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Analysis: The new Iraq rebuilding report

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by Ben Lando
Washington, April 30, 2008
Higher exports and oil prices are bringing in record revenue for Iraq, but the lack of institutional capacity to spend it on capital projects is preventing further development of the oil and gas sector, according to a report by the U.S. Special Inspector General for Iraq Reconstruction.

The report was critical of U.S. reconstruction efforts and work to help Iraq cut down corruption that, along with the inability to actually contract and spend funds, is preventing Iraqi government officials from being able to spend the funds on projects to enable the country with the world's third-largest oil reserves to produce and export at its full potential.

"Although both crude production and crude exports are above target levels, Iraq is not taking full advantage of higher oil prices," the report said. "Inadequate investment in the infrastructure hindered production and export gains."

Iraq has earned $19.4 billion in oil revenues this year through April 20, 2008, nearly half what it earned in all of 2007, according to the U.S. State Department's Iraq Weekly Status Report.

The SIGIR report said Iraq's Oil and Electricity ministries may not have spent even half their capital budget; the U.S. Government Accountability Office says there isn't adequate accounting to verify the extent of the capital expenditures but says it could be in the single-digit percentages. The U.S. State Department, which opts for the higher figure, says it's now moved from funding capital reconstruction projects to funding efforts to build institutional capacity.

This comes as members of the U.S. Congress are threatening Iraq with legislation that would force it to spend a certain level of its own funds on reconstruction -- as well as fuel for U.S. efforts -- or take out in loan from the United States.

"There is simply no reason for the U.S. to continue paying for the cost of the salaries for the Sons of Iraq, for the training and equipping of the Iraqi security forces, and the fuel we use in Iraq given this boon in oil revenue," Sen. Susan Collins, R-Maine, said after the SIGIR report's release. Collins, along with Sens. Ben Nelson, D-Neb., and Evan Bayh, D-Ind., have co-authored one of the at least five similar pieces of legislation. "As the Iraqi government is reaping an unanticipated windfall," she added, "the Iraqis should be picking up the tab for their own reconstruction and stabilization costs."

This and previous SIGIR reports noted more Iraqi money has been spent on reconstruction than American tax dollars, and of the reconstruction expenditures by the United States -- of both American and Iraqi funds -- billions of dollars have been misspent or gone missing altogether.

Iraq produced an average of 2.38 million barrels per day in the first three months of 2008, exporting an average of 1.97 million bpd, a post-war high, according to the SIGIR report. Exact numbers for oil production and export are impossible as Iraq hasn't implemented the needed modernized oil flow accounting system yet, sometimes putting SIGIR report numbers at odds with Iraqi government, other U.S. government and other international reports.

"The Ministry of Oil has a three-year program to install the required metering systems," the report said, to be completed next year. It would give the government the ability to fully, throughout the whole system, count drops of oil and fuel produced, en route and delivered.

The SIGIR report attributed a successful security plan for the northern pipeline's increased export activity. "Four (pipeline exclusion zone) projects are currently under way to protect pipelines in central Iraq," it added: Kirkuk to Baiji to be completed this month; Doura to Hilla to be completed in October; Baiji to Baghdad in November; and Baghdad to Karbala by July 2009. The PEZs are funded as part of the $227 million U.S. Economic Support Fund.

Iraq has pledged to the International Monetary Fund to average 2.2 million bpd production and 1.7 million bpd exports this year, is telling international lenders it will produce 3.5 million bpd by 2010, and has a mid-term goal of reaching 6 million bpd production.

On Iraq's refining capacity, the report notes "Iraq imports almost as much refined fuel as it produces domestically." Iraq has plans to build new refineries and fix existing facilities as its three largest oil refineries continue to operate below capacity.

The SIGIR report also noted the Electricity and Oil ministries are attempting to start coordinating better, but "no concrete plan has yet emerged." The two ministries have operated largely in isolation since 2003.

January through March 2008 electricity production and capacity declined from December 2007 because of scheduled maintenance and other problems, including continued attacks on workers and infrastructure, a drought affecting hydroelectric production and a lack of proper types and quantities of fuel.

Meanwhile, demand continues to grow at a faster pace than power production and capacity and in first quarter 2008 Iraqis needed 7,882 megawatts per day compared with the 3,985 MW per day supplied, including 225 MW of Iranian and Turkish imports.

Iraq's operating capacity was 4,300 MW in 2003 and is now 10,000 MW. "Approximately 2,200 MW in new and rehabilitated power has been added as a result of U.S.-funded projects," the SIGIR report said, with $4.46 billion spent of the $4.91 billion allocated.

The report also noted three key power lines -- from Baghdad South to Mussayib and Baghdad West and Baiji to Baghdad West -- were repaired.

Much of the power network is not fail-safe and overworked, with no central control to ensure proper power-sharing between the various provinces. A $104 million U.S. project to fix this was "91 percent installed and 51 percent commissioned" when it "was terminated because of budget overruns," the SIGIR report said.


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