Overview
The fuels situation in Iraq recovered remarkably in the second half of August, although it is by no means stable and could reverse suddenly with mechanical breakdowns or accidents in refineries, or further attacks on the vulnerable fuel and power distribution systems. The recent sabotage to pipelines from Kirkuk to Baiji may have a serious effect on the ability of the Baiji and Daura refineries to maintain their current levels of production during this month. Other incidents cannot be ruled out.
Nevertheless, supplies of gasoline, including imports, have probably been sufficient to meet local demand and to place some stock into reserves. Kerosene production is estimated to be adequate to meet current demand although there is great concern that it will prove impossible to build up sufficient stocks to meet greatly increased demand over the winter months. No imports have been made yet but they made be necessary as the year progresses. Diesel is still in short supply but less so than in July and early August. With the start-up in early September of at least one small "topping refinery" producing this fuel and the commencement of first diesel imports by the Ministry of Oil, the situation has the potential to improve steadily.
Perhaps the most notable development in fuels availability was the first import of about 8,000 tonnes of barged LPG into the south, drastically reversing an acute supply shortage. It appears that these quantities may be repeated weekly, at least until the Southern Gas Plant is operational. This may be possible by mid-September but may be further deferred to late October. Furthermore, consideration is being given to importing an average of 120 tonnes per day in by rail to the north, above and beyond existing trucked northern imports. Nevertheless, the LPG crisis is by no means over. Imports will be required well into 2004.
The equitable distribution of fuels is now perhaps a more pressing challenge than basic supply. This matter has received a great deal of attention by the responsible elements in the Coalition in recent weeks, at the most senior levels; it is expected that much closer co-operation and integration between the oil industry, the CPA and Coalition Forces at the operational level over the coming months, and greater investment in distribution infrastructure, will lead to more effective results. Coupled with this are new initiatives and an ever-increasing focus on security and smuggling.
Diesel imports by the Ministry of Oil, initially into the north where there is more of a diesel shortage than in the south and smuggling less rampant, are thought to have commenced. Although a reasonable volume of imports are being managed by the Ministry, the Coalition does now seem to have deferred its plans to transfer responsibility for all fuel imports to the Ministry of Oil for at least a month to November, if not more.
Significant investment in the Iraqi oil industry, particularly refining and distribution
Crude production and exports:
National crude production and exports have recovered strongly in the past fortnight after the sharp decline suffered in mid-August owing to civil unrest in Basra. Whilst northern production has continued largely uninterrupted at about 500,000 bpd, southern production, historically the greatest contributor, is now thought to be consistently above a million bpd. On one day, it is believed that total national production exceeded 2 million bpd, but with the condition of the industry's infrastructure, this proved to be unsustainable.
Export capacity continues to be constrained, particularly from the north, by pipeline sabotage. It is now unlikely that there will be any significant exports from the north before next month. These are unlikely to exceed 500,000 bpd before the end of the year.
With limits on exports and the need to produce oil to extract gas for LPG, a large proportion of production continues to be reinjected into the fields. Crude oil production is therefore overstated by the volume reinjected as it is unavailable for export or further processing but continues to be counted as production.
Crude production volumes are more than ample to provide the necessary refinery feedstock for suitable light products. The second half of the month had seen a significant increase in the quantities transferred to the major refineries, perhaps up to 90% of their nominal processing capacity. This was almost double the level of July and the first half of August. However, sabotage to multiple pipelines between Kirkuk and Baiji on the evening of August 29th is likely to significantly reduce the flow to Baiji and Daura refineries and in turn limit their ability to supply much-needed light products.
Gasoline and LPG continues to be imported, principally by the Coalition but in increasing volumes by SOMO, Iraq's State Oil Marketing Organization. However, SOMO is likely to have commenced diesel imports, most likely through the north. SOMO, however, can only pay for its imports by bartering heavy fuel oil. Proceeds from crude oil sales are controlled by the CPA with other significant calls on those funds. In any event, quantities of this relatively low-value product are probably insufficient to barter for required quantities of lighter fuels. Unless SOMO is funded to pay for imports, or unless the Coalition continues to manage fuel imports, a general fuel crisis will continue. This effect of this will be most acute in the north over winter.
It is now clear that the Coalition has deferred the date by which SOMO must take full responsibility for fuel imports until at least November, if not later, and recognizes the need to continue LPG imports into 2004. This will allow time for further rehabilitation of the refineries, minimize the volumes that SOMO will have to import, and increase the volumes of heavy fuel oil available for barter.
Security and smuggling:
Security of oil infrastructure, particularly the hundreds of kilometers of hard-to-guard pipelines, continues to be a major concern. There are probably enough light liquid fuels (excluding LPG) in Iraq to meet the country's most critical needs, albeit at a reduced level, but security (mainly common criminal activity but also guerilla attacks) risks pervade the industry. Damaged pipelines prevent crude being transported to refineries and light products to where they are most needed; repair crews are attacked; dependence on trucking fleets instead of pipelines is risky as cargos can be hijacked or diverted; at least six Iraqi inspectors working to ensure equitable distribution and combat endemic corruption have been murdered in the line of duty.
As a security force, the existing Iraqi oil police are generally ineffective, with lack of weapons, vehicles, communications and even uniforms. Tribes have been contracted to protect some remote facilities; whilst this has been of some assistance, it has not been as successful as hoped. Although a facilities protection contract has been awarded by the CPA to security firm Erinys International for a 7000-man facilities protection service covering 140 key oil industry sites, it is unlikely that this force will be properly manned, trained and equipped until December. A proposal to mobilize an International Police Task Force that would provide up to 30,000 officers throughout Iraq is understood to have been approved but not funded. In the meantime, responsibility for oil infrastructure security will continue to lie with Coalition forces.
However, the Coalition is putting significantly more resources into infrastructure security and counter-smuggling efforts, including a more centralized and integrated management structure. One key initiative that may be considered is an essential services security office within the CPA, initially staffed with Coalition military but transitioning as soon as possible to Iraqi civilian control.
The Coalition's now quite aggressive approach to illegal export smuggling is expected to be bolstered in the south by the addition of five confiscated patrol boats, to be transferred from the UAE and more active interdiction in international waters. However, it presently seems impracticable for Coalition forces to establish effective control over the southernmost sector of the Shatt Al-Arab waterway shared with Iran. Elsewhere, the challenge of exercising effective control over the thousands of kilometers of land borders and stopping smuggling seems beyond the means of the Coalition. Even the volume of regular passenger cars and trucks crossing from neighbouring countries to take advantage of cheaper Iraqi fuel is causing a small but steady drain on local supply.
Smuggling will not be eliminated until general law and order and effective border controls are reinstated and prices in Iraq rise to a level comparable to those of smuggling destinations. All of these are medium to long-term issues but short-term military-led efforts are having an effect.
Distribution:
Until recently, distribution has been left largely in the hands of the responsible arm of the Iraqi Ministry of Oil but this has proved less than totally effective. The Ministry's ability to repair, upgrade and operating the centralised fuel distribution system has been severely limited by very poor communications with outlying facilities and depots, disrupted lines of authority, and lack of funds.
The importance of distribution, especially given the fine balance between supply and demand and the lack of buffer and reserve stocks, is well recognized by the Coalition but it has taken time to address it. In the coming months, we may expect to see much closer co-ordination in distribution at the operational level between the Ministry, CPA and Coalition forces, acting in support of the CPA, and increased funding to the distribution infrastructure. Security allowing, coalition personnel may be posted at about three dozen key sites and distribution centers to provide oversight and expertise. Equitable distribution is now seen as a priority issue affecting stability and security.
Supply limitations aside, there are many factors that limit the effectiveness of the distribution system. At many loading points, insufficient power limits the loading and downloading capacity for trucks and rail cars; the preferred and more secure bulk transport media of pipelines are often not in service; smuggling and corruption are endemic; pre-war middle management may no longer be in service; fuel and fleet accountability is almost non-existent or ineffective. Furthermore, with many pipelines not being available, there is a much greater demand on trucks for both liquid fuel tankers and specialized pressure vessels on trucks for LPG. There are not sufficient quantities of these types of trucks available in Iraq and many of those that are available are in a poor state of repair.
Refining:
Following intermittent but generally steady growth in production since early July, refinery output of gasoline, diesel and kerosene from the country's three major refineries seems to have plateaued at about 30 to 31 million litres per day. This is between 5 and 10 million litres per day (equivalent of about 30,000 to 60,000 bpd) short of total estimated national requirements. Much of this improvement has been due to steady power supply, mainly from newly installed generator power. At Basra refinery, for example, the U.S. Army has made available generating plant that was originally intended for its own facilities.
It is unclear whether the major refineries will be able to move beyond this level in a sustainable manner without substantial investment and refurbishment. At present, they are operating at a very low level of margin of safety in terms of spares availability and routine maintenance.
The greatest risk at present to national refining capacity is the Baiji refinery. This plant is due to go into a major maintenance phase within two months. It comprises three main units (in effect, it is three refineries in one complex) so it is unlikely that all will be taken offline concurrently. Nevertheless, it will have a significant effect. Furthermore, stable power supply, although much improved, is still not guaranteed.
In the shorter term, though, the August 29th sabotage to the Kirkuk-Baiji lines may reduce the amount of crude that can be provided to the refinery and to Daura in Baghdad. At present, it is understood that crude is being provided to Baiji and Daura by other means, but at much reduced volumes. It is not expected that the damaged pipelines will be operational again before the end of this month.
On the positive side, some progress seems to have been made with the assistance of Coalition forces on refurbishing and reactivating a number of Iraq's dozen or so small "topping" refineries. These are thought to be able to process an average of 10,000 bpd each. At least one such plant, at Kisik in northern Iraq, is expected to start producing 200,000 litres of diesel per day in early September, and in excess of 1,000,000 litres per day within a month or so. If more of these refineries can be brought onstream, they may make a collectively significant contribution to the supply of especially diesel and kerosene.
Basra refinery, the country's second largest, is now operating far more effectively following the installation of temporary independent generating capacity by Coalition forces whilst more permanent independent generators are being installed. It has returned to its traditional role of providing about 25% of refined products nationally.
In order to meet national fuel needs by the end of the year, Iraqi's refineries will have to increase production at a monthly compound rate of 10%. As UNJLC expected mid-August, refinery output may have plateaued. It may even fall back again with the effect of the Kirkuk-Baiji pipeline sabotage and the need to take refineries out of operation for much needed maintenance. This makes the need to build up strategic reserve and buffer stocks all the more important, especially before winter.
Gasoline:
For the latter three weeks of August, estimated gasoline supplies have probably exceeded national demand. This has only been possible through the combination of steady refinery production and Coalition imports in excess of 5 million litres per day, even higher in the wake of the mid-month Basra civil unrest.
Lines at petrol stations persist throughout the main cities of Iraq but are not unreasonable given that the entire country has perhaps only 300 retail outlets to service 25 million people. Unusually, the generally good supply situation has not led to a significant decline in black market prices. It appears that situation is perceived as not yet adequately stable and hoarding is still occurring. In many ways, this provides a built-in and readily accessible buffer should supply be further disrupted in the coming weeks.
Imports of mainly second-hand vehicles into Iraq to take advantage of the tax-free regime that will prevail through to at least the beginning of next year and the needs of small household generators to compensate for unstable national grid supplies are adding to gasoline consumption. There is little that can be done to reduce the number of vehicles on the street but restoration of national generating capacity and improvement of distribution infrastructure in the national grid should reduce demand for neighbourhood and domestic generators. Cooler weather in late September and October will also reduce the need for air conditioning and refrigeration and the need for localized power.
UNJLC does not expect a severe gasoline shortage to recur in the near future as long as refinery output is maintained and gasoline imports maintained at substantially the current level. However, it is not inconceivable that the situation may reverse suddenly should refinery output fall unexpectedly (as may occur if insufficient crude cannot be got to Baiji and Daura or if any of the three major refineries suffer a major mechanical failure or industrial accident), or if the Coalition finds itself unable to continue imports. We are not confident that the surplus enjoyed over recent weeks has allowed the accumulation of sufficient strategic reserves to see the country through an extended supply disruption.
Liquid Petroleum Gas (LPG):
Overall LPG supply improved dramatically in the last week of August, especially in the south, with the delivery of 8,000 tonnes from the vessel Queen Xenobia to Khor Zubayr from Kuwait and the doubling of regular trucked imports, again from Kuwait, to eight trucks per day. It seems that this vessel may be able to provide a similar load on a roughly weekly basis, dependent on the capacity of landside infrastructure to cope with the volumes delivered. There now appears to be no longer a need to supply LPG to the south from elsewhere in Iraq, at least for the time being.
Nationally, refinery production of LPG is now consistently above 400 tonnes per day, the highest in the postwar period. This is attributable mainly to a recovery in Basra refinery production. Although a relatively small part of national production, the refineries can make the difference between a severe shortage and a manageable one.
The key to improving local LPG supply will be the start-up of the first of three production trains of the Southern Gas Plant (SGP). This should be able to supply about 1200 tonnes per day fairly within a reasonable time. However, the start-up is dependent on stable power supply to the Rumaila natural gas plant which feeds the SGP. At the earliest, SGP start-up is expected to be mid-September; at the latest the last week of October.
Further imports into the north are being considered by train from Turkey via Syria at a rate of 120 tonnes per day. It has not proved possible to import LPG from Turkey in the required quantities. Trucked quantities into the south from Kuwait should also increase five-fold to 800 tonnes per day, but it is unclear when this will happen or how long this will continue for.
The challenge now, especially in the south, is distribution. It will be necessary to obtain sufficient LPG bottles to ensure that it is possible to distribute this gas. UNJLC understands that there are adequate pre-war supplies of new bottles at the main national gas facility at Taji, near Baghdad. The import of a large number of LPG bottles were facilitated by UNJLC post war. These may also be in Taji. Elsewhere, damage to pipelines and a shortage of LPG trucks limit the ability to get LPG to bottle filling plants where it is most needed.
Whilst it is clear that September will see an easing in the LPG supply situation, this is only because of imports. The only way in which these may be discontinued is if the second train of the SGP is made operational, Northern Gas Plant production is increased, and refinery production increased. The second train of SGP is the most important of these, with perhaps another 800 tonnes per day; the Northern Gas Plant is operating now at close to full capacity and will require substantial investment before it can expand production further; the refineries could produce perhaps a further 200 to 250 tonnes per day until optimal conditions. If supplies are to be adequate to meet the needs of the populace, and particularly to see them through the coming winter months, imports will be necessary well into 2004.
Kerosene:
National kerosene supplies appear to be generally adequate on an overall basis. There are regional shortages, mostly in the north, but they do not appear to be critical. Current consumption is probably being met from locally-refined production, which has grown significantly in the past fortnight. More importantly, increasing volumes are being placed into much-needed reserve stocks for winter. Significantly, the shift away from kerosene production in favour of diesel throughout most of August appears to have been reversed, with relatively more crude allocated to kerosene production.
It is uncertain that it will be possible to build up sufficient winter stocks without imports. It is understood that one reason for the Ministry of Oil commencing diesel imports is to allow an even greater part of locally refining capacity to be allocated to kerosene. Diesel is readily available in the region but most kerosene produced in those countries well-placed for imports is more expensive aviation turbine kerosene. There may be an opposing preference to import kerosene as it is at less risk of being smuggled back out of Iraq than diesel. For now, the preference seems to be to import diesel and use the released refinery capacity to produce kerosene locally.
Diesel:
The shortage of diesel that first became evident in early July following the depletion of major pre-war stocks continues, although supplies have improved markedly in recent weeks. The shortfall between overall demand and local supply has probably fallen to about 3 million litres per day from 8 or 9 million litres per day a month ago. The greater attention given to export smuggling over August has probably made much more of that fuel available for the internal Iraqi market.
It is further understood that SOMO has or will soon commence diesel imports through bartering heavy fuel oil for diesel, most likely from the north. Volumes involved are uncertain but will assist the situation. It is not expected that the Coalition will import diesel for now.
Nevertheless, regional anomalies continue, particularly in the north. Distribution challenges still have to be fully met. Persistent failures in electricity supplies from the national grid are continuing to add to demand with the needs of domestic neighbourhood generators.
Whilst it had been expected that local diesel production would be reduced in favour of kerosene, it appears that quantities of crude devoted to diesel have actually been increased, but a far greater proportion of new volumes of crude transferred to refineries has been devoted to kerosene. In other words, relatively more priority has been given to kerosene, but not to the extent that absolute volumes of diesel were reduced.
Seasonal requirements for the harvest and irrigation, the considerable needs of diesel-fired power stations and water treatment plants, and demands of the transport industry all have significant calls on diesel supplies. To reduce this, steps are being taken by the Coalition, in conjunction with the Commission of Electricity, to convert major power stations that presently burn scarce diesel to more abundant crude oil. One particular power station, Al-Qudos, if so converted, would reduce the demand for diesel by up to 1.5 million litres per day (although it is probably using much less than this now). However, it is likely to be the end of the year before this conversion can be completed.
It is understood that the Ministry of Oil intends to build up diesel reserves of about 400 million litres. Current reserves are thought to stand at less than 25% of this.
Natural Gas:
UNJLC has not considered this fuel to date, but along with diesel, it is very important for power generation and, through that, the provision of humanitarian services.
As with diesel, there seems to be inadequate quantities of natural gas available to support power stations. This may be forcing vital generating capacity to lie idle, or for power stations to operate below current potential.
However, it does appear that with the partial rehabilitation of the country's pipeline system, more natural gas is being made available to power plants, and generating capacity is being utilized accordingly. This recently became more evident in the north but may also have occurred elsewhere.
Aviation fuel:
With the indefinite deferral of the opening of Baghdad International Airport and uncertainty over the opening of Basra Airport to commercial flights, demand for aviation fuel for non-military use continues to be limited to the requirements of humanitarian air services, cargo and courier flights, and those servicing the reconstruction and rehabilitation effort. Most larger aircraft servicing Iraq from neighbouring countries carry sufficient fuel for the round trip but some smaller aircraft servicing the north and south require fuel. Small quantities can be imported from Turkey from the north and there are supplies in the south.
At present, aviation fuel is not an issue. In fact, it is possible that existing bulk stocks at refineries could be put into the kerosene stream, thus increasing the winter stockpile of this vital domestic fuel.
Fuel Supply for UN facilities:
Prior to the events of August 19th, UNJLC has facilitated arrangements through the Ministry of Oil for UN light vehicles to refuel with relative ease and safety at two designated outlets, particularly in Baghdad. It also arranged for secure fuel supplies in Basra and elsewhere is south in the wake of the recent unrest. Some of these arrangements may now have expired. Although UNJLC presently has a much-reduced presence in Iraq, it is endeavouring in arrange strategic supplies for the limited U.N. operations that do continue.
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