Cablegate: Status Report On the Energy Fusion Cell

DE RUEHGB #3129/01 2601419
R 171419Z SEP 07




E.O. 12958: N/A

1. SUMMARY: The Energy Fusion Cell has revised its original
strategy on infrastructure integrity in Iraq, and is helping
Iraq maximize its petroleum export revenue; meet domestic
fuel needs; meet domestic power needs; transition to
market-based energy policy decisions; and transition to
self-capacity. END SUMMARY

2. The Energy Fusion Cell (EFC) was established in March
2007 under DCS STRATOPS and works alongside the Gulf Regional
Division of the Army Corps of Engineers. The EFC provides a
focus within HQ MNF-I for the conduct of all oil and
electricity infrastructure related activities. It has both
planning and operational capacity. The EFC includes
representatives from all relevant elements of MNF-I and the
Embassy, as well as from the Iraqi Ministries of Oil,
Electricity and Defense. In addition, the EFC when necessary
can call on the resources of the Ministries that may be
involved in the planning, support, funding, repair, security
or delivery of strategic infrastructure, e.g., Planning and
Finance. The EFC staff focuses on planning, coordination,
de-confliction and execution. Key to achieving this function
is the link established with the MoD Infrastructure
Coordination Centre. The EFC has recently revised its
strategy along four separate but related lines of operation:
-- Developing Capability
-- Increasing Energy Capacity
-- Increasing Security
-- National Engagement

3. Over the past four months, Iraq has taken important steps
toward improving the level of energy infrastructure stability
needed to provide for the basic needs of the Iraqi people.
The EFC has engaged the Ministry of Electricity (MoE) and
Ministry of Oil (MoO) to develop their capacity, capability
and ability to coordinate with other Coalition and Iraqi
agencies. The Joint Staff directed the work of the EFC along
five areas: maximizing export revenue; meet domestic fuel
needs; meet domestic power needs; transition to market-based
energy policy decisions; and transition to self-capacity.

Maximize Export Revenue
4. The largest success with an imminent impact on Iraq is
the repair and operation of the 46" crude oil export line to
Turkey. Coupled with the repair and sustained operation of
the pipelines that make up the Kirkuk to Bayji corridor, this
has allowed for a 20 percent increase in export capacity of
crude oil. Over ninety percent of the GoI budget is from
crude oil exports, and any increase in exports translates
into a significant increase to gross domestic product (GDP).

5. The Northern Oil Company (NOC), part of the Ministry of
Oil, has maintained the ability to repair pipelines in the
region. The EFC has recognized that the greatest challenge
to the NOC for both the Kirkuk to Bayji corridor and the 46"
export line has been maintaining the line once repaired. In
consultation with the EFC, the NOC began placing Oil
Protection Force (OPF) personnel along the 46" pipeline in
August of 2007. These protection forces decreased the number
and effectiveness of attacks against the line. Prior to the
emplacement of security, the severity of interdictions
routinely required one to two weeks to repair. With the
addition of the OPF to the 46" crude oil pipeline repairs
typically require only one to two days to complete.

6. The success of the 46" export line is principally a NOC
and GoI success. The EFC did not create the security nor did
it identify to the NOC that scrutiny was a problem on the
line. The NOC was already well aware that security was the
lynch pin for successful exporting. The EFC's success in
this project came in crafting a timeline for securing the
pipeline and facilitating the placement of those assets. The
Ministries appear to understand the challenges they face.
Their two greatest challenges are their inability to
coordinate and expedite projects. Without constant pressure
being placed on the NOC by the EFC to implement a security
plan, weeks and months of exporting would have been lost, at
a cost of approximately 200 million dollars per day to the
Iraqi people.

7. The recent successes by the NOC are in addition to the
continued success of the Southern Oil Company (SOC) exports
out of the Al Basra Oil Terminal (ABOT). ABOT continues to
export about 1.5 million barrels per day (MBPD), accounting
for over 85% of national exports.

Meet Minimum Fuel Needs
8. While Iraq is able to use its abundance of crude oil to
support the nation financially, it must also satisfy its own

BAGHDAD 00003129 002 OF 003

fuel needs. The most basic is providing fuel to its
electrical generation capacity. Roughly 250 MW of generation
are idle due to fuel shortages. The long term solution to
this problem is to modernize Iraq's refining technologies to
international standards. In the interim, the EFC is
facilitating the importation of fuel from Kuwait.

9. Because the GoI understands recognizes its short-term
inability to refine enough product to meet its generation
demand, the MoO identified and began contract negotiations
for fuel sources to augment national fuel stores. One major
source was identified in Kuwait. This contract met with
delays when the Governments of Iraq and Kuwait suffered
repeated impasses over details of the contract and rules
concerning border crossings. The EFC is assisting both the
GoI and the MoO to overcome the obstacles of the contract,
for example by obtaining proper security for the movement of
fuel and negotiating with United States Central Command for
use of an alternate border crossing. In this case, the EFC
is serving as the catalyst to free Iraq and Kuwait from
contract mire, and expedite the movement of fuel for power
generation to Iraq. In doing so, the EFC is developing a
sustainable capacity for the MoO to import large quantities
of fuel from its neighbors.

10. The EFC continues to recommend to the GoI that Iraq
needs to modernize its refining capabilities to be able to
fuel domestic power generators, provide strategic reserves,
and maintain sufficient quantities for public consumption.
This type of strategic planning is a key capacity that the
EFC is attempting to develop throughout the Iraqi energy

Meet Minimum Power Needs
11. The three greatest challenges to electrical stability in
Iraq are maintaining current generation, adding new
generation and maintaining the stability of the electrical
grid. The greatest successes in maintaining current
generation have come through the Gulf Region Division (GRD),
United States Army Corps of Engineers, which is a member of
the EFC. GRD trains electrical generation operators to
better maintain and care for their equipment. This
maintenance and correct operation of current generating
capacity has lead to an Iraqi electrical grid that has
succeeded in putting out more power in megawatt-hours than at
any point in Iraqi history.

12. While generation is at its highest point, the demand on
the system has nearly doubled since 2003. To balance this
demand challenge, the Government of Iraq has begun purchasing
new generation. Every step of this process, from contracting
to security planning for delivery, has been aided by the
Iraqi Transition Assistance Office (a State Department
organization which has membership in the EFC) and the EFC.
Currently there are 450 MW of generation in Mussaib that are
in various stages of commissioning and another 350 MW of
generation in Jordon awaiting finalization of delivery plans.

13. Equally important to meeting demand is equitably
distributing the generation throughout Iraq. The EFC is in
daily contact with the MoE in an effort to expedite repair of
400KV transmission lines. Not only has the EFC coordinated
the repair of these lines, but it has also developed a
process through which the MoE creates its repair plans in
coordination with Iraqi Army security.

14. Electrical repair and development are Iraqi successes
which have been facilitated by the EFC and its member
organizations. In all of these projects the EFC has been the
single point of coordination for the US State Department,
Coalition Forces and the Government of Iraq.

Transition to Market Based Energy Decisions
15. The Iraq energy sector remains state controlled, with
the government fixing prices for oil and electricity. The
decision to release the state's control over the energy
sector is one that is solely in the hands of the Government
of Iraq. While that decision is being made, the EFC has been
able to monitor and aid in the development of the tools
needed for a market-based economy.

16. The Al Basra Oil Terminal recently received metering
upgrades that elevate its operations to international
standards, allowing for more accurate sales of Iraqi crude
oil on the open market. Other metering upgrades planned
throughout the country will allow the MoO to accurately
account for the oil from Iraqi crude fields.

BAGHDAD 00003129 003 OF 003

17. A similar project is being discussed in the electrical
sector. Currently the MoE charges residents and businesses
that have working meters an approximate collection rate of
fifty percent. The EFC and ITAO have been working to assist
the GoI improve both metering and collection processes. The
first step to qualifying the electrical sector to be
market-based is to update its ability meter and collect
revenue from the sale of its product.

18. An important indicator that the MoO is willing to move
toward free market principals was identified when the EFC
presented the Minister with a pricing scheme to reduce the
purchase price of heavy fuel oil (a refinery byproduct which
Iraq's outdated refineries overproduce and do not have enough
space to store, causing refinery shutdown). Although the
Ministry did not ultimately accept the dynamic pricing model,
it did agree to lower the price, and did witness as a result
a reduction of its heavy fuel oil stocks. The repeated
efforts by the EFC to introduce market principles to both the
Ministers of Oil and Electricity are beginning to receive
increased interest.

Transition to Self-Capacity
19. The Energy Fusion Cell does not consider that the
measure of its long-term success will be found in its ability
to expedite projects or create lines of communication.
Success is and will be defined by its ability to assist the
GoI and its Ministries in creating enduring processes that
the Ministries of Oil and Electricity can manage and execute
without the aid of Coalition Forces or USM-I.

20. The Ministries of Oil and Electricity must develop the
critical capability to formulate and engage in long-term
integrated strategic planning. Currently, both the
Ministries of Oil and Electricity spend much of their time
and effort reacting to line interdictions and infrastructure
outages. The ministries have demonstrated some capacity to
conduct mid-term planning, but much of this planning is
limited to prioritizing repair projects in isolation from
other projects

21. The Energy Fusion Cell has recognized that the Iraqi oil
and electrical sectors are inextricably linked and require
collaborative planning for both to achieve success. To
facilitate this effort the EFC is developing a strategic
framework for a national energy plan that includes recovery,
development and optimization of the energy sector. It is
hoped that this effort will attract the participation of
representatives of the Ministries of Oil and Electricity and
lead to complete Iraqi ownership of the resulting plan.


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