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• 1. Transport Corridors
• Inspection-at-Sea: A Cost Impediment to the Southern Corridor
• The Jordan Corridor: Improvements Evident
• The Syrian Corridor
• Saudi Arabian Corridor
• 2. Aviation
• 3. Fuels
• General Situation
• Local Fuels Production
• Distribution of fuel products
• Sabotage and Smuggling
• 4. Crude Production and Exports
• 5. Oil Industry Restructuring

1. Transport Corridors

Inspection-at-Sea: A Cost Impediment to the Southern Corridor

The key transport corridor into Iraq continues to be the southern route where goods, both commercial and humanitarian, are trans-shipped through Jebel Ali Freeport in Dubai and enter Iraq through the ports of Umm Qasr and Khor Al-Zubayr, or nearby lesser ports.  However, the practice of Coalition forces inspecting container vessels at sea is significantly increasing the cost of freight using this avenue by reducing the carrying capacity of these ships.

In 1990, UN Security Council Resolution 661 imposed an embargo on Iraq, with vessels calling at Iraqi ports subject to inspection and approval by the Coalition Multinational Interception Force. Following the implementation of the oil-for-food programme, vessels servicing Iraq with oil-for-food cargoes had to be similarly inspected. To facilitate this, containers had to be stowed in a manner that allowed easy access at sea, thus reducing the number of containers that could be carried; break bulk vessels had to have passages in their holds to allow for inspection, taking up space that would normally be used for cargo.

UN Security Council Resolution 1483 of 22^nd May 2003 removed the restriction of trade with Iraq, except for arms and related materials. Nevertheless, the inspection-at-sea regime remains, despite these changed conditions.

This inspection requirement contributes to much higher feeder rates for containerised cargo compared with goods destined for nearby Kuwait. Shippers have to compensate for the lesser cargo that can be carried on each voyage, and for the extra voyage time required whilst undergoing inspection. To illustrate this, a container vessel calling at Kuwait can make a round trip from Dubai in seven days; a similar vessel servicing Umm Qasr requires 14 days for the round trip. This is estimated to add an extra cost of at least US$200 per twenty-foot-equivalent unit (TEU). Passenger ferries and Ro-Ro vessels without passengers are not subject to the same inspection and are reported to be able to make the round trip in the expected seven days.

Removal of the inspection-at-sea regime would significantly reduce the cost of containerised cargo into Iraq, and reduce the transit time for such cargoes.

The Jordan Corridor: Improvements Evident

The Jordon corridor, which uses the Red Sea port of Aqaba for cargos that pass through the Karama-Trebil Jordan-Iraq border, has experienced a number of recent improvements in efficiency, with more in prospect.

Management of the Aqaba Container Terminal is being transferred from the Aqaba Port Authority to the private-sector APM Terminals. APM plans to significantly improve throughput and operations of the terminal. Aqaba Port Authority has already invested in two mobile harbour cranes and yard equipment. Existing gantry cranes are being refurbished. APM intends to introduce rubber-tyred gantry cranes that will allow more efficient stowing of containers. A new traffic management system will reduce the time a vehicle needs to be in the port for a drop off or pick-up from an average of 24 hours to less than an hour. This will lead to earlier availability of imports and eventually increased availability of trucks, with lower rates.

The congestion previously evident in Aqaba’s container terminal is now reduced. This had caused delays and led to a congestion charge of US$450 per TEU for cargo from the US and Western Europe, US$300 from the Far East, and US$150 from Mediterranean ports. In early 2003, vessels had to wait on average for 130 hours before docking. This is now down to 65 hours or less. The cost savings can be significant; with an average of 15,000 TEU’s per month, the surcharges amount to US$6.75 million per month, a cost that must be passed on to the Iraqi or Jordanian economy. It is expected that these surcharges will reduce in the coming months and eventually abolished altogether.

Aqaba’s general cargo terminal has not experienced any congestion and high volumes of oil-for-food, humanitarian and commercial shipments destined for Iraq have been flowing through with no delay or additional terminal costs. However, a shortage of trucks has led to some oil-for-food shipments being delayed in the port.

A significant number of second-hand cars are being imported through Aqaba, averaging 18,800 per month since September 2003, down from a high of 35,000 in June 2003. Most of these are destined for Iraq; the flow through Aqaba for Iraq is estimated at about 13,000 per month. Investment by the port in new yards for storing cars and containers has eliminated the congestion experienced in the latter half of 2003 and the first quarter of 2004.

The Syrian Corridor

Temporary congestion at the Syrian ports of Tartous and Lattakia has led to surcharges of US$50 per TEU from Europe and US$150 from the Far East.

Saudi Arabian Corridor

The Ar’ar crossing point between Iraq and Saudi Arabia has reopened for commercial traffic. Although a generally isolated area, with long distances to travel inside both Saudi Arabia and Iraq, it is well-served by good quality roads and is secure. It holds the potential to significantly reduce the cost of commodities and humanitarian supplies imported into Iraq from Saudi Arabia.

2. Aviation

Several scheduled civilian air services presently operate from Amman to Baghdad, most notably through a subsidiary of Royal Jordanian Airlines and AirServ. Contractors’ flights regularly serve Baghdad. Air freight into Baghdad is also growing. The main hubs for consolidation of airfreight into Baghdad are Bahrain from where DHL has two scheduled flights a day, carrying a combined 60-80 tonnes, and Sharjah, where Eagle Freight has a daily scheduled flight carrying up to 38 tonnes. Air cargo charters are readily available from Sharjah.

3. Fuels

 

General Situation

On a national basis, with the exception of kerosene, demand for all fuels in Iraq continues to exceed supply. However, the situation varies markedly across the country. Availability is generally good in the north and lower south, but poor in Baghdad and the upper south. Baghdad in particular continues to experience shortages with its high population, increased level of economic activity, uncertain supplies from the city’s Daura refinery, and difficulties with supplies from the larger Baiji refinery to the north.

The official prices of fuels continue to be heavily subsidised, encouraging the high demand. Prior to the dissolution of the Coalition Provisional Authority, the authorities were reticent to increase official prices for fear of resistance by the populace. Phased price increases would both reduce consumption and the incentive for export smuggling, with a consequent increase in supply.

 

Local Fuels Production

Several major parts of the country’s largest refinery at Baiji shut down for much-need scheduled maintenance through to the end of June, limiting local production. However, as an indication of increased economic activity within Iraq, Baiji engine lubricants unit resumed production after rehabilitation of the first of two trains. Production capacity is around 100,000 tonnes/year. The refinery will shortly commence rehabilitation of the second train, which has not operated since 1991.

Production from Baghdad’s Daura refinery continues to be limited as a result of insufficient crude oil feed owing to sabotage of pipelines supplying crude from Kirkuk via Baiji. Daura is, in effect, “at the end of the line” for Kirkuk crude. It has started producing 94 Octane gasoline with five refuelling stations allocated to distribute this fuel.

There are no indications of major problems at Basra refinery, despite sabotage to crude oil export pipelines.

Elsewhere, among Iraq’s dozen or so small regional refineries, the Algayara refinery south of Mosul has resumed production of liquid asphalt for road paving. Production is in the region of 300 tonnes/day, all of which is consumed locally. The rehabilitation of the refinery was conducted in collaboration with U.S. Army Corps of Engineers, leading to improved employment in the area.

National refining capacity continues to be affected by disruption to national grid electricity supplies but the industry has ameliorated this with the installation of on-site generating capacity.

 

Distribution of fuel products

Densely-populated Baghdad and the Upper South continue to suffer shortages as evidenced by high black-market prices (see overleaf). The situation in Basra area is generally better than governorates to the north of it. Nevertheless, long queues at fuel stations are a common sight in main cities and the supply situation fluctuates greatly from one day to another. In the north, supplies from Turkey and the generally permissive security situation are similarly reflected in low prices and good availability.

Many factors affect the distribution of fuel products, the most significant of which are:

• Unsteady refinery performance owing to sabotage to crude pipelines, mechanical breakdown and unstable electricity supplies;
• The reluctance of truck drivers to operate in certain areas as a result of security threats;
• High demand on gasoline and diesel due to extended electrical power outages and the need for local generators; and
• High demand for gasoline with the much greater numbers of vehicles on the road. However, it seems that imports of used cars are levelling off as the market reaches saturation.

 

 Gasoline: Shortages in Baghdad were particularly acute in the first half of June as a result of a number of sabotage attacks on the product pipeline from Basra to Baghdad and the shutdown of the Daura refinery. The situation was relieved with trucked fuel product imports from Saudi Arabia following the re-opening of the Ar’ar border point and resumption of Daura production.

To further improve distribution, the industry has started to rehabilitate refuelling stations after receiving 8000 gasoline forecourt pumps. Many filling stations were looted or damaged in April and May 2003 and these new pumps should help to increase the rate at which the stations may service vehicles, reducing queues.

Diesel: Demand is particularly high not only because of the increased consumption for local generators to power air conditioners and refrigeration during the heat of summer, but also with the harvesting season in the south and upper south. Diesel is also needed for irrigation water pumps. Prices in some of these locations exceed ID300 per litre, or 15 times the official price.

 

Note: Prices are much lower in the north with good security and alternative supplies from nearby Turkey, and higher in the centre and south where economic activity is high and security less permissive.

LPG: National production of LPG cooking gas is still probably less than a third of demand with little apparent prospect of this improving in the foreseeable future. Domestic production has hardly increased in the past six months since the Khor Zubayr South Gas Plant – one of the country’s two main plants – came back onstream. Production from this plant is reported to stand at 1200 tonnes per day, together with 200 tonnes of natural gasoline against a pre-war level of 3200 tonnes per day of LPG and 400 to 500 tonnes per day of natural gasoline.

In Kirkuk, where the North Gas Plant is located, distribution of LPG cylinders is rationed with coupons. Consumers are entitled to four cylinders each three week period.

Kerosene: Supplies are thought to be more than adequate for current consumption as summer is the low season for this fuel. However, Iraq will have to build stockpiles for winter if supplies are to be adequate. For last winter, supplies were tight but adequate as a result of massive Coalition imports combined with relatively mild weather. These conditions may not be repeated this winter.

Fuel oil: Given the poor mechanical condition of Iraq’s refineries, about 50% of the volume of all crude oil processed is converted into heavy fuel oil. Iraq therefore has a very large excess of this – perhaps 200,000 barrels per day – and is therefore actively promoting exports through the port of Khor Zubayr through generous pricing.

Sabotage and Smuggling

This remains a constant threat to crude production, transportation and exports, and to fuels production, distribution, and supplies. Since May 2003, there have been more than 100 attacks against the country’s 6,000-km pipeline system and 15,400 km electrical power distribution network. The extent of smuggling, particularly of diesel and heavy fuel oil, is difficult to ascertain but is thought to be sizeable. Iraqi courts are, however, convicting smugglers and impounding their vessels. The incentive for illicit smuggling will not disappear until domestic prices for fuels rise to more realistic levels.

4. Crude Production and Exports

The Iraqi Minister of Oil, Mr. Thamer Ghadban, announced in early June that Iraq expects to reach a crude production level of 3 million barrels per day by the end of 2004, with recent production nearing pre-war levels. These expectations are underpinned by progress – albeit slow – on several major upstream projects. One notable example is the Qarmat Ali water treatment plant which serves the giant Rumaila oilfields in the south. This plant is necessary for pressure maintenance in the fields and was turned over to Iraq’s South Oil Company following a US$280 million restoration and refurbishment programme by Coalition contractors. It is now operating at near full capacity of 52,000 gallons per minute.

Despite several major attacks on export pipelines in the south, exports through the offshore Mina Al-Basra and Khor Al-Amayah terminals are being maintained. The same cannot be said for the Iraq-Turkey pipeline, generally fed by production from the north at Kirkuk. Production from these northern fields is being held back to about 400,000 barrels per day, or about half of their reported capacity. Production and exports could be increased quite significantly from there fields alone if the security situation improves.

5. Oil Industry Restructuring

Reports indicate that the Iraqi oil industry may restructure itself along functional lines as once existed, rather that the more geographical structure imposed by the previous regime. The Iraqi National Oil Company may assume ownership of the upstream operations of South Oil Company and North Oil Company. A separate Refining Company may cover the entire refining sector, and the Oil Distribution Company will be responsible for the distribution of all hydrocarbon products – both oil and gas – in the country. The Gas Industrialisation Company may assume responsibility for LPG producers South Gas Company and North Gas Company.