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Cablegate: Afghanistan: Update On Energy Projects - Fuel Shortage And

VZCZCXRO2400
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #3085/01 3351310
ZNR UUUUU ZZH
P 301310Z NOV 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6253
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0687

UNCLAS SECTION 01 OF 05 KABUL 003085

DEPT FOR SCA/RA, SCA/A, EEB, EEB/ESC/IEC (GRIFFIN)
DEPT PASS AID/ASIA/AA ELLIS, AID/ASIA/SCA
DEPT PASS USTR FOR LILIENFELD AND KLEIN
DEPT PASS OPIC FOR ZAHNISER
DEPT PASS TDA FOR STEIN AND GREENIP
CENTCOM FOR CG CFC-A, CG CJTF-76, POLAD, JICENT
NSC FOR JWOOD
TREASURY FOR ABAUKOL, BDAHL, JCASAL, AND MNUGENT
MANILA PLEASE PASS ADB/USED
PARIS FOR USOECD/ENERGY ATTACHE
OSD FOR SHIVERS, SHINN
COMMERCE FOR DEES, HAMROCK, AND FONOVICH

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ENRG EFIN ETRD KPWR EAID PGOV AF
SUBJECT: AFGHANISTAN: UPDATE ON ENERGY PROJECTS - FUEL SHORTAGE AND
OTHER SETBACKS DOMINATE RECENT NEWS

1. (SBU) Summary. Lackluster progress and recent setbacks in the
energy sector underscore the difficulties of working in Afghanistan.
In particular, critical lack of Afghan government planning and
possible corruption, combined with very limited discretionary
resources and competing demands, have hampered the acquisition of
diesel fuel needed for operation of the country's 390 MW of thermal
electric power generation facilities through the rapidly approaching
winter. Owing to non-performance of a civil works subcontractor,
the US-financed 100 MW power plant in Kabul is delayed and is now
scheduled to come online in stages in mid-January and end-February.
Notable progress in the effort to attract Independent Power
Producers to Afghanistan was tempered by implementation delays in
existing rehabilitation, regulatory, and energy import initiatives.
Several such projects are approaching their final stages. Despite
setbacks, Post maintains its focus on project execution with the aim
of doubling electricity availability by June 2009 - energy which is
needed to create jobs and improve standards of living. End Summary.


--------------------------------
FUEL SAGA AT FOREFRONT - CLOUDED
BY LACK OF TRANSPARENCY
--------------------------------

2. (SBU) After weeks of speculation and multiple informal pleas for
fuel assistance, the Government of the Islamic Republic of
Afghanistan on October 9 formally requested $97 million from the USG
to purchase fuel for its diesel power plants this winter, including
the USAID-funded 100 MW plant being built in Kabul. Revised
calculations provided by the USAID-funded Afghanistan Infrastructure
Rehabilitation Program (AIRP) contractor Louis Berger Group/Black &
Veatch Joint Venture (LBG/B&V JV) noted that real requirements were
probably much lower, in the $20 to $30 million range. The LBG/B&V
JV estimate discounted the usage of older, inefficient, and smaller
thermal generators.

3. (SBU) Rumors and misinformation circulated around the fuel
issue. Within the GIRoA, Minister of Economy Shams repeatedly
"cried wolf", telling international donor agencies that Kabul would
run out of fuel by mid-October. Other officials said the GIRoA had
"found" sufficient funds to power the Kabul Northwest power station,
on a conservative generation schedule, until mid-December. Then
Minister of Energy and Water Khan told Parliament that Kabul
electricity consumers would enjoy 24/7 electricity by the end of
December - an impossible promise given the fuel shortages. Similar
uncertainty attended claims about fuel supplies in the South. The
most accurate barometer of the fuel situation in Afghanistan has
been Minister of Finance Ahady. In a mid-October meeting with A/S
Boucher in Washington, the minister confirmed that $20 to $30
million in additional fuel funding would be sufficient for the
winter, corroborating the LBG/B&V JV estimate. What's not in doubt
is that rationing has already begun: Embassy local employees report
that many Kabulis now enjoy only four hours of electricity in every
72 hours.

4. (SBU) In response to the GIRoA's formal request, the Ambassador
approved up to $28 million to procure fuel, which covers the
estimated cost of powering the USAID-funded 100 MW Kabul plant
through the end of March. (Note: Even less will now be needed in
view of project start-up delay -- see below.) The $28 million will
be reduced from the USG's planned FY 09 contribution to the ARTF, in
effect requiring the GIRoA to use this portion of its ARTF budget to
purchase fuel, and ensuring they meet their operational commitments.
The fuel will be procured directly by USAID and delivered with the
assistance of its contractors, circumventing reportedly corrupt

KABUL 00003085 002 OF 005


GIRoA fuel procurement practices. At current fuel prices, the $28
million fuel allotment will also help support the GIRoA's 45 MW
Kabul Northwest plant in the event its fuel supply is exhausted
prior to commissioning of the more efficient 100 MW plant.

5. (SBU) The GIRoA procures fuel for its power plants via the Fuel
and Liquid Gas Enterprise (FLGE), a department of the Ministry of
Commerce and Industry (MOCI). In 2007, an International Monetary
Fund mission recommended that the government withdraw from the
petroleum sector and privatize the FLGE by March 2009. The GIRoA
responded by pledging to increase the transparency of FLGE's fee
structure and operations. Good intentions notwithstanding, press
reports say the Central Audit and Oversight Committee of the Lower
House of Parliament identified $10 million worth of fuel procurement
contracts that "lack transparency." Privatization of the FLGE,
along with instituting proper fuel planning that takes into account
oil price fluctuations, would help avoid another "fuel saga" next
year.

------------------------------
DELAYED LAUNCH OF USAID-FUNDED
100MW KABUL POWER PLANT
------------------------------

6. (SBU) Non-performance of a principal civil works subcontractor
has necessitated delay in the commissioning of the USAID-funded
100MW thermal electricity generating plant. Initial commercial
operation of Blocks 1 and 2 (35 MW each) will not meet contractual
milestone dates of December 2 and December 28, 2008, respectively.
Nevertheless, all of the Block 1 equipment, including six diesel
engines weighing over 80 metric tons each, and 80 percent of Block 2
equipment have been delivered to the site. Furthermore, much of the
large-scale foundational and infrastructural work as well as camp
accommodations for the 200+ expatriate construction management,
security, and skilled labor personnel are finished or nearly
complete.

7. (SBU) Intensive work is underway to recover from the costly
setbacks. Testing and commissioning of the first block of six
gensets are slated for early December. LBG/B&V JV will soon
submit a revised detailed master project schedule. Interim dates
for commercial operation of Blocks 1 and 2 totaling 70MW are January
18, 2009, and February 28, 2009, respectively, though partial
electricity generation to the grid may begin as early as
mid-December.

--------------------------------------------
NEW PRESIDENTIAL DECREE - PRIVATE ENTERPRISE
IN ENERGY PRODUCTION ENCOURAGED
--------------------------------------------

8. (SBU) The Ministry of Energy and Water (MEW), with assistance
from USAID, has successfully lobbied the GIRoA to establish a power
regulatory body in Afghanistan. President Karzai signed a decree in
late September, authorizing the issuance of operating licenses for
investments in the power sector. These licenses will cover the full
spectrum of power supply operations, including but not limited to:
power generation, transmission, distribution, power trading and
other energy services.

9. (SBU) The operating licenses will be issued by a new Department
of Regulatory Affairs (DRA) which will remain within the MEW until
an independent regulator is established. The DRA will aim to
promote private sector investment in Afghanistan's energy industry,
giving commercial businesses the opportunity to develop and manage

KABUL 00003085 003 OF 005


the country's energy services, make the energy sector more
efficient, and share expertise. The decree could smooth the entry
of the Independent Power Producers (IPP) into the Afghanistan energy
marketplace and legitimize entities currently operating as
quasi-IPP's now.

--------------------------------------------- ---
SOUTH EAST POWER SYSTEM (SEPS) KAJAKI HYDROPOWER
PROJECT ENCOUNTERS A CONTRACTUAL ISSUE
--------------------------------------------- ---

10. (SBU) The successful delivery of key components of a new turbine
generator (18 MW capacity) to the Kajaki Dam site by a large
military convoy in August was a major milestone. However,
rehabilitation work on the second of the two older turbines on the
site (the first one is operational, delivering 16.5 MW) has been
stalled. In late October, China Machine-Building International
Corp. (CMIC), the partially state-owned Chinese company performing
the rehabilitation work under sub-contract to LBG, was reportedly
directed by the Chinese government to evacuate its five personnel
from the Kajaki jobsite because the Chinese government had
information regarding a Taliban threat to kidnap them. Despite
LBG/B&V JV assurances to CMIC that all Kajaki site personnel are
protected by a security force of some 150 private security and 250
British military personnel, CMIC personnel left the site on November
4, 2008. The site has not recently come under attack, and security
experts consider the kidnapping threat to be virtually nil.

11. (SBU) Both LBG/B&V JV and Post are taking actions to effect a
reversal of CMIC's decision. Ambassador Wood recently met with
Chinese Ambassador to Afghanistan Yang Houlan to urge the Chinese
government to permit CMIC to return to the site. Yang agreed to
recommend to his government that CMIC be permitted to remobilize.
More recently, Yang told Charge' Dell that Beijing supports
restarting work, but the decision rests with CMIC. Yang urged USAID
to re-engage with CMIC, a process which has begun. Alternative
plans utilizing personnel from the U.S. vendor of the second turbine
have been formulated in case CMIC does not return soon. LBG/B&V JV
is optimistic that CMIC will return in time to complete the
installation of the new (third) turbine (for which CMIC is the
vendor) on schedule by December 2009, but is making contingency
plans to complete the work without CMIC if necessary.

------------------------------------------
NORTH EAST POWER SYSTEM - UZBEK COMPONENT,
DELAY IN IMPORTING POWER
------------------------------------------

12. (U) Hopes for mitigating the winter fuel crunch were further
dashed when recent developments pushed back the importation of 150
MW of power from Uzbekistan from January 2009 to May 2009. Popular
conjecture attributes the delay to the historically difficult and
uneasy working relationship between the two countries. The GIRoA
also failed to make its first payment ($10 million) for construction
of the required 43 Km 220kV transmission line in Uzbekistan on time.
The payment has since been made and final payment of $5 million
will be due upon completion and commissioning of the line. The
importation of Uzbek power under a Power Purchase Agreement will
significantly increase low-cost electricity supply, thereby raising
living standards and spurring economic growth.

---------------------------
COMMERCIALIZATION OF DABM -
DISAPPOINTING PROGRESS
---------------------------

KABUL 00003085 004 OF 005

13. (SBU) The effort to corporatize the public national electric
utility DABM is inching forward. For the past few months Minister
of Economy and utility CEO Shams has been soliciting applications
from suitable Afghan candidates to serve in a Transition Management
Unit (TMU) which will oversee the corporatization of DABM. In
October the Minister remarked that corporatization attempts had been
delayed by an internal GIRoA row over the control of $1.7 million of
World Bank funds for initial operation of the TMU. However, recent
mediation by the MOF has brokered an arrangement between MEW and
DABM under which the World Bank funds will be freed up to launch the
TMU in the near future.

14. (SBU) The slow pace of efforts to transform DABM is a source of
frustration for the donor community as well as those GIRoA officials
who support commercialization of electricity distribution. A
proposed USAID program will side-step the lack of progress by
engaging an outside contractor to take over the operation and
maintenance of the Kabul Electricity Department (KED) - DABM's
largest division, serving the city of Kabul and distributing
approximately 40 percent of DABM's total nationwide electricity
generation to nearly one million consumers in the capital. Strong
support for the KED commercialization project from the Ministers of
Economy and Energy and Water has been secured, and USAID plans to
start the procurement process for an operating contractor by
end-2008.

----------------------------------------
SHEBERGHAN GAS FIELDS TESTING - DELAY IN
MOBILIZATION; OPIC PROPOSAL UPDATE
----------------------------------------

15. (SBU) ARAR, the Turkish/American contractor hired by USAID to
test existing wells at Sheberghan, suffered additional delays in
recent weeks. Slow issuance of valid Afghan multi-entry visas for
workers along with poorer than expected infrastructure for
transporting heavy equipment caused the delays. Full mobilization
is now slated for early December with initial test results available
by mid-January 2009 and final test results to be submitted by the
end of April 2009.

16. (SBU) The test results are instrumental for an Overseas Private
Investment Corporation (OPIC) proposal to develop an IPP (100 MW
natural gas-fired power plant) at Sheberghan. ECONOFF recently met
with the Norwegian aid agency (NORAD), which is assisting the
Ministry of Mines in the promotion of gas fields adjacent to
Sheberghan. They maintain that historical data (which will be
confirmed by ARAR testing at Sheberghan) point to upwards of 3
billion cubic meters of gas in the adjacent wells. With few if any
alternative uses of this gas, NORAD suggests that those gas
resources be combined with Sheberghan to develop a larger IPP gas
plant (600 MW vs. 100 MW).

17. (SBU) Minister Ahady met in mid-October with OPIC President
Mosbacher in Washington to discuss the proposal for private
investment in a 100 MW gas-fired plant at Sheberghan. Until
recently, Minister Ahady had been cool to the idea of an IPP
utilizing this gas. Minister Ahady requested the proposal be
revised to reduce the proposed price of electricity from $.08
per/KWH to $.06 per/KWH - to better compete with the $.04-$.05/per
KWH cost of imported power. Furthermore, he envisions a plant
capable of 200-250MW vs. 100 MW. Comment: Post hopes the momentum
generated by this interaction will produce results, and will
continue to facilitate communication between both parties. Also,
USAID is in the final stages of recruiting a senior energy advisor

KABUL 00003085 005 OF 005


to support the design and implementation of IPP agreements.

WOOD

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