.
More seriously for the medium to longer term, the technology used by the refineries is several generations old. Only the newer Baiji refinery has thermal or catalytic cracking but this is not functioning at present. This means that the yield of higher value products such as diesel, gasoline and kerosene is severely limited and perhaps less than half of what it might otherwise be. It is debatable whether the country will be able to meet all its own fuel needs without imports, even if the refineries are working at full capacity without disruption.

GASOLINE

Production of gasoline has dropped from marginally above half of total estimated daily demand of about 15 million litres to perhaps less than about 30% of this, mainly because of power disruptions to refineries, smuggling, problems with the distribution system, and increased demand for gasoline for small electricity generators during power outages.
Extensive gasoline imports by SOMO and the Coalition have prevented the situation from worsening but at high financial cost. This is unsustainable, particularly for those imports paid for by the Coalition. Viable alternatives will have to be found, either through increasing local production, or imports paid for by Iraq in exchange for fuel oil or cash.

DIESEL

A critical shortage of diesel is now evident throughout Iraq with the black market price for diesel doubling in recent days to ID250. This is a serious problem with secondary distribution networks for food adversely affected.
Unlike gasoline, the Coalition has not imported large quantities of diesel, and this fuel is often the product of choice for export smuggling. New supplies have been further limited by refinery shutdowns with power outages. On the demand side, the needs of small power generators to provide offline electricity and ice for refrigeration have added to the usual transport requirements and the seasonal requirements of the harvest. This extra demand is unlikely to reduce until stability is restored to the power grid.
A further reduction in domestic supply is likely to occur over the remainder of the year as refineries increase their production of kerosene at the expense of diesel in preparation for winter (see below on kerosene). If imports are necessary, the Ministry would prefer to import diesel in preference to kerosene. The former is readily available in the region, whereas the latter is not. UNJLC has received reports of 70 million litres of diesel – about four to five days consumption - in Basra and a further 11 million litres in Baiji, but disruption to pipelines means that it is impossible to transport this to Baghdad.
A diesel crisis is likely into August, particularly if smuggling is not brought under control and if imports are not started.

LIQUIFIED PETROLEUM GAS

Domestic supply of this primary domestic cooking fuel has deteriorated significantly with the combined effects of lower imports by the Coalition and disruption to the North Gas Plant from power outages. The populace is placing greater reliance on alternative fuels such as kerosene. Distribution continues to be uneven with the situation in the south more serious than elsewhere. Continued LPG imports will be necessary at least throughout the summer and beyond to meet estimated daily demand of 4,000 to 4,500 tonnes.
Expected imports averaging 1700 tonnes per day through the country's main LPG export port at Khor al-Zubayr in the south – originally planned for mid-July - will probably have to be deferred for several weeks until the pipeline to carry the gas to Baghdad is repaired. At present, there are no other viable distribution options, by truck, rail or bottles.
The commencement of production from the nearby South Gas Plant, also planned for mid-July, is now impossible until August. In any event, without effective distribution networks, there is little value in operating the plant.
The Coalition is investigating importing a further 600 tonnes per day from Kuwait through to the end of September. This may assist the situation but is still only about 15% of daily demand.

KEROSENE

The Ministry of Oil intends to follow its seasonal plan is to build up the kerosene inventory for the winter but this will be more difficult as the population is already using kerosene extensively as an cooking fuel alternative to LPG. The target stock level is 500 million litres by mid-November, which requires production of an additional 4 million litres per day, on top of current consumption of at least 6 million litres per day over the next four months. Shortages are not yet evident but are possible.

AVIATION FUEL

There is little demand at present for aviation fuel for non-military use but the prospective opening of Baghdad International Airport and Basra Airport to commercial flights, probably not before the end of July, may create a sudden increase in demand. Iraq can produce aviation fuel but to do so will mean reducing diesel and kerosene production.

FUEL SUPPLY FOR UN AND NGO VEHICLES

UNJLC, in co-operation with the Ministry of Oil and several of is operating companies, is facilitating arrangements for UN and NGO vehicles to be able to refuel with ease at designated gasoline and diesel stations, particularly in Baghdad and Basra. This should greatly ease security concerns arising from lack of certainty of fuel supplies, and assist in their ability to continue their work.

---