The UNJLC Iraq Fuel Bulletin aims to provide a clear and concise periodic overview – usually weekly – of the situation as it exists in Iraq with regards to the oil industry. It focuses on the availability of fuels, particularly as they affect the welfare of the populace and related humanitarian work. It further seeks to identify major issues for the humanitarian community and other interested parties, to provide relevant background and constructive recommendations on current issues, and to alert responsible parties to emerging issues in the crisis so that they may be addressed in good time. The UNJLC Iraq Fuel Planning Team presently has dedicated representatives in Baghdad, Basra and Erbil. For further information please contacted info@unjlc.org

Contact details for all UNJLC offices are available here.

• OVERVIEW
• Crude production and exports
• Security and smuggling
• Distribution
• Refining
• Liquid Petroleum Gas (LPG)
• Kerosene
• Diesel
• Aviation fuel
• Fuel Supply for UN Light Vehicles

OVERVIEW The fuel situation in Iraq has deteriorated further in the past week. Greater shortages have appeared in the south, upper south, and parts of the north. This applies even to gasoline where the overall national supply is generally adequate. The twin effects of inadequate supply and inequitable distribution are conspiring to maintain high black market prices and low levels of availability. Iraq is presently producing several times more crude than is normally required for conversion into adequate quantities of refined products, but is unable to process enough of this through its dilapidated refinery system to meet demand. With only half of the processed crude refined into usable light products (the balance being heavy fuel oil), domestic supply falls far short of requirements. To help bridge this gap, the Coalition and Ministry of Oil are continuing to import gasoline and LPG in large quantities. However, no significant imports of diesel or kerosene have been made to date. The latter two fuels are particularly important from the humanitarian perspective, the first for cooking year-round; the second for winter heating. It is necessary to stockpile significant quantities of kerosene for winter but this year’s is well behind schedule. To catch up, much more kerosene will have to be produced locally at the expense of diesel. Winter kerosene shortages are a near certainty. Of particular concern are indications that the Coalition expects the Ministry of Oil to meet the gap between domestic supply and demand as early as the end of next month. This may prove impracticable in the time available. As the Ministry does not presently have access to the financial proceeds of crude oil exports, it will be limited to bartering heavy fuel oil for imported gasoline, diesel, kerosene and LPG. Domestic refinery production is unlikely to recover sufficiently in the next six to eight weeks to allow reduced overall imports. As there may be insufficient fuel oil available to barter for the required quantities of light products, and as this trade has significant practical difficulties, not the least in financing, it may prove to be a less than satisfactory strategy for anything other than relatively modest quantities. Unstable supplies from the national power grid to all parts of the industry and security of facilities are the two most critical factors preventing further increases in domestically-produced fuels. Despite their condition, Iraq’s refineries could significantly increase production and delivery of refined products if pipelines were uninterrupted and power supplies remained sufficient and constant. Export smuggling, particularly of diesel, also remains a major problem but is now being addressed more aggressively by the Coalition. New LPG imports into the south during August and first post-war production from the Southern Gas Plant in September may improve the LPG supply situation in the near term. However, this may be offset by a scaling back of Coalition imports. With a less than effective distribution system, pipeline problems and insufficient trucking capacity, an LPG crisis is almost certain to continue.

Crude production and exports

Total sustainable national crude oil production is now well established above 1.25 million barrels per day. Production from the north has been generally stable since the industry restarted post-conflict. The increase comes almost exclusively from the south, made possible by now regular crude exports through the Mina Al-Bakr terminal. No crude exports have yet been made through Turkey from northern production and it is unclear when these may commence.

This crude production is about three times what would be required, if processed into suitable light products, to meet all of Iraq’s domestic and humanitarian needs. However, it has been possible to transfer only about 20% of this production to refineries, and the technical limitations of the refineries themselves have allowed only about half of that volume to be refined into useful products. The balance of production is heavy fuel oil. Such lighter fuels as are produced meet only half of the country’s needs. Accordingly, there will be an ongoing need for fuel imports – either by the Oil Ministry or through the Coalition - for several months to come.

Significantly, the oil industry’s marketing arm appears to be unable to use the proceeds from crude oil sales to finance refined product imports. These go direct to the Iraq Development Fund, controlled by the Coalition Provisional Authority. The industry is therefore forced to resort to bartering heavy fuel oil for the required lighter products. This is proving unsatisfactory. Given that heavy fuel oil is less valuable per unit of volume than lighter products, and the volume of fuel oil available for barter is similar to the volumes of lighter products required, the industry is unable to satisfy domestic requirements either through local production or Ministry of Oil imports. Under the present arrangements, unless the Ministry is able to pay for imports to close the gap between domestic supply and demand, or unless the Coalition increases fuel imports, a generalized fuel crisis will continue. This will be especially harsh on people in the coming winter, particularly in the north.

Security and smuggling

The Coalition is now clearly taking a more aggressive approach to illegal export smuggling and racketeering with some effect, especially in the south and north. Systems are also being put in place in several areas to track trucks leaving from depots to ensure that they deliver their fuel cargoes to their intended destinations. It will be impossible to stamp out illegal trade and diversion of fuels at least until regular law and order are restored, but the recent campaigns have at least increased costs and risks to smugglers.

Fuel exports, other than under the auspices of the Ministry of Oil, continue to be implicitly permitted by the CPA by virtue of their omission from the list of prohibited exports under the Authority’s Order No. 12. Although making unofficial fuel exports illegal will not stop the trade, it would provide a legal basis for interdicting smugglers. UNJLC recommends that this be actively considered.

Personal security of Coalition contractors and Iraqis working to restore the industry is also an issue with the death of one U.S. contractor this week and various other attacks.

Vulnerable facilities such as pipelines, power lines and transformers continue to be subject to deliberate sabotage or criminal damage. This is expected to continue. However, a contract for a 7000-man facilities protection service covering 140 key oil industry sites is expected to be awarded by the CPA in the coming days. This will augment the existing oil police guard force, which has proved to be less than entirely effective. It will take time for the new force to become operational and it is uncertain whether the manpower will be adequate in the prevailing circumstances. It is nevertheless a welcome development.

Distribution

Inequitable distribution and logistical problems are evident throughout Iraq, particularly outside Baghdad. The past week has seen severe shortages of diesel and gasoline in the south, upper south and north. Black market prices in affected areas such as Basrah have at times reached ten times the price in the capital, and 50 times the official price. In some areas, rationing was implemented.

Large quantities of diesel have been shifted from Basrah to the upper south and Baghdad, increasing the perception of a shortage in the south. With the Basrah refinery off line for several days, gasoline is in unusually short supply. Long lines reappeared at Basrah’s ten petrol stations for the first time in several weeks. Power failures at these stations often prevented them from distributing whatever limited supplies were available

The north, with the exception of the three largely Kurdish governorates, continues to be better served with LPG than other regions as most LPG imports from Turkey are directed there. Although there are shortages in Baghdad, it is the main beneficiary of LPG production from the Kirkuk’s North Gas Plant and from Daura refinery. The south, however, has an acute shortage of LPG, although this may be relieved by September with imports directed at the area, and the start-up of first post-war production from the South Gas Plant. In contrast to the LPG situation, diesel and kerosene are in very short supply in the north, and less so in the south.

Logistical problems include an inadequate number of serviceable fuel tankers and LPG trucks for transport both between and within regions, and a low level of buffer stocks to absorb the effect of sudden increases in demand or temporary supply shortages. Pipelines are also subject to damage by corrosion and lack of maintenance, sabotage, and looting of refined products – even crude oil – by thieves tapping into the lines.

Refining

The country’s three major refineries are presently producing approximately 50% of national light fuel requirements. At present, they are processing perhaps 60% of their design throughput in part because of disruptions to pipelines providing feedstock, and in part because of mechanical and maintenance problems. A number of smaller “topping” refineries throughout the country, with capacities of between 2,000 and 20,000 barrels per day, can provide for local needs of gasoline and diesel, but many of these are not operating for lack of crude supplies and spares.
All major refineries continue to suffer from lack of stable power. They could significantly increase production – although perhaps not quite to the level of national self-sufficiency – if power supplies were guaranteed. The effect has been felt particularly at Basrah refinery which is now totally dependent on generators and isolated from the national grid. As a result of various failures, it ceased operations entirely for the last four days of July, and only came onstream recently with reduced capacity. Stable power is unlikely to exist at Basrah for several months. Only Daura refinery has sufficient independent power. Baiji’s needs are much larger and more complex, as are Basrah’s to a lesser extent.
In principle, once these problems are addressed, the refineries should be able to meet all of Iraq’s domestic and humanitarian needs; in practice, because of the degradation in the refineries over many years, their low level of maintenance, technology and productivity, and shortages of spare parts, it will be many months before this is possible.
The country’s refining capacity continues to rely greatly on the Baiji refinery, which is itself functioning with difficulty. Much-needed major maintenance has been deferred in view of the situation but this cannot continue indefinitely.
Supplies of chemicals and catalysts required by the refineries appear to be adequate on a national basis but there are regional shortages and distribution problems. For example, at least one small topping refinery in the north could produce gasoline and diesel, but has not been allocated the necessary additives. Further supplies should enter the country in the next couple of months as oil-for-food deliveries gather momentum.

 

Above: Domestic production of light fuels – gasoline, diesel and kerosene – is heavily dependent on the Baiji refinery. Any major disruption to operations at this installation will cause a severe shortage of fuels. At present, it is working with difficulty significantly below its nominal capacity and is well overdue for major planned maintenance.

Gasoline

Together, supplies of locally produced gasoline and imports by the Coalition and Ministry of Oil appear to be meeting overall national demand. However, uneven distribution across the country has led to major regional shortages and increases in the black market price, especially in the south. On some days, particularly when the Basrah refinery was not producing, black market prices exceeded ID500, or 25 times the official price. Even higher prices are expected in the coming week until regular supplies are restored to the market. Long lines have reappeared at petrol stations in several governorates, although the situation in Baghdad is generally good.



Above: Market prices for gasoline vary widely across Iraq, indicating major inefficiencies in distribution. With few exceptions, prices are at least five times the official rate but have at times exceeded ID500.

However, Coalition imports are uncertain beyond the end of next month. It is unlikely that local refining capacity will have recovered sufficiently by then to replace these. In order to maintain stability in the gasoline market, the Coalition will have to extend its own imports or provide the Ministry with the means to greatly increase its own.
The combination of mechanical and maintenance problems with gasoline producing plant in Basrah and a several-day refinery shutdown have severely limited supplies to the area and led to unexpectedly severe shortages.

Liquid Petroleum Gas (LPG)

Total LPG supply, including imports, continues to meet no more than 50% of estimated national daily summer demand. As for gasoline, distribution of supplies are uneven with market prices being at least ID3000 per 12kg bottle, compared to the official price of ID250. The price in many regional towns and cities exceeds ID4000.
At present, the Coalition has a vessel with about 45,000 tonnes of LPG offshore, in preparation for offloading into smaller lightering barges to Khor Zubayr later in August. Assuming that domestic production and the level of existing LPG imports from Turkey remains unchanged, this quantity will be sufficient to close the existing gap between supply and demand for about one full month. However, with the logistical need to fill storage tanks and pipelines prior to distribution, it is unlikely that these supplies will reach the public before September. The severe LPG shortage will therefore continue throughout August. It may well continue beyond that if the new supplies cannot be distributed effectively.
In the meantime, new imports by truck from Kuwait should help to alleviate the shortage, at least in the south, by mid-August. The commencement of first postwar production from the rehabilitated Southern Gas Plant by late August at the earliest will also assist supply.
However, with an estimated 20% rise in winter LPG consumption above summer demand of 4200 tonnes per day, planning requirements call for stockpiling of up to 100,000 tonnes by the end of autumn. By September, if current plans are achieved, the country may be producing no more than 2500 tonnes per day, comprising 1200 tonnes per day from the South Gas Plant, 900 tonnes per day from North Gas Plant, and 400 tonnes per day from refineries. This will result in a daily shortfall in current consumption of 1700 tonnes, before winter stockpiling. This deficit will have to be made up from imports. If the Coalition ceases imports in October and the Ministry is unable to or fails to compensate for this, a winter LPG crisis will emerge.

Kerosene

Regional shortages of kerosene do exist at present, especially in the north, but there does not yet appear to be a nationwide problem. Prices are, however, particularly high in the three northern Kurdish governorates where supplies are especially low and the need is generally greater than elsewhere.
However, kerosene is particularly important as a heating fuel in winter. During that season, Iraq uses about six times the volume of kerosene as it does in summer. The Ministry of Oil endeavours each year to stockpile up to 500 million litres in preparation for the cold weather. This programme does appear to have started but is behind schedule with the demand for diesel (kerosene and diesel being produced from the same distilled fraction of crude) drawing on supplies that would normally be diverted to the winter reserves.
It may be impractical to import kerosene from regional countries as it is not generally refined locally in the quantities that may be required. As such, the Ministry may prefer to reduce diesel production and utilize refining capacity for kerosene. The current diesel crisis and a possible winter kerosene crisis are therefore directly related. The current high level of demand for diesel may prevent kerosene production needed for future consumption in winter.

Diesel

A diesel shortage has been evident throughout Iraq for more than a month now following the almost complete exhaustion of large pre-war stocks and inability of the refineries to replace these. The situation has been worsened by extensive export smuggling to regional countries and the increased demand from small power generators because of national grid failures. Furthermore, many of the small to medium-sized power stations and the water sanitation facilities operate on diesel fuel. These installations are being accorded priority of supply, with the balance allocated for transport, agricultural and domestic uses.
No significant diesel imports have been made by either the Coalition or the Ministry of Oil but there have been persistent indications over recent weeks that these are imminent. The last few large stocks of diesel throughout the country – such as reserves at cement factories - have been identified and are being introduced to the market. However, they will not ease supply for more than several days. It is possible that imports may commence once these stocks are consumed, but the Coalition may be waiting until the level of export smuggling has been reduced before doing so.
It is certain that a diesel crisis will persist for the foreseeable future, even if imports are commenced immediately. Volumes of domestically produced diesel may decrease in the next three to four months as refineries focus more on kerosene for winter needs at the expense of diesel.
An obvious source of imports for diesel, especially from a logistical view, would be Iran, with the large Abadan refinery complex across the Shatt Al-Arab waterway from Basrah. However, this is also the main region for export smuggling, and political sensitivities may preclude supplies being obtained from this source.

Aviation fuel

With Baghdad International Airport now not expected to be served by regular commercial airline operations for at least several months, demand for aviation fuel in Iraq is limited to the requirements of humanitarian air services, cargo and courier flights, and aircraft bringing in contractors to assist in reconstruction and rehabilitation.
Nevertheless, there are adequate supplies of aviation fuel in Iraq, particularly in Baghdad. UNJLC has arranged for the main supplies to be tested in Iraqi laboratories and they have passed the Russian “RT” standard, as has been used in Iraq for the past 20 years. Independent testing to verify these results has been arranged at recognized international laboratories. The results should be available shortly.
Should production of aviation fuel be necessary, the Iraqi refineries are capable of delivering the required quantities. These are unlikely to be of a volume that would reduce materially the availability of kerosene or diesel for domestic or humanitarian use.

Fuel Supply for UN Light Vehicles

UNJLC has facilitated arrangements through the Ministry of Oil and its operating companies for UN vehicles to refuel with relative ease and safety at designated 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 humanitarian work. Work has also commenced on arranging a strategic emergency fuel supply for UN operations in Baghdad in case an unexpected deterioration in the security situation and the need for overland evacuation.

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