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Cablegate: Rrt Erbil -- The Lights Are On -- Krg Benefits From Private

VZCZCXRO7233
PP RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #3787/01 3380856
ZNR UUUUU ZZH
P 030856Z DEC 08 ZDK
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC PRIORITY 0658
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 003787

SIPDIS

E.O. 12958: N/A
TAGS: PGOV ENRG ECON EINV IZ
SUBJECT: RRT ERBIL -- THE LIGHTS ARE ON -- KRG BENEFITS FROM PRIVATE
SECTOR INVESTMENT IN ELECTRICITY

This is an Erbil Regional Reconstruction Team (RRT) cable.

1. Summary: Electricity supply has jumped in Erbil Province, thanks
partly to a privately-owned power plant fueled by gas from the Dana
Gas/Crescent Petroleum gas field. Private power generation could
produce as much as 1,900 MW by 2010 when plants in Dohuk and
Sulaimaniyah are projected to come on line. Kurdistan Regional
Government (KRG) efforts are currently focused on meeting the
region's growing power demands, but the KRG is also promoting
investment in its considerable gas, hydro and wind assets with a
view to becoming a net power exporter to the rest of the country.
The KRG power sector suffers from lack of access to financing, weak
capacity and inexperience in long-range planning. U.S. Advisers are
working with the KRG Ministry of Electricity to address these
shortcomings, as well as to implement best international practices
in pricing, billing and revenue collection. End summary.

----------
Background
----------
2. Since 2003, the Kurdistan Region (KR) has used power from the
national grid (200 MW), hydropower (100 MW), suppliers in Turkey
(130-200 MW) and Iran (2.5 MW) and city-owned generators (200 MW) to
meet its growing power needs. But supplies have been unable to meet
more than half of the current estimated demand of 1,500 MW (up from
250 MW in 1991). In 2007, on average, only 21-43 percent of total
demand was met in the region (compared to 54% of demand met in the
rest of Iraq.) Demand in the KR (as elsewhere in Iraq) has been
growing substantially, by one estimate, at 15% per year.


3. Further exacerbating the shortfall has been the fact that
drought has reduced hydropower output, the national grid produces
insufficient electricity to meet national demand, and biannual
renegotiation of the Turkish contract with the GoI more often than
not leaves Dohuk Province without power in the coldest and hottest
months of the year (septel). As elsewhere, access to subsidized
diesel fuel is a chronic problem. With the KRG providing between
2-8 hours of electricity a day (depending on the season), most
families, as elsewhere in Iraq, were obliged to rely on private
generation (either their own small generator or a neighborhood
generator) for which they paid from $40 - $150 a month. There are
680 of these alone in the city of Erbil.

-------------------------------
ELECTRICITY HOURS JUMP IN ERBIL
-------------------------------
4. The recent inauguration of a 500 MW gas-powered privately-owned
generation plant in Erbil and seasonal reduction in demand have
helped to improve power supply dramatically in the province. Erbil
residents are now enjoying 10-12 hours of government-supplied
electricity a day. The brainchild of a well-to-do Kurdish investor
(based in Amman), the USD 390 million Pir Daud plant is one of three
Build-Own-Operate (BOO) power plants that Mass Global Trading is
building in the KR. Mass Global's contract with the KRG provides
for a fifteen year, 2.9 cents per Kilo Watt Hour (KWH) guarantee and
government-supplied fuel. (Pir Daud is expected to break even by
2015.) The Trade Bank of Iraq (TBI) helped finance the project,
providing letters of credit for the import of the equipment and by
extending direct credit facilities.

5. The Pir Daud plant is linked by pipeline to the Dana
Gas/Crescent Petroleum Khor Mor gas field. (Note: The $650 million
Khor Mor gas field is the largest single private investment in Iraq
today and the largest private sector oil and gas project in Iraq in
several decades. End note). One of the project's key features is
Qseveral decades. End note). One of the project's key features is
that Dana/Crescent will supply free natural gas to the Kurdistan
Region's power plants. Dana/Crescent plans to recover profits by
extracting and selling valuable natural gas liquids from the gas
stream.

6. Pir Daud is not yet at full capacity. On October 4, natural gas
began flowing at 75 million cubic feet per day (mcfd) to Pir Daud.
The gas flow will rise in stages to 300 mcfd within the first half
of 2009. There are plans to increase Pir Daud capacity by 250 MW by
installing two more 125 MW GE Frame 9 turbines, bringing the plant
to 750 MW total.

--------------------------------------
Sulaimaniyah Plant: Financing Problems
--------------------------------------
7. Mass Global is also building a 750MW plant in Sulaimaniyah that
will be fed by the same pipeline. The Chamchamal project was to be
completed in 3 stages, with the first of the 250 MW units slated to
begin operations in November and the entire project to be completed
by the end of 2009. However, work on Chamchamal power plant is
behind schedule (reportedly due to contract renegotiation with
Siemens and the investor.) An International Finance Corporation
(IFC) mission was in Sulaimaniyah in September to hold negotiations
with the CEO of Mass Global for an equity stake in the project but
subsequently pulled out of the project, reportedly because of the
international financial crisis. (Mass Global is also reportedly

BAGHDAD 00003787 002 OF 003


negotiating with the GOI Ministry of Electricity on a 500 MW gas
turbine power project to be located near the Taq-Taq field in
Sulaimaniyah.)

8. When completed, the two new power plants will have combined
generating capacity of 1,500 MW, sufficient to power about 750,000
homes or several large industrial projects. The third Mass Global
project (in collaboration with another investor) is a 400 MW BOO
heavy fuel oil-fired power plant based in Dohuk which is not
projected to come on line until 2010. Dohuk is not connected to the
national grid which feeds Erbil and Sulaimaniyah. As a result,
until the plant comes on line, Dohuk will remain critically
dependent on the vagaries of biannual GoI renegotiation of
Turkish-supplied power.

---------------
Managing Demand
---------------
9. To complement the supply side improvements, the KRG recognizes
that it needs to devote attention to the demand side of the power
equation -- a focus of the USAID-drafted Energy Master Plan which is
intended to serve as a road-map for the Kurdistan Region Ministry of
Electricity. Although monthly bills average only USD 3 per
household, bill collection is abysmally low. USAID-funded
Electricity Subject Matter Experts (SME) have guided the Ministry's
efforts to put in place pilot meter-testing programs in the Erbil
region with a view to the eventual privatization of this function.
A number of private companies are currently involved: Apator
(Poland) is installing eighty state-of-the-art test meters in Erbil;
Slovenian and Chinese companies are also providing test meters in
Erbil. In addition to these pilot programs, Digital Metering (DM),
a Dubai-based metering company, was given a contract by the KRG
Ministry of Electricity for installation of 100,000 meters (40,000
in Sulaimaniyah, 35,000 in Erbil and 25,000 in Dohuk). (DM's project
is financed by a $50 million Canadian loan.)

10. The SME Advisers are also working with the KRG Director General
of Electricity on a realistic pricing strategy. Tariffs in the KR
are currently 2 cents a Kilowatt Hour (KWH). (By way of comparison,
residents of New York City pay 17 cents a KWH.) Although the
average tariffs will be increased to 5 cents a kilowatt-hour in
2009, the marginal cost of production has been estimated at close to
7 cents a KWH. (Comment: Given the high prices that residents have
become accustomed to paying for private generation, it would appear
that there is a price between USD 3 a month and USD 150 a month
which consumers should be willing to pay. Nonetheless, an informal
survey of Erbil residents revealed a deep-seated opposition both to
privatization as well as to any price increases. The KRG
announcement that prices would double - before service had actually
improved - was a highly unpopular move. End comment.)

-------------------------
Adding Transmission Lines
-------------------------
11. The KRG Ministry of Electricity will need additional
transmission capacity for the 4th Pir Daud unit when it comes on
line. Additional transmission capacity is currently being
contracted and is proceeding to catch up. In September the KRG MoE
announced the award of a $33 million 132 kilovolt electrical
transmission and distribution project that links Aqra, in Dohuk
province, to Khabat in Erbil province to a US Company, Symbion
Power. In addition, the MoE announced a tender for a 37-km 33kV
two-line transmission system from Dokan Lake to the Sulaimaniyah
Water Project. A $20 million distribution improvement project -
Japanese funded, UNDP implemented - is also in the works.
QJapanese funded, UNDP implemented - is also in the works.

----
Fuel
----
12. The chronic shortage of government-subsidized diesel fuel
(coming from the Bayji refinery) affects those facilities which are
still dependent on fuel. While there is currently no refinery
capacity in the KR, refineries are to be built by companies which
have signed Production Sharing Contracts which the KRG (these
projects constitute part of their infrastructure improvement
commitment). Heritage Oil has agreed to build a 20,000 barrel/day
refinery in their Miran Block (not yet sited). Topco's 20,000
barrel per day refinery in their Taq-Taq Block has been sited, but
not yet constructed. Norwegian oil company DNO is close to
completion of a 6,000 barrel/day diesel fuel refinery.

------------------------
The future is hydropower
------------------------
13. In August 2007, KRG Minister of Electricity Hoshyar Siwaily
stated in a press conference that by 2009 Kurdistan region would be
able to supply enough electricity for the Region and to export power
to the other provinces of Iraq. The potential certainly exists for
this resource-rich, thinly populated and industry-poor region to
export to the larger population and industrial centers in the south
- but not in the next five years, based on supply and demand trends
in the region.

BAGHDAD 00003787 003 OF 003

14. The Kurdistan region is endowed with significant hydro
resources and some experts believe that the long-term power solution
lies with the region's hydropower potential. A 2007 Japanese ODA
study prioritized 20 medium-sized sites for a total of 2,000 MW.
The massive Bekhma Dam - designed as a multi purpose hydropower
project and abandoned in the early 1990s - could deliver 1,600 MW.
(Comment: We understand that there are plans to reactivate the USD 5
billion, centrally-financed project. End comment.) The MoE
recently has announced tenders for detailed feasibility studies for
three hydropower plants in the three governorates of the Kurdistan
Region: Halwan Hydropower plant (53MW), Gali Balinda Hydropower
plant (111MW), and the Delga Hydropower plant (97MW).

15. The MoE also announced tenders for feasibility studies in three
provinces to carry out wind power assessment at high wind velocity
sites in Chamchamal, Makhmor, Azmer and Haji Omran. These can be
quickly assembled and, along with natural gas-based turbine
projects, they could potentially be the "least cost generation"
options for the region's electricity needs. And finally, the KR is
estimated to have some 82 trillion cubic feet of associated gas;
capturing flared gas alone could produce 4,000 MW of electricity.

-------
Comment
-------
16. The KRG's encouragement of private sector operators has
produced significant improvements in electricity supply, but access
to financing (such as that discussed with the IFC) is urgently
needed to continue the improvements to power delivery. For its
part, the KRG Ministry is short on technical expertise and new to
long-range planning. Fortunately, USAID SMEs are filling some of
this gap. In addition to work on billing, revenue collection,
training and capacity building, they are guiding the Ministry to
look at the steps necessary to set up an independent regulatory
body. U.S. advice is highly esteemed by the Minister and his
Directors General; the work of our USAID-funded experts has been
important in steering the direction of this important ministry and
should be continued.
CROCKER

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