Crude production and exports:Following a decline in late June and in the first half of July, total national crude oil production has recovered to the earlier postwar peak. This is mainly attributable to increased southern production, made possible by exports through Mina Al-Bakr. However, overall production continues to be constrained by the combined effects of sabotage to pipelines and installations, disrupted power supplies, limited storage capacity, and the parlous state of subsurface and surface infrastructure. Additionally, the limited ability to export crude to Turkey or Syria is holding back northern production. This should be partially resolved for Turkey within the relatively near term.
In principle, Iraq is producing sufficient crude oil to meet domestic and humanitarian needs. However, in practice, it lacks the refining capacity to convert this crude into adequate quantities of the lighter products, specifically gasoline, diesel, kerosene and LPG. Furthermore, a deliberate strategy to maximize northern LPG production to supply the countryâ??s only functioning major gas plant is boosting crude production to allow gas extraction. However, much of the crude extracted is reinjected into the reservoirs, perhaps to be lost forever. Real crude production is therefore, to some extent, overstated.
Crude exports have restarted through Mina Al-Bakr. However, they may be curtailed as power supply problems at Basra refinery mean that power previously used for export pumps may have to be diverted to refinery operations. Fuel oil exports â?? used for barter trade for gasoline and LPG â?? have been halted at Umm Qasr port on the authority of port management because of unsafe and environmentally damaging operations.
Security and smuggling:The Coalition, particularly in the south and on the Syrian and Turkish borders, is now making a more concerted effort to prevent export smuggling. Little information is available on the eastern border with Iran, but there does now seem to be a high level commitment to at least decreasing the viability of the trade by raising the cost to the participants. Failing to at least limit it in part will continue to cancel out the benefits of expensive fuel imports.
Lack of security and law-and-order continue to impede the restoration of the oil industry. Sabotage and simple criminal looting of infrastructure, particularly of vulnerable items such as power lines and pipelines, are a regular occurrence. Thieves are cutting open or tapping into pipelines â?? even crude oil pipelines â?? and pumping out fuel, thus cutting feed to refineries. Direct attacks on contractors and Coalition personnel working to restore capacity are increasing the needs for security, even in northern areas previously considered safe.
Above: Fuel export smuggling at Abu Floos Port, near Basra. This one operation, on one day, is estimated to have smuggled out about 750,000 litres of diesel, or up to 10% of the national daily production
However, moves now appear to have been made to address this problem. The CPA, through the Ministry of Oil, has issued a solicitation for security services for the industry, covering 140 sites, with most of the guard force to be Iraqi nationals and transfer of responsibility to Iraqi control over a two year period.
Corruption in distribution:The supply and price of fuels available to the public and humanitarian operations continues to be greatly affected by corruption throughout the distribution chain. Most types of fuels can be readily diverted to the black market. Indeed, traders often sell black market fuel directly outside petrol stations. There is a marked lack of effective control by the authorities in this area. With meters not functioning at most depots and petrol stations, the Iraqi entities responsible for fuel distribution are unable to ensure that quantities of fuel leaving depots reach the public. Black market prices are increasing.
Although the US$ black market price is still low by world standards, (diesel 14 cents per litre, gasoline 13 cents per litre), this must be viewed in the context of the nominal prices paid for fuel by Iraqis prior to the hostilities, and the low income level of most of the populace. Black market fuel prices, per litre, are between ten and twenty times that of the officially posted pre-hostility prices.
Black market prices have been increasing in recent weeks, particularly for diesel.
Refining:Stability of electrical power supply is crucial to the efficient running of all three of Iraqâ??s major refineries. Short disruptions can put a refinery offline for days. As such, both the Coalition and Ministry are addressing power as a priority. UNJLC has provided assistance in this by facilitating expedited delivery, through UNDP, of generating capacity to refineries under the oil-for-food programme.
Following a period of relatively uninterrupted power, recent days have seen new problems, particularly in the south. Basra refinery was offline for several days mid-month when the main power supply was cut by the theft of transmission lines. Baiji refinery, the countryâ??s largest, also went offline for at least one day due to power supply problems. However, overall domestically-produced refined products have recovered to the level seen in late June.
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 Above: Sabotaged power lines feeding Basra refinery from Shuaiba power station. These will take many days to repair The basic hydro-skimming technology used by Iraqâ??s refineries mean that they can convert perhaps only half of the crude oil feedstock into light-end products. The balance is heavy fuel oil, of limited use. It is doubtful whether, even with emergency rehabilitation, the refineries will be able to meet Iraqâ??s fuel needs before next year. Baiji refinery, the countryâ??s largest, may enter a delayed planned maintenance phase in August, thus removing substantial national refining capacity and creating a further reduction of domestic supplies into the autumn.
Gasoline:Local gasoline production remains at about a third of estimated daily demand of 15 million litres but significant Ministry and Coalition imports have maintained supply at about 75% of demand. However, Coalition imports are uncertain beyond September and it is unlikely that local refining capacity will have recovered sufficiently by then to replace these. If supplies are to be maintained, the Coalition will have to extend its own imports or the Ministry will have to greatly increase its own barter imports. Export smuggling continues to take large but indeterminable quantities of gasoline off the Iraq market.
Liquid Petroleum Gas (LPG):Supply of this vital cooking fuel is still unsatisfactory, especially in the south. The national shortage is estimated by UNJLC at about 2500 tonnes per day, even with daily imports averaging 1000 tonnes. However, from mid-August, an increase in supplies of up to 3500 tonnes per day should significantly improve supply, provided it can be effectively distributed and gas bottling capacity can cope.
This additional supply would comprise imports averaging 1700 tonnes per day through Khor Zubayr LPG export terminal, combined with 600 tonnes per day from Kuwait, and the start-up of production of one of the South Gas Plantâ??s three trains, with up to 1200 tonnes per day.
Nevertheless, Iraq has a seasonal need to stockpile LPG for winter when usage peaks; it is far from certain whether the Coalition will continue to pay for the current heavy level of imports. Unless a second train from the South Gas Plant and further production from North Gas Plant can be brought onstream to replace estimated daily imports of 3300 tonnes during August, an LPG crisis may re-emerge in the winter.
Significantly, the LPG shortage has led to increased demand for kerosene as a substitute at a time when Iraq would normally be building up its kerosene supplies for winter.
To date, there have been no imports of diesel or kerosene, and LPG imports are inadequate to meet demand.
Kerosene:There does not yet seem to be a major shortage of kerosene, despite it being used widely as an alternative to LPG for cooking. However, the Ministry of Oil usually stockpiles up to 500 million litres by mid November. This will be more difficult as kerosene demand is already high at about 6 million litres per day, and the need to produce diesel reduces the amount of refined product that can be used to generate kerosene. A failure to solve the diesel shortage may lead to a kerosene crisis later in the year.
Diesel:A critical shortage of diesel continues, particularly with the effect of export smuggling to regional countries where the price is much higher, and increased demand for power generation given national grid failures. This has already affected secondary food distribution networks.
Diesel consumption is also greatly increased by the failure in recent years to convert several medium-sized power stations to fuel oil. With stability of power supplies being so crucial in Iraq at present, large volumes of diesel are being diverted to these stations.
There are large stocks of diesel in various parts of the country but it is difficult to transport these to where they are needed. In any event, they would not constitute more that several weeks supply, if that. Once consumed, there is no way to replace them.
Unlike gasoline, neither the Coalition nor the Ministry of Oil have imported large quantities of diesel to date. However, decisions appear to have been made by both parties to now do so, although quantities are uncertain. It is nevertheless clear that the Coalition is now paying much closer attention to the effect of the diesel shortage.
Domestic supply may reduce further during the next six months as refineries increase their production of kerosene at the expense of diesel in preparation for winter. This may further necessitate imports of diesel, particularly as it is more practicable to source this regionally. A diesel crisis will continue into August, particularly if imports are not commenced and smuggling not controlled more effectively.
Aviation fuel:There is little current demand for aviation fuel but with the prospective opening of Baghdad International and Basra Airports to commercial flights, there are an increasing number of enquiries about this. Already, humanitarian air services are looking for ways to refuel in Iraq, particularly in the centre and north, with limited success. Iraq can produce aviation fuel but only at the expense of higher priority diesel and kerosene.
Fuel Supply for UN and NGO Vehicles:UNJLC is facilitating arrangements through the Ministry of Oil and its operating companies for UN and NGO vehicles to refuel with relative ease at designated gasoline and diesel stations, particularly in Baghdad, Hilla 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.
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