Rebuilding Iraq
Integrated Strategic Plan Needed to Help Restore Iraq's Oil and Electricity Sectors Gao ID: GAO-07-677 May 15, 2007Since 2003, the United States has provided several billion dollars in reconstruction funds to help rebuild Iraq oil and electricity sectors, which are crucial to rebuilding Iraq's economy. For example, oil export revenues account for over half of Iraq's gross domestic product and over 90 percent of government revenues. The U.S. rebuilding program was predicated on three key assumptions: a permissive security environment, the ability to restore Iraq's essential services to prewar levels, and funding from Iraq and international donors. This report addresses (1) the funding made available to rebuild Iraq's oil and electricity sectors, (2) the U.S. goals for these sectors and progress in achieving these goals, and (3) the key challenges the U.S. government faces in these efforts.
Billions have been provided to rebuild Iraq's oil and electricity sectors, but Iraq's future needs are significant and sources of funding uncertain. From fiscal years 2003 through 2006, the United States spent about $5.1 billion to rebuild the oil and electricity sectors. The United States also spent an additional $3.8 billion in Iraqi funds on these sectors. However, Iraq will need billions of additional dollars to rebuild these sectors. The Iraqi government and donors represent important sources of potential funding. However, the oil and electricity ministries have encountered difficulties spending capital improvement budgets because of weaknesses in budgeting and procurement practices and major security challenges. Moreover, Iraq has not made full use of potential international contributions. It is also unclear what additional financial commitments, if any, will be provided to Iraq's oil and electricity sectors as part of a new international compact. Despite 4 years of effort and the substantial resources expended, production in both sectors has consistently fallen below U.S. program goals. In addition, State's estimate of Iraq's oil production levels may be overstated due to inadequate metering that does not allow precise measurement of crude oil production. The Iraqi government projects that it will be able to meet the demand for electricity in 2009. However, these projections assume that the Ministry of Electricity will be assured of the stable supply of the fuel needed for electricity generation, which has been lacking due to poor coordination between the oil and electricity ministries. A variety of security, corruption, legal, and planning challenges have impeded U.S. and Iraqi efforts to restore Iraq's oil and electricity sectors. The challenging security environment and insufficient protection efforts have continued to place workers and infrastructure at risk. Corruption, smuggling, and other illicit activities result in revenue losses and low cost recovery. Furthermore, the Iraqi government has difficulty attracting foreign investment because, according to the World Bank, it lacks an adequate legal framework, including comprehensive hydrocarbon legislation that would govern distribution of future oil revenues and granting of exploration rights. Finally, although the oil and electricity sectors are mutually dependent, the Iraqi government lacks integrated planning for these sectors, which has led to inefficient management of the country's resources.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-677, Rebuilding Iraq: Integrated Strategic Plan Needed to Help Restore Iraq's Oil and Electricity Sectors
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
May 2007:
Rebuilding Iraq:
Integrated Strategic Plan Needed to Help Restore Iraq's Oil and
Electricity Sectors:
GAO-07-677:
GAO Highlights:
Highlights of GAO-07-677, a report to Congressional Committees
Why GAO Did This Study:
Since 2003, the United States has provided several billion dollars in
reconstruction funds to help rebuild Iraq oil and electricity sectors,
which are crucial to rebuilding Iraq‘s economy. For example, oil export
revenues account for over half of Iraq‘s gross domestic product and
over 90 percent of government revenues. The U.S. rebuilding program was
predicated on three key assumptions: a permissive security environment,
the ability to restore Iraq‘s essential services to prewar levels, and
funding from Iraq and international donors.
This report addresses (1) the funding made available to rebuild Iraq‘s
oil and electricity sectors, (2) the U.S. goals for these sectors and
progress in achieving these goals, and (3) the key challenges the U.S.
government faces in these efforts.
What GAO Found:
Billions have been provided to rebuild Iraq‘s oil and electricity
sectors, but Iraq‘s future needs are significant and sources of funding
uncertain. From fiscal years 2003 through 2006, the United States spent
about $5.1 billion to rebuild the oil and electricity sectors. The
United States also spent an additional $3.8 billion in Iraqi funds on
these sectors. However, Iraq will need billions of additional dollars
to rebuild these sectors. The Iraqi government and donors represent
important sources of potential funding. However, the oil and
electricity ministries have encountered difficulties spending capital
improvement budgets because of weaknesses in budgeting and procurement
practices and major security challenges. Moreover, Iraq has not made
full use of potential international contributions. It is also unclear
what additional financial commitments, if any, will be provided to
Iraq‘s oil and electricity sectors as part of a new international
compact.
Despite 4 years of effort and the substantial resources expended,
production in both sectors has consistently fallen below U.S. program
goals. In addition, State‘s estimate of Iraq‘s oil production levels
may be overstated due to inadequate metering that does not allow
precise measurement of crude oil production. The Iraqi government
projects that it will be able to meet the demand for electricity in
2009. However, these projections assume that the Ministry of
Electricity will be assured of the stable supply of the fuel needed for
electricity generation, which has been lacking due to poor coordination
between the oil and electricity ministries.
A variety of security, corruption, legal, and planning challenges have
impeded U.S. and Iraqi efforts to restore Iraq‘s oil and electricity
sectors. The challenging security environment and insufficient
protection efforts have continued to place workers and infrastructure
at risk. Corruption, smuggling, and other illicit activities result in
revenue losses and low cost recovery. Furthermore, the Iraqi government
has difficulty attracting foreign investment because, according to the
World Bank, it lacks an adequate legal framework, including
comprehensive hydrocarbon legislation that would govern distribution of
future oil revenues and granting of exploration rights. Finally,
although the oil and electricity sectors are mutually dependent, the
Iraqi government lacks integrated planning for these sectors, which has
led to inefficient management of the country‘s resources.
Figure: Iraqi Reported Crude Oil Production, Exports, and U.S. Goals,
June 2003 through December 2006:
[See PDF for Image]
Source: Iraq Ministry of Oil estimates collected by State Department's
Iraq Reconstruction and Management Office.
[End of figure]
What GAO Recommends:
This report recommends that the Secretary of State, in conjunction with
relevant U.S. agencies and international donors, work with Iraqi
ministries to develop an integrated energy strategy. State commented
that the Iraqi government, not the U.S. government, is responsible for
taking action on GAO‘s recommendations. GAO believes that these
recommendations are still valid given the billions made available for
Iraq‘s energy sector and the U.S. government‘s influence in overseeing
Iraq‘s rebuilding efforts.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-677].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph Christoff at (202)
512-8979 or christoffj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
The United States, Iraq, and Donors Have Funded Reconstruction of
Iraq's Oil and Electricity Sectors, but Iraq's Future Needs Are
Significant and Sources of Funding Uncertain:
Iraq's Oil and Electricity Production Goals Have Not Been Met, Oil
Production Figures May Be Overstated, and Iraq Faces Difficulties
Sustaining Infrastructure:
Major Challenges Hinder Efforts to Meet Iraq's Oil and Electricity
Needs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Department of State:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Status of Appropriation Funds Apportioned to the Oil and
Electricity Sectors, as of September 30, 2006:
Table 2: Iraqi Funds Used for U.S. Oil and Electricity Sectors, as of
December 31, 2005:
Table 3: U.S. Goals and 2006 Averages for Iraq Oil Sector:
Table 4: U.S. Goals and 2006 Averages for Iraq Electricity Sector:
Figures:
Figure 1: Overview of Oil Network:
Figure 2: Crude Oil Production Levels in Iraq, 1970-2005:
Figure 3: Overview of Electricity Network:
Figure 4: 2006 Ministry of Oil and Electricity Spending by Major
Category, as of November 2006:
Figure 5: Iraqi Reported Crude Oil Production, Exports, and U.S. Goals,
June 2003 through December 2006:
Figure 6: Comparison of IRMO and EIA Data on Iraq's Crude Oil
Production:
Figure 7: Peak Electricity Generation and Demand in Iraq, May 2005 to
December 2006:
Figure 8: Enemy-Initiated Attacks against the Coalition and Its Iraqi
Partners:
Figure 9: Downed Transmission Tower in Iraq:
Figure 10: Attack on Oil Pipeline:
Abbreviations:
CERP: Commander's Emergency Response Program:
CPA: Coalition Provisional Authority:
DAD: Donor Assistance Database:
DFI: Development Fund for Iraq:
DOD: Department of Defense:
EIA: Energy Information Administration:
EPPS: Electrical Power Security Service:
GRD: Gulf Regional Division:
IDA: International Development Assistance:
IMF: International Monetary Fund:
IRFFI: International Reconstruction Fund Facility for Iraq:
IRMO: Iraq Reconstruction Management Office:
IRRF: Iraq Relief and Reconstruction Fund:
LPG: liquefied petroleum gas:
mbpd: million barrels per day:
mscfd: million standard cubic feet per day:
mw: megawatt:
mwh: megawatt hours:
PCO: Project and Contracting Office:
SIB: Strategic Infrastructure Battalions:
SIGIR: Special Inspector General for Iraq Reconstruction:
tpd: tons per day:
UN: United Nations:
UNDP: United Nations Development Programme:
USAID: United States Agency for International Development:
United States Government Accountability Office:
Washington, DC 20548:
May 15, 2007:
Congressional Committees:
The Iraqi government inherited an oil and electricity infrastructure
that was greatly deteriorated due to the previous regime's neglect,
international sanctions, and years of conflict, looting, and vandalism.
Since 2003, the U.S. government has provided several billion dollars in
reconstruction funds to help restore Iraq's crude oil production and
exports and improve Iraq's electrical generating capacity,
transmission, distribution, and monitoring systems.[Footnote 1] Both
sectors are crucial to rebuilding the economy. Iraq's crude oil
reserves, estimated at 115 billion barrels, are the third largest in
the world. Oil export revenues account for over half of Iraq's gross
domestic product and over 90 percent of its revenues. This revenue is
essential to Iraq's ability to provide for its needs, including
reconstruction. In addition, an inadequate and unreliable supply of
electricity affects both public perceptions of the government's ability
to deliver basic services and the productivity of Iraq's oil sector,
which is highly dependent on electricity.
GAO's review of reconstruction efforts in Iraq, done under the
Comptroller General's authority to conduct evaluations on his own
initiative, examined U.S. activities directed at rebuilding the oil and
electricity sectors.[Footnote 2] Specifically, we addressed (1) the
funding made available to rebuild Iraq's oil and electricity sectors
and the factors that may affect Iraq's ability to meet its future
funding needs, (2) the U.S. goals for the oil and electricity sectors
and progress in achieving these goals, and (3) the key challenges the
U.S. government faces in helping Iraq restore its oil and electricity
sectors.
To accomplish our objectives, we reviewed and analyzed U.S., Iraqi,
donor government, United Nations (UN), International Monetary Fund
(IMF), and World Bank reports and data. During our field work in
Washington, D.C; Baghdad, Iraq; and Amman, Jordan, we met with
officials from the Department of State, the U.S. Agency for
International Development (USAID), the Department of Defense (DOD), the
Department of the Treasury, and the Department of Energy. During our
two trips to Iraq and Jordan, we met with Iraqi, UN, IMF, World Bank,
donor country (Japan and European Union), private sector, and U.S.
officials. We observed several embassy meetings and a donor meeting led
by the Iraqi Ministry of Planning. We also interviewed U.S., Iraqi, and
UN officials at a November 2006 electricity conference sponsored by the
UN Development Programme (UNDP) at the Dead Sea, Jordan. We analyzed
data on Iraq's 2006 and 2007 budgets and 2006 budget expenditures. We
found these data to be sufficiently reliable for comparing Iraq's
intended ministry expenditures and determining that Iraq has not been
able to fully expend its budget in certain budget categories. We
examined data on Iraqi oil production from the Department of State's
Iraq Reconstruction and Management Office (IRMO) and the Department of
Energy's Energy Information Administration (EIA). Although we found
some limitations in these data, they were sufficiently reliable to
determine whether U.S. goals for oil production were being met. We also
examined data on oil exports and electricity production in Iraq and
found them sufficiently reliable for determining if U.S. goals were
being met. Appendix I contains a more detailed description of our scope
and methodology.
We conducted our review from January 2006 through March 2007 in
accordance with generally accepted government auditing standards. The
work performed for this review has also contributed to several related
GAO products on Iraq.[Footnote 3]
Results in Brief:
While billions have been provided to rebuild Iraq's oil and electricity
sectors, Iraq's future needs are significant and sources of funding
uncertain. For fiscal years 2003 through 2006, the United States made
available about $7.4 billion and spent about $5.1 billion to rebuild
the oil and electricity sectors. The United States spent an additional
$3.8 billion in Iraqi funds on the two sectors, primarily on oil and
electricity sector contracts administered by U.S. agencies. However,
according to various estimates and officials, Iraq will need billions
of additional dollars to rebuild, maintain, and secure Iraq's oil and
electricity sectors. The Ministry of Electricity estimates that about
$27 billion will be needed to meet the sector's future rebuilding
requirements; a comparable estimate has not been developed by the
Ministry of Oil. Since the majority (about 70 percent) of U.S. funds
has been spent, the Iraqi government and the international donor
community represent important sources of potential funding. However,
prospects of such funding are uncertain. First, the Oil and Electricity
Ministries have encountered difficulties spending capital improvement
budgets because of weaknesses in budgeting, procurement, and financial
management. As of November 2006, the Ministry of Oil had spent less
than 3 percent of its $3.5 billion 2006 capital budget to improve
Iraq's oil facilities. Second, Iraq has not made full use of potential
international contributions and it is unclear what additional financial
commitments, if any, will be provided to Iraq's oil and electricity
sectors as part of a new international compact (agreement), according
to U.S. officials. As of March 2007, donors had committed $580 million
in grants for the electricity sector and had offered loans for oil and
electricity projects; however, Iraq has not accessed these loans in
part due to concerns about its high debt burden.
Despite 4 years of effort and the substantial resources devoted to
restoring Iraq's oil and electricity sectors, production in both
sectors has consistently fallen below U.S. program goals. Key U.S.
goals for the oil sector are to reach a crude oil production capacity
of 3 million barrels per day (mbpd) and crude oil export levels of 2.2
mbpd, and to increase production capacity and stock levels of refined
fuels. However, State Department data indicate that actual crude oil
production and exports averaged, respectively, about 2.1 mbpd and 1.5
mbpd in 2006, and refined fuel production and stock levels did not meet
the goals set. In addition, IRMO's estimate of Iraq's oil production
levels may be overstated since inadequate metering does not allow
precise measurement of crude oil production. The U.S. goal for
electrical peak generation capacity is 6,000 megawatts (mw); however,
electricity in Iraq averaged 4,280 mw of peak generation per day in
2006, about 3,950 mw short of demand in 2006. The Iraqi government
projects that it will not be able to fully meet the demand for
electricity until 2009. However, these projections assume that the
Ministry of Electricity will be assured of a stable supply of the fuel
needed for electricity generation, which has been lacking in the past
due to poor coordination between the Oil and Electricity Ministries.
Some improvements in current crude oil and electricity production
levels may be achieved once the Army Corps of Engineers Gulf Region
Division (GRD) finalizes its remaining oil and electricity projects,
which are scheduled for completion by April 2008. However, these
projects have experienced continued delays, undermining prospects for
meeting U.S. production goals. Additionally, Iraq has experienced
difficulty in sustaining the infrastructure rehabilitated with U.S.
funds. For example, the U.S. decision to install gas turbine generators
without an assured supply of natural gas required the use of fuel oils
that resulted in increased maintenance costs and decreased power
output.
A variety of security, corruption, legal, and planning challenges have
impeded U.S. and Iraqi efforts to restore Iraq's oil and electricity
sectors. These challenges have made it difficult to achieve the current
crude oil production and export goals that are central to Iraq's
government revenues and economic development. In the electricity
sector, these challenges have made it difficult to achieve a reliable
Iraqi electrical grid that provides power to all other infrastructure
sectors and promotes economic activity. The U.S. reconstruction effort
was predicated on the assumption that a permissive security environment
would exist. However, the deteriorating security environment continues
to place workers and infrastructure at risk while protection efforts
have been insufficient. Corruption, smuggling, and other illicit
activities result in revenue losses and low cost recovery. Widespread
corruption and smuggling reduce revenues that could be collected
through the legal sale of refined oil products such as gasoline.
According to State Department officials and reports, about 10 percent
to 30 percent of refined fuels is diverted to the black market or is
smuggled out of Iraq and sold for a profit. Moreover, the lack of an
effective metering system within the electricity sector hinders efforts
to accurately measure consumption and deter theft. Furthermore,
according to U.S. and World Bank officials, the government also lacks
an adequate legal and regulatory framework, including comprehensive
hydrocarbon legislation that would govern distribution of future oil
revenues and granting of exploration rights. Until this framework is
established, it will be difficult to attract the billions of dollars in
additional foreign investment needed to modernize Iraq's oil sector and
ensure that the government has the oil revenues essential for future
reconstruction and reconciliation. Finally, although the oil and
electricity sectors are mutually dependent, the Iraqi government lacks
integrated planning for these sectors, which has led to inefficient
management of the country's resources. According to the U.S.
government, about $4 billion in potential revenues are lost each year
through inefficient energy production practices, such as the flaring of
natural gas, underscoring the need for such a plan.
This report makes several recommendations, including that the Secretary
of State, in conjunction with relevant U.S. agencies and in
coordination with the donor community, work with the Ministries of Oil
and Electricity to (1) develop an integrated energy strategy for the
oil and electricity sectors that identifies, among other items, key
goals and priorities, future funding needs, and steps for enhancing
ministerial coordination; (2) set milestones and assign resources to
expedite efforts to establish an effective metering system for both the
oil and electricity sectors; (3) improve the existing legal and
regulatory framework, for example, by developing fair and equitable
hydrocarbon legislation, regulations, and implementing guidelines; (4)
set milestones and assign resources to expedite efforts to develop
adequate budgeting, procurement, and financial management systems; and
(5) implement a viable donor mechanism to secure funding for Iraq's
future oil and electricity rebuilding needs.
In commenting on a draft of this report, State agreed that all the
steps we included in our recommendations are necessary to improve
Iraq's energy sector but stated that these actions are the direct
responsibility of the Government of Iraq, not of the Department of
State, any U.S. agency, or the international donor community. State
also commented that U.S. agencies are already taking several actions
consistent with our recommendations. We recognize that these actions
are ultimately the responsibility of the Iraqi government. However, it
is clear that the U.S. government wields considerable influence in
overseeing Iraq stabilization and rebuilding efforts. We also
acknowledge that State has made some efforts to address the issues that
led to our recommendations and have refined our report accordingly.
However, we believe additional actions are warranted given the lack of
progress that has been made over the last 4 years in achieving Iraq
reconstruction goals. Also, some of State's initiatives are relatively
new. For example, State commented that an Energy Fusion Cell composed
of the Embassy, Multinational Force-Iraq, and the ministries of oil and
electricity has been formed to craft an integrated energy strategy and
that the practical effectiveness of this effort will depend on whether
the cell is able to obtain buy-in from the two Iraqi ministries.
However, since the details of the strategy have not been released, it
is still unclear whether this strategy will fully address the key
elements of an effective strategy identified in our report, such as
identifying rebuilding priorities, resource needs, stakeholder roles
and responsibilities, and performance measures and milestones. The
uncertainty over ministry buy-in also underscores the importance of
State working closely with other U.S. agencies, the government of Iraq,
and the international donor community in crafting a new energy sector
strategic plan.
Background:
Iraq's oil infrastructure is an integrated network that includes crude
oil fields and wells, pipelines, pump stations, refineries, gas/oil
separation plants, gas processing plants, export terminals, and ports
(see fig. 1). This infrastructure has deteriorated significantly over
several decades due to war damage, inadequate maintenance, and the
limited availability of spare parts, equipment, new technology, and
financing. Considerable looting after Operation Iraqi Freedom and
continued attacks on crude and refined product pipelines have
contributed to Iraq's reduced crude oil production and export
capacities.
Figure 1: Overview of Oil Network:
[See PDF for image]
Sources: GAO; photo (u.S. Army Corps of Engineers); clip art (Map
Resources).
[End of figure]
Iraq's crude oil reserves, estimated at a total of 115 billion barrels,
are the third largest in the world. However, Iraq's ability to extract
these reserves has varied widely over time and has been significantly
affected by war. Figure 2 shows Iraq's daily average crude oil
production levels annually from 1970 through 2005.[Footnote 4] In the 5
years preceding the 2003 invasion, crude oil production averaged 2.3
mbpd.
Iraq's crude oil production reached it highest annual average, 3.5
mbpd, in 1979. In September 1980, Iraq invaded Iran and production
levels plummeted. Although the Iran-Iraq War continued until 1988,
production levels grew steadily after 1983, peaking at 2.9 million
barrels per day in 1989. The following year, Iraq invaded Kuwait, which
began the Gulf War. In January 1991, the United States and coalition
partners began a counter-offensive (Operation Desert Storm). Crude oil
production once again dropped precipitously and remained relatively low
from 1990 to 1996, while Iraq was under UN sanctions. Under the UN Oil
for Food program, Iraqi crude oil production began to rebound, peaking
at an annual average of 2.6 mbpd in 2000. In March 2003, the United
States and coalition partners invaded Iraq. Crude oil production
dropped again to a low of about 1.3 million barrels per day (annual
average) in 2003 but then rebounded relatively quickly.
Figure 2: Crude Oil Production Levels in Iraq, 1970-2005:
[See PDF for image]
Source: GAO analysis of data from the U.S. Department of Energy, Energy
Information Administration.
Note: Data on Iraq's crude oil production include lease condensates.
Lease condensates are hydrocarbons that are gaseous underground but
become liquid above ground and are subsequently commingled with the
crude oil. Therefore, the actual values for Iraq's crude oil production
would be slightly lower if lease condensates were excluded from the
data.
[End of figure]
Iraq's electricity infrastructure consists of a network of (1)
generation facilities that produce power; (2) transmission stations and
lines that transmit power from power stations to distribution networks;
(3) distribution stations and lines that move power to the end users;
and (4) an automated monitoring and control system, under development,
which is a centralized communications and control system designed to
monitor system performance and control equitable distribution of power
(see fig. 3). According to senior U.S. agency officials, Iraq's
electricity infrastructure was in worse condition following the 2003
conflict than initially anticipated or reported in the 2003 UN/World
Bank Needs Assessment.[Footnote 5] The report noted that the severe
degradation of Iraq's generating capacity--from about 5,100 megawatts
in 1990 to about 2,300 megawatts after the 1991 Gulf War--was largely
due to war damage to generation stations. Although the report notes
that production was restored to about 4,500 megawatts before the 2003
conflict, U.S. officials said that Iraq's electrical infrastructure had
experienced significant deterioration due to the war and years of
neglect under Saddam's regime.
Figure 3: Overview of Electricity Network:
[See PDF for image]
Sources: GAO analysis of U.S. Army Corps of Engineers (USACE) and State
Department's Iraq Reconstruction Management Office data; USACE and Nova
Development (clip art).
[End of figure]
From May 2003 through June 2004, the Coalition Provisional Authority
(CPA), led by the United States and the United Kingdom, was the UN-
recognized authority responsible for the temporary governance of Iraq
and for overseeing, directing, and coordinating reconstruction efforts.
In 2003, the CPA committed to improving the oil sector in Iraq and
stated that its activities were to include repairing and restoring the
oil infrastructure to pre-war levels, among other goals. The CPA also
committed to improving the electricity sector in Iraq and stated that
CPA partners would provide reliable, stable, and predictable power to
the people and enterprises of Iraq by rebuilding generation,
transmission, and distribution networks, as well as system control and
communications; by establishing a sound regulatory framework for the
electricity sector; and by ensuring improved security for
infrastructure.
In developing its reconstruction plan, the CPA made several assumptions
that never materialized.[Footnote 6] The first and most critical
assumption was that there would be a permissive security environment to
conduct reconstruction activities. Second, the CPA assumed that U.S.-
funded reconstruction activities would help restore Iraq's essential
services--including oil production and electricity generation--to
prewar levels. The CPA assumed that the Iraqi government and the
international community would help finance Iraq's developmental needs
and that Iraqi oil revenues could help pay for reconstruction costs.
The CPA estimated that Iraq's oil production would increase to about
2.8 to 3 mbpd by the end of 2004. Additionally, it assumed that because
of its expertise, the United States would focus its resources on long-
term reconstruction projects.
With the establishment of Iraq's interim government in June 2004, the
CPA's responsibilities were transferred to the Iraqi government or to
U.S. agencies. Since then, the Department of State has been responsible
for overseeing U.S. efforts to rebuild Iraq. The Project and
Contracting Office (PCO), a temporary DOD organization, was tasked with
providing acquisition and project management support. In December 2005,
DOD merged the PCO with the U.S. Army Corps of Engineers Gulf Region
Division, which supervises DOD reconstruction activities in Iraq.
Additionally, the State Department's Iraq Reconstruction and Management
Office (IRMO) has been responsible for strategic planning and for
prioritizing requirements, monitoring spending, and coordinating with
the military commander. According to U.S. officials, IRMO is scheduled
to sunset on May 10, 2007, and is to be replaced by the Office of
Transition and Assistance Coordination. IRMO advisors to the ministries
will continue their work under the new office or other relevant U.S.
offices. As of March 2007, IRMO had assigned the Ministries of Oil and
Electricity 10 and 18 advisors, respectively. Additionally, USAID
awarded and managed its own contracts for electricity under its Bechtel
contracts which, as of April 2007, were being closed out. USAID
continues to award its own contracts, which are now generally
associated with economic assistance, governance, capacity building, and
its community stabilization program.
The United States, Iraq, and Donors Have Funded Reconstruction of
Iraq's Oil and Electricity Sectors, but Iraq's Future Needs Are
Significant and Sources of Funding Uncertain:
For fiscal years 2003 through 2006, the United States made available
about $7.4 billion, obligated about $7.1 billion, and spent about $5.1
billion in U.S. funds to rebuild Iraq's oil and electricity sectors.
The U.S. government also has spent about $3.8 billion in Iraqi funds,
as of December 31, 2005, for reconstruction activities, including CPA
contracts administered by U.S. agencies. However, according to various
estimates, each sector will need billions more to achieve its
rebuilding goals. Since the majority of the U.S. funds have been spent,
the Iraqi government and international donor community represent
important sources of potential future funding. However, these sources
of funding remain uncertain. The Ministries of Oil and Electricity have
encountered difficulties spending their existing capital improvements
budgets, and their future budgets are subject to the volatility of oil
revenues. The Iraqi government has not made full use of potential
international contributions, and future donor funding is also
uncertain.
United States Has Spent Billions in U.S. and Iraqi Funds to Support
Reconstruction:
The United States has spent the majority (about 70 percent) of the $7.4
billion in funds it made available to reconstruct the electricity and
oil sectors. Additionally, the United States spent $3.8 billion in
Iraqi funds on oil and electricity sector reconstruction activities.
United States Has Spent Billions to Support Reconstruction of Iraq's
Oil and Electricity Sectors:
U.S. agencies have spent about $5.1 billion of the $7.4 billion made
available for the oil and electricity sectors, as of September 30, 2006
(see table 1). For the oil sector, U.S. agency efforts focused
primarily on production and exportation, and to a lesser extent on the
rehabilitation of refinery and gas facilities. For the electricity
sector, U.S. agency efforts generally focused on restoring or
constructing generation, transmission, distribution, and automated
monitoring and control system projects.
Table 1: Status of Appropriation Funds Apportioned to the Oil and
Electricity Sectors, as of September 30, 2006:
Dollars in millions.
Oil sector.
Source of funds[A] /authority: 2003 Iraq Relief and Reconstruction Fund
(IRRF 1)/ P.L. 108-11;
Agency/program: DOD/ Restore Iraq Oil;
Funding: Apportioned: $166.0;
Funding: Obligated: $166.0;
Funding: Expended: $166.0.
Source of funds[A] /authority: The Natural Resources Risk Remediation
Fund (NRRRF)/ P.L. 108-11;
Agency/program: DOD/ Restore Iraq Oil;
Funding: Apportioned: 802.0;
Funding: Obligated: 800.6;
Funding: Expended: 797.7.
Source of funds[A] /authority: 2004 Iraq Relief and Reconstruction Fund
(IRRF 2)/ P.L. 108-106;
Agency/program: DOD;
Funding: Apportioned: 1,724.7;
Funding: Obligated: 1,604.6;
Funding: Expended: 1,163.0.
Source of funds[A] /authority: Total oil;
Agency/ program: [Empty];
Funding: Apportioned: $2,692.7;
Funding: Obligated: $2,571.2;
Funding: Expended: $2,126.7.
Electricity sector.
Source of funds[A] /authority: IRRF 1/ P.L. 108- 11;
Agency/program: DOD / Restore Iraq Electricity;
Funding: Apportioned: $300.0;
Funding: Obligated: $299.9;
Funding: Expended: $299.9.
Agency/program: USAID/ Restore Critical Infrastructure[B];
Funding: Apportioned: Not available;
Funding: Obligated: Not available;
Funding: Expended: Not available.
Source of funds[A] /authority: IRRF 2/ P.L. 108- 106;
Agency/program: DOD;
Funding: Apportioned: 3,403.0;
Funding: Obligated: 3,260.1;
Funding: Expended: 1,966.0.
Agency/program: USAID;
Funding: Apportioned: 836.6;
Funding: Obligated: 836.6;
Funding: Expended: 741.9.
Source of funds[A] /authority: Commander's Emergency Response Program
for FY2004-06 (CERP)[C] /P.L. 108-106, P.L. 108-287, P.L. 109-13,
P.L.109-148, P.L. 109-234;
Agency/program: DOD;
Funding: Apportioned: 163.6;
Funding: Obligated: 163.6;
Funding: Expended: Not available.
Source of funds[A] /authority: Total electricity;
Agency/program: [Empty];
Funding: Apportioned: $4,703.2;
Funding: Obligated: $4,560.2;
Funding: Expended: $3,007.8.
Source of funds[A] /authority: Total;
Agency/ program: [Empty];
Funding: Apportioned: $7,395.9;
Funding: Obligated: $7,131.4;
Funding: Expended: $5,134.5.
Sources: DOD, USAID, and State Department's Iraq Reconstruction and
Management Office data.
[A] According to the DOD comptroller's office, although some military
construction funds also were used for reconstruction efforts, they were
not apportioned by sector. Further, about $1.1 million of Operations
and Maintenance, Army funds were initially apportioned, obligated, and
expended for electricity projects. Also, $285 million in emergency
supplemental funds were made available for cross-sector operations and
maintenance sustainment of key U.S.-funded infrastructure.
[B] According to USAID, IRRF 1 funds under its Restore Critical
Infrastructure program were not apportioned by sector. Under this cross-
sector reconstruction program, about $995 million was apportioned and
obligated and about $939 million was disbursed as of September 30,
2006.
[C] DOD and its executing agency, the U.S. Army, were unable to provide
complete data for U.S.-appropriated CERP funding for the electricity
sector. Under CERP, DOD commits funds to projects once identified. DOD
does not track sector commitments after the year of the corresponding
appropriation. Thus, any updated data on amounts apportioned,
obligated, or expended by sector are not available and not reflected in
this table.
[End of table]
Funding for electricity included about $164 million for the Commander's
Emergency Response Program (CERP) during fiscal years 2004 to
2006.[Footnote 7] Additional funding for CERP has been provided under
the Department of Defense 2007 Appropriations Act,[Footnote 8] which
makes available up to $500 million for CERP in Iraq and Afghanistan.
The fiscal year 2007 CERP allocation for electricity projects in Iraq
was not available as of March 2007, according to Army and DOD
officials. CERP provides coalition military commanders with a tool to
rapidly respond to urgent humanitarian relief and reconstruction needs
in their geographic area of responsibility.
U.S. Agencies Spent Billions in Iraqi Funds on Oil and Electricity
Reconstruction Activities:
U.S. agencies spent about $3.8 billion in Iraqi funds in the oil and
electricity sectors, as of December 31, 2005 (see table 2). These funds
came from vested and seized assets from the previous Iraqi
regime[Footnote 9] and oil revenues in the Development Fund for Iraq
(DFI).[Footnote 10] The CPA spent vested and seized assets on
reconstruction activities, including projects, ministry operations, and
liquefied petroleum gas. DFI funds consist of oil proceeds, UN Oil for
Food program surplus funds, and returned Iraqi government and regime
financial assets; DFI funds continue to be used for contracts
administered by U.S. agencies.[Footnote 11] According to International
Advisory Monitoring Board of the DFI documents, the Iraqi government
granted U.S. agencies limited authority to administer outstanding
contracts entered into by the former CPA that required subsequent
payments after June 28, 2004.[Footnote 12] This authority expired on
December 31, 2006. In March 2007, the U.S. government requested that
the Iraqi government extend the authority to December 31, 2007.
Table 2: Iraqi Funds Used for U.S. Oil and Electricity Sectors, as of
December 31, 2005:
Oil sector: Development Fund for Iraq;
Disbursed: $2,709,267,000.
Oil sector: Seized funds;
Disbursed: 95,000,000.
Oil sector: Vested funds;
Disbursed: 7,000.
Oil sector: Total for oil sector;
Disbursed: $2,804,274,000.
Electricity sector: Development Fund for Iraq;
Disbursed: $1,014,674,000.
Electricity sector: Seized funds;
Disbursed: 2,975,000.
Electricity sector: Vested funds;
Disbursed: 12,925,000.
Electricity sector: Total for electricity sector;
Disbursed: $1,030,574,000.
Total;
Disbursed: $3,834,848,000.
Source: GAO analysis based on data from CPA, DOD, and the independently
audited DFI Statement of Cash Receipts and Payments, as reported to the
Iraqi government and the International Advisory Monitoring Board.
Notes: Current independent auditor's data for the DFI are as of
December 31, 2005. The results of the independent audit of 2006 funds
have not yet been released. Sector activities include the DFI purchase
of about $2,241 million in petroleum products and $50 million in
generated electricity from other countries. Disbursed figures do not
include DFI funds provided through the CERP and other small programs,
which also support reconstruction activities.
[End of table]
Billions of Additional Dollars Needed to Rebuild Oil and Electricity
Sectors, but Future Iraqi Funding Is Uncertain:
According to the Iraqi government, the UN, and the U.S. government,
Iraq's Ministries of Oil and Electricity will need billions of
additional dollars to rebuild, maintain, and secure Iraq's oil and
electricity infrastructure and achieve production goals. However, the
Iraqi government has had difficulty fully expending its funds already
allocated to the electricity and oil sectors. In addition, the amount
of Iraq's future budget revenues is uncertain due to Iraq's dependency
on potentially volatile oil revenues. According to the World Bank,
volatility in oil export revenues could hamper the prospects for Iraq's
reconstruction program because volatility increases uncertainty, leads
to wasteful public investment in times of boom, and depresses
investment when oil prices are low.
Billions of Additional Dollars Are Needed to Fund the Rebuilding of the
Oil and Electricity Sectors:
The Iraqi government, the UN, and the U.S. government estimate that
Iraq will need billions of additional dollars to continue rebuilding,
maintaining, and securing Iraq's oil and electricity infrastructure.
For example, the Ministry of Electricity's 2006-2015 Electricity Master
Plan estimates that $27 billion will be needed to reach its goal of
providing reliable electricity across Iraq by 2015. The goals of the
Master Plan are to (1) rehabilitate the existing power generation
plants and transmission and distribution networks, (2) increase
generation capacity, (3) provide a secure power supply to all
consumers, (4) build the capacity of ministry staff to implement the
plan, and (5) connect Iraq's grid with neighboring countries. The
achievement of these goals is intended to ensure that Iraq meets its
future demands for electricity, which are expected to double by 2015.
Under the master plan, the demand for electricity would be first met in
2009.
For the oil sector, a comparable estimate of future rebuilding needs
has not been developed. According to DOD, the investment in Iraq's oil
sector is "woefully short" of the absolute minimum required to sustain
current production and additional foreign and private investment is
needed for the development of Iraq's energy sector. Moreover, U.S.
officials and industry experts have stated that Iraq would need an
estimated $20 billion to $30 billion over the next several years to
reach and sustain a crude oil production capacity of 5 million barrels
per day. This production goal is below the level identified in the
Iraqi 2005-2007 National Development Strategy--at least 6 million
barrels per day by 2015.
Iraq's Oil and Electricity Ministries Have Not Spent Existing Funds for
Infrastructure Improvements and Future Iraqi Funds Are Uncertain:
The Iraqi government has not fully spent the capital project funds
already allocated to the electricity and oil sectors in Iraq's 2006
budget. According to U.S. and foreign officials, the Ministries of Oil
and Electricity have encountered difficulties spending these budgets
because of government weaknesses in budgeting, procurement, and
financial management. While Iraq's inability to expend its capital
budgets may not directly affect U.S.-funded projects, U.S. investments
alone are not adequate for the full reconstruction and expansion of the
oil sector. Therefore, Iraq's continued difficulties in spending its
capital budgets could hamper efforts to attain its current
reconstruction goals. In 2006, Iraq planned to spend more than $3.5
billion and $767 million for capital projects in the oil and
electricity sectors, respectively. These amounts accounted for about 98
percent of the Ministry of Oil's total budget ($3.6 billion) and 91
percent of the Ministry of Electricity's total budget ($840 million)
that year (see fig. 4). However, as shown in figure 4, only 3 percent
of oil sector capital project funds had been spent and about 35 percent
had been spent in the electricity sector, as of November 2006.[Footnote
13] We are examining U.S. efforts to work with the Iraqi ministries
regarding ministry budget execution issues in greater detail in another
ongoing review.
Figure 4: 2006 Ministry of Oil and Electricity Spending by Major
Category, as of November 2006:
[See PDF for image]
Source: GAO analysis of Iraq's budget, provided by U.S. treasury.
[End of figure]
According to U.S. officials, Iraq lacks the clearly defined and
consistently applied budget and procurement rules needed to effectively
implement capital projects. For example, the Iraqi ministries are
guided by complex laws and regulations, including those implemented
under Saddam Hussein, the CPA, and the current government. According to
State officials, the lack of agreed-upon procurement and budgeting
rules causes confusion among ministry officials and creates
opportunities for corruption and mismanagement. Additionally, according
to State and DOD, personnel turnover within ministries, fear of
corruption charges, and an onerous contract approval process[Footnote
14] have caused delays in contract approval and capital improvement
expenditures. Moreover, according to IRMO officials, the Ministry of
Oil faces continued difficulties in obtaining Ministry of Finance and
other official approvals for meeting its operations and maintenance
expenses, procuring needed replacement items, and funding critical
emergency repairs and new projects. According to the World Bank, Iraq's
procurement procedures and practices are weak and lack effective bid
protest mechanisms and transparency on final contract awards, among
other problems.[Footnote 15]
In response to the problems that Iraq is experiencing in spending its
budgets, the United States is considering some additional options for
facilitating Iraq's expenditure of these capital project funds. In
April 2007, the State Department authorized DOD, under section 607 of
the Foreign Assistance Act of 1961, as amended (Public Law 87-195), to
provide commodities and services to the Iraqi government on an advance-
of-funds basis. DOD has identified areas in which the government of
Iraq may seek its help, including the procurement of fuel, electrical
power generation, water projects, and security upgrades. According to
DOD officials, Iraq must formally request this assistance before such a
mechanism could be utilized. These officials indicated that no
additional details could be provided since the details are still being
worked out with the Iraqi government. We are monitoring the use of this
mechanism as part of our ongoing work on Iraq and will report
separately on this issue at a later date.
In addition to the challenges in spending its current budgets, Iraq's
future budget revenues are subject to some uncertainty due to Iraq's
high dependence on crude oil export revenues. Oil exports are estimated
to be $31 billion in 2007, accounting for more than 90 percent of the
government revenue budgeted for fiscal year 2007. Iraq's oil revenues
are determined by the amount of crude oil Iraq exports and its price.
While crude oil exports have been relatively stable, the price of Iraqi
crude oil has been much more variable. The price of Iraqi crude oil
rose from a little over $30 per barrel in 2004 to above $60 per barrel
during the summer of 2006 and then fell again to about $50 per barrel
at the end of 2006. In the first quarter of 2007, prices were once
again rising. These fluctuations, which are dependent on a wide range
of geopolitical and economic factors, make it hard to reliably forecast
government revenues. According to the World Bank, volatility of oil
export revenues may hamper the prospects of Iraq's reconstruction
program, since volatility increases uncertainty, leads to wasteful
public investment in times of boom, and depresses investment when oil
prices are low.
Iraq Has Not Made Full Use of International Financial Assistance and
Prospects for Future Funding Are Uncertain:
International donor funds represent an important source of potential
funding. Potential funding for Iraq's oil and electricity sectors is
available in the form of bilateral grants and loans, multilateral
grants through the International Reconstruction Fund Facility for
Iraq,[Footnote 16] and multilateral loans through the World Bank, the
International Monetary Fund, or the Islam Development Bank.
However, as of March 2007, donors had not provided any grants to the
oil sector, and the Iraqi government had not taken advantage of
available loans for either the oil or the electricity sector. Some
grants have been provided to the electricity sector. As of March 2007,
of the more than $14 billion in overall non-U.S. assistance pledged for
Iraq, about $580 million had been committed and $441 million spent on
grants for electricity projects.[Footnote 17] According to U.S. and
donor officials, no donor funding was provided to the oil sector
because of an expectation that sufficient funds would be provided
through Iraq's oil revenues and private investors.
Although loans have been offered to the Iraqi government, it has not
accessed this source of financing to date due, in part, to its concerns
about adding to its considerable debt burden. For example, Japan has
announced its intention to provide yen loans to the Iraqi government
for several projects totaling about $1.1 billion for the electricity
and oil sectors.[Footnote 18] However, according to the State
Department, as of January 2007, the Iraqi government had not reached
agreement with Japan on the terms of the loans. As we previously
reported, Iraq has significant foreign debt remaining from the Saddam
Hussein regime, which presents financial challenges for Iraq's
reconstruction and economic development.[Footnote 19]
Moreover, it is unclear to what extent the International Compact with
Iraq will serve as a viable mechanism to obtain additional donor
support for Iraq. Initiated by Iraq and the UN in July 2006, the
compact is intended to promote wider international engagement in the
redevelopment of Iraq and to secure additional financial assistance to
support major investments in sectors such as oil, electricity, and
agriculture. Under the compact, Iraq would undertake economic,
political, and security reforms to receive additional donor support.
According to the State Department, the compact was signed and formally
launched on May 3, 2007. According to the State Department, the
international community will be able to contribute under the compact in
a number of ways including debt reduction or forgiveness, pledging new
financial and technical assistance, and expediting the disbursement of
previously pledged assistance. However, the extent to which the compact
can be expeditiously implemented and stimulate international assistance
remains uncertain.
Iraq's Oil and Electricity Production Goals Have Not Been Met, Oil
Production Figures May Be Overstated, and Iraq Faces Difficulties
Sustaining Infrastructure:
Oil and electricity production have consistently fallen below U.S.
program goals, undermining U.S. and Iraqi government efforts to improve
essential services. Production levels may be overstated and measuring
them precisely is challenging due to limited metering and poor
security. Further, the demand for electricity significantly outstripped
the available supply in 2006. To help improve Iraq's oil and
electricity production, the United States has funded a variety of
projects. However, some of these projects, which could provide
additional production capacity, have faced significant delays
undermining efforts to meet U.S. program goals. Additionally, Iraq has
difficulty sustaining U.S.-funded infrastructure projects once they are
completed.
U.S. Oil and Electricity Goals Have Not Been Met:
Key reconstruction goals for Iraq's oil and electricity sectors,
including those for crude oil production and exports, refined fuel
production capacity and stock levels, and electricity production, among
others, have not been met. In addition, Iraq's oil production levels
may be overstated given problems with inadequate metering. Department
of Energy, for example, reports Iraq's oil production at 100,000 to
300,000 barrels per day less than what the State Department reports.
Production goals for electricity are outweighed by increasing demand,
which is difficult to measure and continues to significantly exceed
supply.
Iraq's Crude Oil Production and Exports Have Not Met Goals:
Key reconstruction goals for Iraq's oil sector have yet to be achieved
(see fig. 5). Key U.S. goals for the oil sectors are to reach an
average crude oil production capacity of 3 million barrels per day
(mbpd) and crude oil export levels of 2.2 mbpd, and increase production
capacity and stock levels of refined fuels.[Footnote 20] However, in
2006, actual crude oil production and exports averaged, respectively,
about 2.1 mbpd and 1.5 mbpd, and refined fuel production and stock
levels did not meet their goals.
In August 2003, the CPA established a U.S. program goal to increase
crude oil production to about 1.3 mbpd. The CPA increased this goal
every 2 to 3 months until July 2004, when the goal became to increase
crude oil production capacity to 3.0 mbpd (shown in fig. 5). State also
set an eventual crude oil production goal of 2.8 mbpd in March 2006.
Production capacity differs from actual production. Production capacity
is the maximum amount of production a country can maintain over a
period of time. For example, EIA has defined production capacity as the
maximum amount of production that (1) could be brought online within 30
days and (2) sustained for at least 90 days. Since Iraq has been trying
to increase its production of crude oil, we use actual production as an
indicator of Iraq's production capacity in this report.
Figure 5: Iraqi Reported Crude Oil Production, Exports, and U.S. Goals,
June 2003 through December 2006:
[See PDF for image]
Source: Iraq Ministry of Oil estimates collected by State Department's
Iraq Reconstruction and Management Office.
[End of figure]
Besides production and export of crude oil, the CPA also established
goals for the production of natural gas and liquefied petroleum gas
(LPG), as well as the national stocks of refined petroleum products
(such as gasoline) that are used to generate energy by consumers and
businesses.[Footnote 21] These CPA goals were to increase production
capacity of natural gas to 800 million standard cubic feet per day
(mscfd); increase production capacity of LPG to 3,000 tons per day
(tpd); and meet demand for benzene (gasoline), diesel, kerosene, and
LPG by building and maintaining their stock levels at a 15-day supply.
However, the 2006 averages did not meet these goals, as shown in table
3. To increase the stocks of petroleum products and the availability of
these products to consumers, Iraq legalized the importation of
petroleum products by private companies to supplement its own
production and state-owned company imports. For 2006, the IMF estimated
that Iraq's state-owned companies imported about $2.6 billion of
petroleum products. At the recommendation of the IMF, the Iraqi
government has also been reducing subsidies for refined oil products,
which raises the prices consumers pay. In the past, refined oil
products in Iraq have been highly subsidized, which leads to increased
demand. Reduction in domestic demand for refined oil products would
allow additional crude oil to be exported for revenue rather than
refined in Iraq.
Table 3: U.S. Goals and 2006 Averages for Iraq Oil Sector:
Metric: Crude oil production (million barrels per day);
U.S. Goal: 3.0 mbpd (capacity);
2006 Average: 2.1 mbpd;
2007 Average, as of February 28, 2007: 1.9 mbpd.
Metric: Crude oil exports (million barrels per day);
U.S. Goal: 2.2 mbpd;
2006 Average: 1.5 mbpd;
2007 Average, as of February 28, 2007: 1.4 mbpd.
Metric: Natural gas production (million standard cubic feet per day);
U.S. Goal: 800 mscfd (capacity);
2006 Average: 730 mscfd;
2007 Average, as of February 28, 2007: N/A.
Metric: LPG production (tons per day);
U.S. Goal: 3,000 tpd (capacity);
2006 Average: 1,709 tpd;
2007 Average, as of February 28, 2007: N/A.
Metric: National stock levels of refined fuels: diesel, kerosene,
gasoline, LPG;
U.S. Goal: 15 days for each fuel;
2006 Average: Diesel: 5 days Kerosene: 10 days Gasoline: 3 days LPG: 5
days;
2007 Average, as of February 28, 2007: Diesel: 3.5 days Kerosene: 4
days Gasoline: 2 days LPG: 1 days.
Source: GAO analysis based on State Department and Defense Department
data.
[End of table]
Iraq's Crude Oil Production May Be Overstated:
Iraq's crude oil production statistics may overstate Iraq's oil
production. We compared IRMO's statistics to those published by the
EIA, which are based on alternate sources.[Footnote 22] Part of EIA's
mission is to produce and disseminate statistics on worldwide energy
production and use. While these two data sets follow similar trend
lines, EIA's series is generally 100,000 to 300,000 barrels per day
lower than IRMO's statistics. At an average price of $50 per barrel,
this is a discrepancy of $5 to $15 million per day. Figure 6 shows
these two data sets over the time period (June 2003 to December 2006)
for which data were available for both. According to EIA, several
factors may account for the discrepancy. One known factor is the lack
of storage facilities for crude oil in Iraq. With limited storage, the
crude oil in Kirkuk that cannot be either processed by refineries or
exported (both of which have been hampered by limited refinery capacity
and sabotage to oil pipelines) is re-injected into the ground after the
natural gas liquids are removed.[Footnote 23] Another factor affecting
the discrepancy may be differences in the frequency and timing of the
data. IRMO's data is reported daily in real time, while EIA produces
monthly data that has been reviewed and corroborated from several
sources. This lag in reporting and longer time period may allow
analysts to address inconsistencies such a double-counting and
reinjection. In addition, IRMO regularly reports on sabotage and
interdictions to crude oil pipelines and other disruptions in the crude
oil production process. Also, under Saddam Hussein, Iraq had a history
of diverting crude oil production to circumvent UN sanctions.
Therefore, it is possible that corruption, theft, and sabotage may also
be factors in the discrepancy.
Figure 6: Comparison of IRMO and EIA Data on Iraq's Crude Oil
Production:
[See PDF for image]
Source: Iraq Ministry of Oil estimates collected by State Department's
Iraq Reconstruction and Management Office and U.S. Energy Information
Administration.
[End of figure]
However, identifying, measuring, and resolving these factors without
precise metering is more difficult. Without knowing precisely how much
crude oil is being produced and transported along the extensive network
of pipelines, refineries, and export facilities, the government is
limited in its ability to identify potential weaknesses in the system.
According to an IRMO oil advisor, meters are in place at many locations
but are not usable in many instances due to the difficulties in
obtaining needed replacements and spare parts. Without comprehensive
metering, crude oil production must be estimated using less precise
means, such as estimating flow through pipelines, and relying on
reports from on-site personnel rather than an automated system that
could be verified.
An improved metering system has been a U.S. and international donor
priority since early 2004 but has faced delays in its implementation.
In 1996, the UN first cited the lack of oil metering when Iraq was
under UN sanctions. In 2004, the International Advisory and Monitoring
Board (IAMB) for the Development Fund for Iraq recommended the
expeditious installation of metering equipment, in accordance with
standard oil industry practices. According to the IAMB, in June 2004,
the CPA had approved a budget to replace, repair, and calibrate the
metering system on Iraq's oil pipeline network and to contract the
metering of Iraq's oil resources. However, the oil metering contract
was not completed due to security and technical issues. In June 2006,
the IAMB reported that the Iraqi government had entered into an
agreement with Shell Oil Company to serve as a consultant for the
Ministry of Oil on metering and calibrating that would include the
establishment, within the next 2 years, of a measuring system for the
flow of oil, gas, and related products within Iraq and export and
import operations. The U.S. government is assisting in this effort by
rebuilding one component of the metering system in the Al-Basrah oil
port--Iraq's major export terminal--and expects the project to be
complete by June 2007.
The collection of reliable statistics is also complicated by the
challenging security environment and the numerous entities involved in
compiling countrywide production data (from wellheads, through
pipelines, to final uses in refineries or exports). Iraq's current oil
operations are divided among several state-owned oil companies that
have responsibility for operations. Therefore, IRMO, which is
responsible for producing aggregate data on Iraq's production levels,
must collect daily reports from the Ministry of Oil and each of the
state-owned enterprises and combine them into a countrywide total. IRMO
tries to identify and correct any anomalies and monitors the data on a
daily basis.
Iraq's Electricity Production Has Not Met Goals or Increasing Demand:
Key reconstruction goals for Iraq's electricity sector have yet to be
achieved and demand continues to outpace supply. In 2004, the CPA
established a U.S. program goal to improve peak generation capacity to
6,000 mw per day by the end of June 2004. However, by the end of 2006,
peak generation capacity for the year averaged only 4,280 mw per day
and the goal remained at 6,000 mw per day.[Footnote 24] In March 2006,
the State Department also set a goal to achieve 12 hours of power per
day both in Baghdad and nationwide. In 2006, hours of power per day
nationwide averaged 11 and only 5.9 in Baghdad. This was well below the
goal, as shown in table 4.
Table 4: U.S. Goals and 2006 Averages for Iraq Electricity Sector:
Metric: Peak generation;
U.S. Goal: 6,000 mw (capacity);
2006 Average: 4,280 mw;
2007 Average, as of February 28, 2007: 3,803 mw.
Metric: Average daily generation;
U.S. Goal: 110,000 mwh;
2006 Average: 94,665 mwh;
2007 Average, as of February 28, 2007: 84,796 mwh.
Metric: Hours of power nationwide and in Baghdad;
U.S. Goal: 12 hours (hrs);
2006 Average: Nationwide: 11.0 hrs Baghdad: 5.9 hrs;
2007 Average, as of February 28, 2007: Nationwide: 8.6 hrs Baghdad: 5.1
hrs.
Source: GAO analysis based on State Department's Iraq Reconstruction
and Management Office data.
[End of table]
The State Department also aimed to reach 110,000 megawatt hours
(mwh)[Footnote 25] of average daily generation in 2005 and 2006 (see
fig. 7).[Footnote 26] However, average daily peak generation for 2006
reached 94,665 mwh, also below the goal.
Figure 7: Peak Electricity Generation and Demand in Iraq, May 2005 to
December 2006:
[See PDF for image]
Source: Iraq Ministry of Electricity estimates collected by Department
of State.
[End of figure]
Further, demand has continued to exceed supply throughout 2005 and
2006, reaching a peak demand of 200,744 mwh for the week of August 20,
2006 (see fig. 7).[Footnote 27] For 2006, demand averaged 8,180 mw
exceeding the average peak electricity supply of 4,280 mw by about
3,950 mw. According to U.S. agency officials, demand for electricity
has been stimulated by a growing economy and a surge in consumer
purchases of appliances and electronics. In addition, electricity is
subsidized in Iraq, which leads to increased demand. If the Ministry of
Electricity's master plan for 2006 to 2015 to rehabilitate and expand
the national grid is implemented, the ministry estimates that Iraq will
be able to meet its projected demand for electricity in 2009. However,
these projections assume a stable supply of fuel for electricity
generation, which has been lacking in the past due to poor coordination
between the ministries. The projections are also based on the
assumption that the Ministry of Electricity will be able to mobilize
funding for projects listed in the Master Plan and properly manage,
maintain, and operate its electricity infrastructure.
Moreover, the widespread use of off-grid electrical generators to meet
unmet demand from the national grid makes it difficult to measure total
demand and the progress made toward meeting that demand. According to
USAID, it is estimated that neighborhood generators provide an
additional 2,000 mw per day. However, electricity usage from
neighborhood generators cannot be accurately measured, according to
IRMO officials. Likewise, when measuring production, it is important to
note that the U.S. and Iraqi goal is to supply homes from the national
grid rather than from the inefficient use of small household and
neighborhood generators. Thus, production from those generators would
not be considered in meeting production targets.
Most Major U.S. Projects Completed, but Iraq Faces Difficulties
Sustaining U.S. Rebuilding Efforts:
The United States has completed the majority of its planned projects in
the oil and electricity sectors, funded through the fiscal year 2004
Iraq Relief and Reconstruction Fund (IRRF 2).[Footnote 28] Some of the
remaining oil projects that could help meet U.S. program goals have
faced delays due to a variety of factors such as scope changes during
engineering and design phase, delays in mobilizing subcontractors, the
poor condition of equipment, and the insecure working environment.
Moreover, Iraq has experienced difficulty in sustaining the
infrastructure rehabilitated with U.S. funds.
As of March 2007, the Army Corps of Engineers GRD reported that 88
percent of its work on planned IRRF oil projects had been completed and
that it expected to complete all projects by May 2007. In the
electricity sector, GRD reported in March 2007 that 73 percent of its
work on planned IRRF 2 electricity projects had been completed and that
it expected to complete its other projects by April 2008. According to
DOD, this remaining work will enable Iraq to increase crude oil
production capacity by 0.5 million barrels per day and petroleum gas
production by 1,800 tons per day. In the electricity sector, GRD's IRRF
2 projects, once completed, will provide a total of 1,879 mw of
potential generation capacity, which could serve an estimated 1.7
million homes. According to GRD reporting, all U.S. agency projects
(GRD and USAID) are expected to add or restore a total of 2,555 mw when
completed.
Some key U.S. projects are likely to face continued schedule slippage
or transfer to state oil companies before they are completed, thereby
undermining efforts to reach U.S. program goals. The following
illustrates the issues facing two U.S. projects.
* Qarmat Ali Pressure Maintenance. GRD has reported that the United
States has committed about $105 million for three projects ($41
million, $27 million, and $37 million) to restore the Qarmat Ali water
reinjection and treatment plant to create and maintain sufficient oil
field pressure in the Rumailah oil field, one of the largest southern
oil fields. According to GRD engineers, the final completed project
could result in an increase in crude oil production capacity of 200,000
barrels per day. As of April 2007, 56 percent of the work of the last
project has been completed. The Special Inspector General for Iraq
Reconstruction (SIGIR) has reported schedule slippage caused by the
poor condition of the original pumps, motors, and valves. According to
IRMO oil officials, due to lack of funding for the administrative task
orders that cover life support and security, the construction phase of
this project was de-scoped and responsibility was transferred to Iraq's
South Oil Company. Furthermore, IRMO oil officials question whether the
project will increase production; they contend that the water injection
will at best reduce the decline of the oil field's production.
* South Well Workover. According to IRMO officials, in the refurbishing
of wells throughout Basrah, delays have been caused by poor contractor
performance, bad equipment, lack of spares, and subcontract disputes.
GRD has reported that the United States has committed $93 million for
this project, including the workover of 30 wells in the Rumaila fields
and completion and replacement of tubing in 50 wells in West
Qurna.[Footnote 29] This project began in June 2006 and had an expected
completion date of December 2006. As of April 2007, the work was
completed and could result in an increase in crude oil production
capacity of 150,000 barrels per day (50 wells at 3,000 bpd).
Further, despite capacity building efforts, Iraq has experienced
difficulty in sustaining the infrastructure rehabilitated with U.S.
funds. For example, the U.S. decision to install gas turbine generators
without an assured supply of natural gas has resulted in increased
maintenance requirements and decreased power output. Iraq's inability
to sustain the new and rehabilitated oil and electricity infrastructure
undermines efforts to reach U.S. program goals.
In the oil sector, U.S. agency and contractor officials report that the
sector's rebuilding efforts continue to be impeded by the lack of
modern technology; the lack of qualified staff and expertise at the
field, plant, and ministry levels; an ineffective inventory control
system for spare parts within the oil sector's 14 operating companies;
and difficulties in spending budgets for equipment upgrades and
replacements. The U.S. government has provided additional training and
management assistance in response to these needs. According to DOD,
IRRF funds were allocated toward sustainment and capacity development
activities including training to state-owned oil companies on
preparation of long-term service agreements and training on heavy
equipment, procurement of functional and operational spare parts, and
the invitation-to-bid process.
According to U.S. government reporting, the lack of an adequate
operating and maintenance practices is one of many factors inhibiting a
robust electrical grid in Iraq. U.S. officials also report that
rebuilding of the electricity sector has been slowed by the lack of
training for plant workers, inadequate spare parts, and an ineffective
asset management and parts inventory system. Electricity plants are
sometimes operated beyond their recommended limits and use poor-quality
fuels that rapidly deteriorate parts, involve longer maintenance
downtimes, and increase pollution. According to U.S. government
officials, Iraq needs to develop cleaner and more reliable sources of
natural gas for its generators supporting the national grid. Currently,
Iraq's fuel supply does not meet demand and its quality is
inconsistent. For example, of the 35 natural gas turbines the U.S.
government installed in power generation plants, 16 are using diesel,
crude, or heavy fuel oil due to the lack of natural gas and lighter
fuels. As a result, maintenance cycles are reportedly three times as
frequent and three times as costly. Poor-quality fuels also decrease
the power output of the turbines by up to 50 percent and can result in
equipment failure and damage, according to U.S. and Iraqi power plant
officials. The U.S. government also estimates that Iraq is flaring
enough natural gas to generate at least 4,000 mw of electrical power.
Because of natural gas shortages, diesel has to be imported at a cost
of about $1.2 billion a year, thus straining economic resources.
The U.S. government is providing some assistance to address these
shortfalls. According to DOD, over $120 million of IRRF funds were
allocated toward sustainment and capacity development for the
electricity sector, which included the award of a long-term operations
and maintenance support contract to (1) support Ministry of Electricity
efforts to develop, implement, and sustain a functional and effective
operations and maintenance organization and plan, and (2) perform
operations and maintenance activities at select thermal and gas turbine
power facilities. According to DOD, GRD also received $250 million in
fiscal year 2006 Economic Support Funds to support sustainment and
capacity development programs in the electricity sector.
Major Challenges Hinder Efforts to Meet Iraq's Oil and Electricity
Needs:
The U.S. government and Iraq face several key challenges in improving
Iraq's oil and electricity sectors. First, the U.S. reconstruction
program assumed a permissive security environment that never
materialized; the ensuing lack of security resulted in project delays
and increased costs. Second, corruption, smuggling, and other illicit
activities have diverted government revenues potentially available for
rebuilding efforts. Third, according to the World Bank, Iraq's lack of
an adequate legal and regulatory framework and financial management
systems hinder progress and make it difficult to attract foreign
investors. Finally, although the oil and electricity sectors are
mutually dependent, the Iraqi government lacks integrated planning for
these sectors leading to inefficiencies that could hinder future
rebuilding efforts.
Poor Security Conditions Have Slowed Reconstruction and Increased
Costs:
The U.S. reconstruction effort was predicated on the assumption that a
permissive security environment would exist. However, since June 2003,
overall security conditions in Iraq have deteriorated and grown more
complex, as evidenced by the increased numbers of attacks and the Sunni-
Shi'a sectarian strife that followed the February 2006 bombing of the
Golden Mosque in Samarra (see fig. 8). Enemy-initiated attacks against
the coalition and its Iraqi partners continued to increase through
October 2006 and remain high. The average total number of attacks per
day has risen from 71 per day in January 2006 to a record high of 176
per day in October 2006. For the last 3 months, average attacks per day
were 164 in February, 157 in March, and 163 in April 2007.
Figure 8: Enemy-Initiated Attacks against the Coalition and Its Iraqi
Partners:
[See PDF for image]
Source: Multi-National Force-Iraq, Apr. 2007.
[End of figure]
The deteriorating security environment continues to pose a serious
challenge to Iraq's oil and electricity sectors and has, in part, led
to project delays and increased costs. Insurgents have destroyed key
oil and electricity infrastructure (see fig. 9), threatened workers,
compromised the transport of materials, and hindered project completion
and repairs by preventing access to work sites. Moreover, looting and
vandalism have continued since 2003. U.S. officials reported that major
oil pipelines in the north continue to be sabotaged, shutting down oil
exports and resulting in lost revenues (see fig. 10). For example,
according to GRD, although eight gas oil separation plants in northern
Iraq have been refurbished, many are not running due to interdictions
on the Iraq-Turkey pipeline and new stabilization plant. GRD noted that
if the lines and plant were in operation today, an additional 500,000
barrels per day would be produced in northern Iraq. Major electrical
transmission and fuel lines also have been repeatedly sabotaged,
cutting power to other parts of the country. According to Ministry of
Electricity and U.S. officials, workers are frequently intimidated by
anti-coalition forces and have difficulty repairing downed lines. Oil
pipeline repair crews also are overwhelmed by the amount of work and
are unable to make rapid repairs.
Figure 9: Downed Transmission Tower in Iraq:
[See PDF for image]
Source: State Department's Iraq Reconstruction Management Office.
[End of figure]
Figure 10: Attack on Oil Pipeline:
[See PDF for image]
Source: U.S. Army Corps of Engineers Gulf Region Division.
[End of figure]
Although it is difficult to quantify the costs of poor security
conditions in time and money, agency and contractor documents and
agency officials report numerous security-related issues that have
resulted in delays in the design and execution of projects and reduced
scopes of work. Poor security conditions also have increased the cost
of providing security services for contractors and sites. For example,
when a project is shut down or delayed due to security conditions, the
fixed costs of contractor camps and salaries continue to accrue even
though contractors in the field are unable to continue their work. GAO
previously reported that our analyses of five U.S.-funded electricity
sector contracts indicate that as of December 31, 2004, security costs
to obtain private security services and security-related equipment
ranged from 10 to 36 percent of project costs.[Footnote 30] In December
2006, GAO reported that DOD estimated that its design-build contractors
would incur security costs of about 14 percent on electricity contracts
worth about $732 million.[Footnote 31]
In an effort to stop the sabotage of electricity infrastructure, the
Ministry of Electricity contracted with tribal chiefs to protect the
transmission lines running through their areas, paying them about $60
to $100 per kilometer, according to State's Iraq Reconstruction
Management Office (IRMO). However, in October 2006, IRMO officials
reported that this scheme was flawed and did not result in improved
infrastructure protection. According to U.S. and UN Development Program
officials, some tribes that were paid to protect transmission lines
also sold materials from the downed lines and extracted tariffs for
access to repair the lines.
The U.S. government has developed a number of other initiatives to
better protect the oil and electricity infrastructure and transfer this
responsibility to the Iraqi government.[Footnote 32] Such efforts
include fortifying the physical integrity of the infrastructure,
improving rapid repair capability, and improving the capabilities of
infrastructure protection security forces such as the Oil Protection
Force, the Electrical Power Security Service (EPSS), and the Strategic
Infrastructure Battalions (SIB). The U.S. government has paired these
security forces with coalition partners and has trained and equipped
the EPSS[Footnote 33] and SIBs. However, U.S. officials stated that the
EPSS effort was unsuccessful and that the capability and loyalty of
some of the SIB units are questionable. According to a U.S. official
and a recent Center for Strategic and International Studies
report,[Footnote 34] these security forces have been underpaid,
underequipped, and poorly led, and are of questionable quality.
Additional information on the nature and status of these efforts and
the SIBs is classified.
Corruption, Smuggling, and Other Illicit Activities Impact Revenues and
Cost Recovery:
Corruption in Iraq is reportedly widespread and poses a major challenge
to building an effective Iraqi government and effective institutions. A
World Bank report notes that corruption undermines the government's
ability to make effective use of current reconstruction assistance. A
2006 survey by Transparency International ranked Iraq's government as
the second most corrupt in the world.
U.S. and international officials have noted that corruption in Iraq's
oil sector is pervasive. In 2006, the World Bank and Ministry of Oil's
Inspector General estimated that millions of dollars of government
revenue are lost each year to oil smuggling or diversion of refined
products. According to State Department officials and reports, about 10
percent to 30 percent of refined fuels are diverted to the black market
or are smuggled out of Iraq and sold for a profit. According to State
Department reporting, Iraqi government officials may have profited from
these activities. The insurgency has been partly funded by corrupt
activities within Iraq and from skimming profits from black marketers,
according to U.S. Embassy documents. One factor that had stimulated
black market activities and fuel smuggling to neighboring countries was
Iraq's low domestic fuel prices, which were subsidized by the
government. However, under the IMF's Stand-by Arrangement with Iraq,
the government has already increased domestic fuel prices five
times,[Footnote 35] significantly reducing the subsidy for many fuel
products. The Iraqi government intends to continue the price increases
during 2007, as well as encourage private importation of fuels, which
was liberalized in 2006. The purpose is to decrease the incentive for
black market smuggling and to increase the availability of fuel
products.
Illegal connections to existing power lines and nonfunctioning meters
negatively affect the Iraqi Ministry of Electricity's ability to manage
its electricity system and finance the improvements needed. According
to U.S. and international donor officials, electricity meters may be
old, intentionally damaged, inaccurate, nonfunctioning, or nonexistant
for some businesses and households. As a result of illegal connections
and lack of metering, the Ministry of Electricity cannot obtain an
accurate measure of the electricity consumed by households and
businesses, which contributes to inaccurate billing and low cost
recovery.
Inadequate Legal and Regulatory Framework and Financial Management
Systems Hinder Progress:
According to the World Bank, Iraq lacks clear institutional, legal, and
regulatory structures and adequate financial management systems. These
would ensure more effective resource management, transparency of oil
revenues, and the financial accountability of Iraqi ministry and plant
managers.
The World Bank reports that additional incentives are needed to
stimulate oil production and investment. According to the Bank, these
incentives would include a clear legal and regulatory framework,
clearly assigned roles for Iraq's ministries, state agencies, and the
private sector, and a predictable negotiating environment for
contracts. According to U.S. officials, until a new hydrocarbon (oil
and gas) law is passed and implemented, uncertainties exist for the oil
sector in each of these areas.
As of February 26, 2007, the Iraqi Cabinet (Council of Ministers) had
approved a draft oil and gas law that as of May 1, 2007 awaits
consideration and enactment by the Parliament (Council of
Representatives). The draft law was expected to clearly assign roles,
decentralize the development of oil and gas fields, centralize control
of revenues, and grant regions[Footnote 36] and regional oil companies
the right to draw up contracts with foreign companies for exploration
and development of new oil fields.[Footnote 37] However, according to
State Department officials, although the draft oil and gas law provides
a necessary framework, some vital provisions, which will be in four
annexes and companion legislation,[Footnote 38] have yet to be
prepared. Moreover, according to the State Department, the oil and gas
law cannot go forward without the companion legislation. According to
the Kurdistan Regional Government, the Oil and Energy Committee of the
Iraq Council of Ministers will prepare the annexes, which will allocate
the management of particular petroleum fields and exploration areas in
Iraq to the Kurdistan Regional Government, the Iraq National Oil
Company, and the Iraq Ministry of Oil. According to State Department
and Kurdistan Regional Government officials, the Committee also needs
to come to agreement on model petroleum contracts and guidelines for
contractual terms. The Kurdistan Regional Government has stated that,
until this is completed, no investment in Iraq can begin.
According to U.S. officials, the oil and gas law is necessary but not
sufficient to attract the near-term involvement of international oil
companies. The legislation does not clearly detail how revenue
resulting from foreign participation will be divided. According to
State Department officials, the revenues will be collected in a central
account and shared among provinces on the basis of population levels,
but the details will be addressed in a separate hydrocarbon financial
management law. Some U.S. officials note that the per capita
distribution of funds will require a politically sensitive census to be
undertaken.
After the Iraqi government passes legislation to enhance the
transparency of the legal and regulatory environment, it sometimes has
difficulty developing related implementing regulations and guidelines.
For example, according to the Department of State, implementing
regulations have yet to be issued for Iraq's Fuel Import Liberalization
Law, which passed on September 6, 2006.[Footnote 39] According to the
State Department, the law allows private imports of refined fuel
products and thereby breaks the monopoly of government imports and sets
the stage for the private importation of gasoline and diesel at market
prices. According to U.S. officials, the Ministry of Oil and the Iraqi
National Oil Company may have had difficulty recruiting the skilled oil
and gas technical experts needed to craft implementing regulations.
Additionally, according to U.S. and donor officials, the Iraqi
government lacks adequate financial management systems at all levels
that would ensure the financial accountability of Iraqi ministry and
plant managers. The World Bank reported that effective oil generation
and management include transparency in collecting, monitoring, and
reporting revenues. U.S. and international officials report that, given
the importance of oil revenues to the Iraqi economy, management of
these revenues is crucial.[Footnote 40] The United States and
international donors are working with the Iraqi government to improve
financial management practices at Iraq's key ministries, including the
oil and electricity ministries.
Lack of Integrated Energy Planning Creates Inefficiencies and Could
Hinder Future Rebuilding Efforts:
Although the oil and electricity sectors are mutually dependent, the
Iraqi government lacks integrated planning for these sectors, according
to U.S. and international donor community officials. Specifically, the
Iraqi government lacks an integrated energy plan that clearly
identifies future costs and resource needs; rebuilding goals,
objectives, and priorities; stakeholder roles and responsibilities,
including steps to ensure coordination of ministerial and donor
efforts; an assessment of the environmental risks and threats; and
performance measures and milestones to monitor and gauge progress. For
example, the lack of cooperation and coordination among the Oil and
Electricity Ministries, particularly in supplying appropriate fuels to
the electricity sector, has resulted in inefficiencies such as
increased maintenance costs and frequent interruptions in electricity
production, according to IRMO officials. According to U.S. and
international donor officials, the Ministries of Oil and Electricity
will need to more closely coordinate their efforts to achieve the Iraqi
government's ambitious future rebuilding goals.
According to IRMO advisors to the Iraqi government, a reliable supply
of electricity is essential to the oil industry and vice versa. The
electricity sector is heavily dependent on fuels produced by the oil
sector, and oil and gas facilities rely on electricity supplied from
the national grid. For example, in March 2007, IRMO reported that a
problem within the national electricity grid caused a loss of power to
the Bayji oil refinery, Iraq's largest refinery, resulting in a reduced
output of refined fuel products. As we previously reported, Iraq's fuel
supply does not meet demand and is of inconsistent quality, resulting
in inefficient operation of the gas turbine electricity generators that
help power the national grid.
Although the need for an integrated plan has been recognized, an
integrated energy sector plan has yet to be developed and the current
electricity master plan does not state how future coordination will
take place and will require actions that have been difficult to achieve
in the past. The Iraqi Minister of Electricity recognized the need for
integrated planning in his speech at the November 2006 UNDP and Iraqi
government electricity conference at which the 2006-2015 Electricity
Master Plan was presented to donors. According to the Minister, the
energy sector is faced with the challenge of expediting simultaneous
implementation of strategic projects, since one sector complements the
other. However, the Ministry of Oil's contribution to the Electricity
Master Plan was limited to a description of the current fuel situation
and the types of fuels the Ministry of Oil would make available for
power generation. According to an IRMO advisor to the Ministry of Oil,
the Ministry of Electricity merely includes the requirements for
supplying electricity to oil facilities within its annual power budget.
Moreover, international donors cautioned that the 2006-2015 Electricity
Master Plan does not address how future coordination between the two
ministries will be ensured or how events affecting one sector will be
mitigated to prevent disruptions in the other. Officials of one key
donor country also noted that the rigor used to prioritize electricity
projects was questionable. According to the World Bank, Iraq needs
sound economic criteria to help evaluate whether to rehabilitate or
renew electricity projects.
Further, international donors stated that, although the Electricity
Master Plan contains milestones, it is ambitious, given the current
condition of the infrastructure, sizable funding need, and limited past
coordination between the Electricity and Oil Ministries. According to
the UNDP, the plan's successful implementation will require actions
that have been difficult to achieve in the past such as the
coordination of all stakeholders, mobilization and timely release of
funds, conversion of heavy fuel oil to natural gas, building of new
generating capacity closer to demand, and a reduction in sabotage and
looting.
According to IRMO officials, the Ministry of Oil has not developed a
plan comparable to the Electricity Master Plan and currently has no
plan to detail how it will increase the country's crude oil production
capacity to reach or surpass 6 million barrels per day by 2015.
According to GRD, Iraq's current oil production capabilities remain
unknown and no master plans exist for actions that will enable Iraq to
increase its capacity in the future. According to the U.S. government,
Iraq is losing about $4.1 billion per year in potential fuel revenues
through its inefficient energy production practices, such as the
flaring of natural gas, underscoring the need for such a plan.
Conclusions:
The United States has spent billions of dollars to rebuild Iraq's oil
and electricity sectors. However, billions more will be needed to
surmount the current security, corruption, management, and legal
challenges facing Iraq and attain the U.S. program goals first
established under the CPA. The absence of reliable crude oil production
and refinery data complicate efforts to measure progress and identify
trends in government revenues and possible illicit diversions. Weak
budgeting and procurement practices have also slowed Iraq ministry
efforts to spend funds already approved for reconstruction projects.
Although the United States is exploring some new options for providing
rebuilding services on an advance-of-funds basis, it is unclear how
this arrangement will contribute to the improvement of ministry
procurement and budgeting systems. In addition, the lack of a clear
legal and regulatory environment impedes new foreign investment. The
passage of Iraqi hydrocarbon legislation could serve as an important
impetus for stimulating additional investment if and when security
conditions improve to acceptable levels. However, it is difficult to
identify the most pressing future funding needs, key rebuilding
priorities, and existing vulnerabilities and risks given the absence of
an overarching energy sector strategic plan that comprehensively
assesses the requirements of the energy sector as a whole. Given the
highly interdependent nature of the oil and electricity sectors, such a
plan would help identify the most pressing needs for the entire energy
sector and help overcome the daunting challenges affecting future
development prospects.
Recommendations for Executive Action:
We recommend that the Secretary of State, in conjunction with relevant
U.S. agencies and in coordination with the donor community, work with
the Iraqi government and particularly the Ministries of Oil and
Electricity to:
1. Develop an integrated energy strategy for the oil and electricity
sectors that identifies and integrates key short-term and long-term
goals and priorities for rebuilding, maintaining, and securing the
infrastructure; funding needs and sources; stakeholder roles and
responsibilities, including steps to ensure coordination of ministerial
and donor efforts; environmental risks and threats; and performance
measures and milestones to monitor and gauge progress. The strategic
plan should include an integrated fuel strategy to ensure the delivery
of appropriate refined fuels for more efficient electricity production
and a risk-based method for prioritizing future projects.
2. Set milestones and assign resources to expedite efforts to establish
an effective metering system for the oil sector that will enable the
Ministry of Oil to more effectively manage its network and finance
improvements through improved measures of production, consumption,
revenues, and costs.
3. Improve the existing legal and regulatory framework, for example, by
setting milestones and assigning resources to expedite development of
viable and equitable hydrocarbon legislation, regulations, and
implementing guidelines that will enable effective management and
development of the oil sector and result in increased revenues to fund
future development and essential services.
4. Set milestones and assign resources to expedite efforts to develop
adequate ministry budgeting, procurement, and financial management
systems.
5. Implement a viable donor mechanism to secure funding for Iraq's
future oil and electricity rebuilding needs and for sustaining current
energy sector infrastructure improvement initiatives once an integrated
energy strategic plan has been developed.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Departments of Defense and
State. DOD provided technical comments, which we incorporated where
appropriate.
The Department of State provided written comments, which are reprinted
in appendix II. State also provided us with technical comments and
suggested wording changes that we incorporated as appropriate. In
commenting on a draft of this report, State agreed that all the steps
we included in our recommendations are necessary to improve Iraq's
energy sector but stated that these actions are the direct
responsibility of the government of Iraq, not the Department of State,
any U.S. agency, or the international donor community. We recognize
that these actions are ultimately the responsibility of the Iraqi
government and thus recommend that the Department of State work with
the Iraqi government to accomplish these actions. Further, we believe
that our recommendations to the State Department are valid given the
billions of dollars that the United States has invested in Iraq's
energy sector to date, the U.S. government's responsibility to ensure
that funds are well spent, and the influence the United States holds in
overseeing Iraq stabilization and rebuilding efforts. The U.S.
government is uniquely positioned to provide encouragement and
assistance in implementing these recommendations given the resident
expertise of the senior IRMO advisors staffed to Iraq's oil and
electricity ministries. The ministries of oil and electricity have 10
and 18 IRMO advisors, respectively.
In their written comments, State noted that U.S. agencies are already
undertaking work that complements several of our recommendations. We
acknowledge that State has taken some actions to address these steps,
and we have refined our report language accordingly. However, our
recommendations are still warranted given the lack of progress that has
been made over the last 4 years in achieving U.S. program goals and the
considerable influence that the United States wields in overseeing Iraq
stabilization and rebuilding efforts. Also, some of the State
Department initiatives are relatively new. For example, State commented
that an Energy Fusion Cell composed of the Embassy, Multinational Force-
Iraq, and the Ministries of Oil and Electricity has been formed to
craft an integrated energy strategy but that the practical
effectiveness of this effort will depend on whether it is able to
obtain buy-in from the two Iraqi ministries. However, it is unclear
whether this new effort addresses the key elements of an effective
strategy identified in our report, such as identifying rebuilding
priorities, resource needs, stakeholder roles and responsibilities, and
performance measures and milestones. Therefore, our recommendation for
an integrated energy strategy for the oil and electricity sector is
still valid.
With respect to our recommendation to establish an effective metering
system, State commented that the installation and reading of retail
electricity meters would be difficult in the present security
environment and that the United States is paying for the installation
of meters on Iraq's oil export terminal. We agree with State's comment
and refined our recommendation to focus on the need to improve Iraq's
oil metering system. However, the oil metering project for Iraq's oil
export terminal that State highlighted in its comments is only one of
the elements of an effective metering system. Iraq still lacks a
comprehensive oil metering system to reliably measure the outputs of
its crude oil production and refinery operations. This vulnerability
has existed for several years; in 2004, a UN body recommended that such
a metering system be expeditiously installed. Thus, we retained our
recommendation for installing an effective oil metering system.
Regarding our recommendation to improve the existing legal and
regulatory framework, State commented that U.S. agencies are already
working to improve Iraq's legal and regulatory frameworks. However,
Iraq's framework for managing its oil industry and the use of its
energy resources remains undefined after months of contentious Iraqi
government debate. This framework is crucial to Iraq's efforts to
rebuild its oil-dependent economy. Setting specific benchmarks and
assigning resources to expedite the development of this legislative
framework as we recommended is necessary to encourage progress and
focus continued leadership attention on this issue.
With respect to our recommendation to develop adequate ministry
budgeting, procurement, and financial management systems, State
commented that teams are working with the Ministries of Oil and
Electricity to address budgeting, procurement, and financial management
issues but acknowledged that the bureaucracy of the Iraqi government is
a hindrance to these efforts. The large unexpended 2006 capital budgets
in Iraq's oil and electricity ministries that we highlighted in our
report also underscore the need for additional assistance and
benchmarks for developing effective budgeting, procurement, and
financial management systems in Iraq's oil and electricity ministries.
Finally, regarding our recommendation to secure funding for Iraq's
future oil and electricity rebuilding needs, State noted that the
International Compact with Iraq, formally launched in Sharm El-Sheikh
on May 3, 2007, aims to build upon existing mechanisms to provide
bilateral donors with better ways to coordinate their contributions of
financial and technical assistance. However, no supporting details were
released on what additional financial commitments, if any, are being
provided to Iraq's energy sector as part of this compact. Thus, it is
too early to judge the potential implications of this new coordination
arrangement.
We are sending copies of this report to interested congressional
committees. We will also make copies available to others on request. In
addition, this report is available on GAO's Web site at
http://www.gao.gov. If you or your staff have any questions, please
contact me at (202) 512-8979 or christoffj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix III.
Signed by:
Joseph A. Christoff:
Director:
International Affairs and Trade:
List of Congressional Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Patrick J. Leahy:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Subcommittee on State, Foreign Operations, and Related Programs:
Committee on Appropriations:
United States Senate:
The Honorable Carl Levin:
Chairman:
The Honorable John S. McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Joseph R. Biden, Jr.
Chairman:
The Honorable Richard G. Lugar:
Ranking Member:
Committee on Foreign Relations:
United States Senate:
The Honorable Joseph I. Lieberman:
Chairman:
The Honorable Susan M. Collins:
Ranking Member:
Committee on Homeland Security and Governmental Affairs;
United States Senate:
The Honorable John P. Murtha, Jr.
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
Nita M. Lowey:
Chairman:
Frank R. Wolf:
Ranking Member:
Subcommittee on State, Foreign Operations, and Related Programs:
Committee on Appropriations:
House of Representatives:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan L. Hunter:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable Tom Lantos:
Chairman:
The Honorable Ileana Ros-Lehtinen:
Ranking Member:
Committee on Foreign Affairs:
House of Representatives:
The Honorable Henry A. Waxman:
Chairman:
The Honorable Tom Davis:
Ranking Member:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable John F. Tierney:
Chairman:
The Honorable Christopher Shays:
Ranking Member:
Subcommittee on National Security and Foreign Affairs:
Committee on Oversight and Government Reform:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
To examine U.S. activities directed at rebuilding the oil and
electricity sectors, we assessed (1) the funding made available to
rebuild Iraq's oil and electricity sectors and the factors that may
affect Iraq's ability to meet its future funding needs, (2) the U.S.
goals for the oil and electricity sectors and progress in achieving
these goals, and (3) the key challenges the U.S. government faces in
helping Iraq restore its oil and electricity sectors. As part of this
work, we made multiple visits to Iraq and Jordan during 2006. We
conducted our review from January 2006 through March 2007 in accordance
with generally accepted government auditing standards. The information
on foreign law in this report does not reflect our independent legal
analysis but is based on interviews and secondary sources.
To address the amount of U.S. funds that were appropriated, obligated,
and disbursed for the reconstruction of Iraq's oil and electricity
sectors, we collected funding information from the Department of
Defense (DOD), U.S. Army, Department of State, U.S. Agency for
International Development (USAID), and the Coalition Provisional
Authority (CPA). Data for U.S.-appropriated funds are as of September
30, 2006. We also reviewed U.S. agency inspector generals' reports,
Special Inspector General for Iraq Reconstruction (SIGIR) reports, and
other audit agency reports. Although we have not audited the funding
data and are not expressing our opinion on them, we discussed the
sources and limitations of the data with the appropriate officials and
checked them, when possible, with other information sources. We
determined that the data were sufficiently reliable for broad
comparisons in the aggregate, and we noted limitations at the sector
level.
To address the amount of Iraqi funds used by U.S. agencies to support
the rebuilding of Iraq's oil and electricity sectors, we relied on CPA
documents, past GAO interviews with the CPA, and reviews of independent
auditor's reports. To identify sources and uses of Development Fund for
Iraq (DFI) funds for the oil and electricity sectors, as agreed with
U.S. officials, we relied on funding data obtained from Development
Fund for Iraq Statement of Cash and Receipts and Payments (with
Independent Auditor's Report) reports for January 1, 2004, through
December 31, 2005, from the International Monitoring Advisory Board. We
determined the data were sufficiently reliable to describe the major
disbursements from the DFI to the oil and electricity sectors and noted
limitations in reporting as identified in the independent auditor's
report. For the sources and uses of vested and seized assets, we relied
on CPA and DOD funding data. To determine the reliability of these
data, we examined CPA schedules and relied on past GAO interviews with
CPA officials responsible for the data. We verified results with DOD
officials. We determined that the data were sufficiently reliable for
broad comparisons in the aggregate, and we noted limitations at the
sector level.
To assess Iraqi budget allotments and expenditures for the oil and
electricity sectors, as well as potential future budget support, we
obtained and assessed Iraqi budget data from the U.S. Department of the
Treasury. We corroborated our analysis and findings with information
from other U.S. agencies, the Iraqi government, and the International
Monetary Fund. While we did not independently verify the precision of
the data on Iraq's budget execution, we found that they were
sufficiently reliable to show the relative differences in budget
execution across Iraq's ministries and budget categories (e.g., capital
projects versus salaries). Finally, we obtained oil revenue and pricing
data from the Department of State, Iraq Reconstruction Management
Office (IRMO) officials and discussed with them the collection and
preparation of these statistics. We also corroborated the data with
external sources. Data on revenue are based on U.S. agency estimates
that use internationally recognized financial sources for pricing
calculations, such as Bloomberg and Platts. We found that these data
were sufficiently reliable for the purpose of showing trends in Iraq's
crude oil export revenue and prices.
To address international assistance for the rebuilding of Iraq's oil
and electricity sectors, we reviewed documents and met with U.S.,
Iraqi, and international donor officials. As agreed with the Department
of State, United Nations (UN), and World Bank officials, we obtained
data and information on multilateral contributions from the UN
Development Programme Iraq Trust Fund and the World Bank Iraq Trust
Fund through the Iraq Reconstruction Fund for Iraq Web site. [Footnote
41] As agreed with Department of State officials, we obtained data and
information on bilateral contributions from their quarterly report to
Congress[Footnote 42] and the Iraqi Ministry of Planning's Development
Assistance Database (DAD).[Footnote 43] We also obtained data and
information on bilateral contributions from international donors,
including Japan and the European Union. To assess the reliability of
the data on pledges, commitments, and deposits made by international
donors, we interviewed officials at the Department of State who are
responsible for monitoring the data provided by the IRFFI and donor
nations. We determined that the data on donor commitments and deposits
made to the IRFFI were sufficiently reliable for the purposes of
reporting at the sector level. Based on discussions with the Ministry
of Planning, UN, World Bank, and Department of State officials, we
determined that the DAD was incomplete and would not provide accurate
data for reporting purposes. However, according to Department of State
officials, this is the best available source of data and the department
uses this data in their reports to Congress.
To assess U.S. goals for the electricity and oil sectors, U.S. measures
of progress in achieving these goals, and the planning and status of
reconstruction projects, we reviewed reports and planning documents
obtained from the Department of State's IRMO and Near East Asia bureau;
DOD's U.S. Army Corps of Engineers Gulf Region Division (GRD) and
Project Contracting Office, including contractors; USAID; CPA; U.S.
embassy officials in Iraq; International Monetary Fund; the World Bank;
and the UN. We also obtained views from international donors such as
Japan and the European Community. To assess U.S. goals, we reviewed
planning and strategy documents from the CPA and U.S. government,
including the National Strategy for Victory in Iraq; Iraq's National
Strategy for Development; the MNF-I/U.S. Embassy Baghdad Joint Action
Campaign Plan; and the Department of State's Quarterly Update to
Congress, 2207 Report, among others. To monitor the status of efforts
and reconstruction projects, we reviewed daily, weekly, and biweekly
reporting from the Department of State, DOD, GRD, and USAID. We
compiled daily data from IRMO to provide summary data on crude oil and
electricity production averages. We discussed and reviewed documents on
goal, metric, data limitations, and project status with GRD, USAID,
IRMO, and international donor officials. IRMO collects its crude oil
production and export data from estimates provided by Iraq's Ministry
of Oil and state-owned companies that have responsibility for various
regions and parts of the production process. We identified the
challenges IRMO faces in collecting these data, which we discuss in the
report, including limited metering at oil facilities. We also compared
crude oil production data from IRMO to data reported by the Department
of Energy, Energy Information Administration (EIA). We noted a
discrepancy between these two data sets and discussed with EIA
officials the reasons for this discrepancy, which we note in the
report. We also examined IRMO data on Iraq's national stocks of refined
petroleum products, such as gasoline. For electricity production, IRMO
receives data from Iraq's Ministry of Electricity based on electricity
output from Iraq's electricity national grid. It does not include
electricity production from local generators. We also reviewed prior
GAO, U.S. agency inspector general, SIGIR, and other audit agency
reports. Based on this analysis, we found the data sufficiently
reliable for identifying production goals in both sectors and whether
actual production is meeting these goals. We report oil and electricity
production data as of December 31, 2006, and reconstruction project
progress data as of March 3, 2007.
To determine the challenges affecting sector progress, we reviewed and
analyzed U.S., Iraqi, donor government, UN, International Monetary Fund
(IMF), and World Bank reports and data. Over the course of our field
work in Washington, D.C; Baghdad, Iraq; and Amman, Jordan, we met with
officials from the Department of State, USAID, DOD, the Department of
the Treasury, and the Department of Energy. Over the course of our two
trips to Iraq and Jordan, we met with Iraqi, UN, International Monetary
Fund, World Bank, donor country (Japan and European Union), and private-
sector officials. We observed several embassy meetings and a donor
meeting led by the Iraqi Ministry of Planning and Development. We also
interviewed U.S., Iraqi, and UN officials at a November 2006
electricity conference sponsored by the UN Development Program at the
Dead Sea, Jordan.
[End of section]
Appendix II: Comments from the Department of State:
United States Department of State:
Assistant Secretary for Resource Management and Chief Financial
Officer:
Washington, D.C. 20520:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "Rebuilding
Iraq: Integrated Strategic Plan Needed to Help Restore Iraq's
Electricity and Oil Sectors," GAO Job Code 320383.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact Matt
Amitrano, Desk Officer, Bureau of Near Eastern Affairs,
at (202) 647-5690.
Sincerely,
Signed by:
Sid Kaplan (Acting):
cc: GAO - Steve Lord:
NEA - C. David Welch:
State/OIG - Mark Duda:
Department of State Comments on the GAO Draft Report:
Rebuilding Iraq: Integrated Strategic Plan Needed to Help Restore
Iraq's Electricity and Oil Sectors (GAO-07-677, GAO Code 320383):
Thank you for the opportunity to comment on the draft report Rebuilding
Iraq: Integrated Strategic Plan Needed to Help Restore Iraq's
Electricity and Oil Sectors. This report makes five recommendations to
the Secretary of State, in conjunction with relevant U.S. agencies and
the international donor community, with the Ministries of Oil and
Electricity:
1. Develop an integrated energy strategy:
2. Set milestones and assign resources to expedite efforts to establish
an effective metering system for both sectors:
3. Improve existing legal and regulatory frameworks:
4. Set milestones and assign resources to expedite budgeting,
procurement, and financial management systems:
5. Implement a viable donor mechanism to secure funding for rebuilding:
While we agree that all of these things are necessary to improve Iraq's
energy sector, the actions recommended are the direct responsibility of
the sovereign Government of Iraq (GOI), not of the Department of State,
any U.S. agency, or the international donor community. However, the
United States remains committed to providing assistance to the GOI to
improve the sector, including work complementary of several of these
recommendations.
Recommendation 1: An Energy Fusion Cell (EFC) composed of the Embassy,
MNF-I and the Ministries of Oil and Electricity has been formed with
the purpose of assisting the Ministries develop an integrated strategy.
The practical effectiveness of the EFC will depend on whether it is
able to obtain buy in from the two Iraqi ministries.
Recommendation 2: The metering problem is fundamentally different for
the oil and electricity sectors. In the oil sector, U.S. assistance is
paying for installation of meters on the Al Basrah Oil Terminal. We
support recent GOI efforts to contract with Shell Oil to work on a
strategy to meter production at the fields and the refineries. In the
electricity sector, metering capacity is lacking at the retail customer
level. The installation, maintenance, and regular reading of retail
electricity meters throughout Baghdad and other parts of Iraq would be
very difficult in the present security environment.
Recommendation 3: The U.S. Departments of State, Commerce, Energy,
Interior, and the U.S. Agency for International Development are
providing assistance to the GOI to improve the regulatory and legal
frameworks. The Departments of Commerce, Energy, and Interior received
Iraq Relief and Reconstruction Funds through an Interagency Assistance
Agreement in September 2006. All agencies are coordinated through the
Economic section of Embassy Baghdad.
Recommendation 4: Ministry Advisory Teams are now working with the
Ministries of Oil and Electricity. Their principal focus is on the
activities cited in the recommendation. We acknowledge that GOI
bureaucracy is a hindrance to these capital intensive sectors, and will
continue to offer assistance on reforming the Iraqi procurement
process.
Recommendation 5: The International Reconstruction Fund Facility for
Iraq (IRFFI) is a multilateral fund that provides an effective
mechanism for donors to support Iraq. United Nations Development Group
and the World Bank administer IRFFI's two trust funds, which have
received disbursements from donors totaling about $1.1 billion and $0.5
billion respectively. All but about $200 million of the amounts already
paid into the trust funds have been committed to development projects
in Iraq.
The International Compact with Iraq (ICI), formally launched in Sharm
El-Sheikh on May 3, 2007, aims to build upon IRFFI mechanisms to
provide bilateral donors with better ways to coordinate their
contributions of financial and technical assistance. The ICI calls for
establishment of an ICI Executive Committee, Secretariat and
International Consultation Group. The Executive Committee will work
with the Iraqi government to identify projects while the Consultative
Group coordinates what donors have to offer. The ICI Secretariat will
monitor and report on donor activities and act as a clearing house,
which will help to match needs to contributions.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Joseph Christoff (202) 512-8979 or christoffj@gao.gov:
Acknowledgments:
In addition, Stephen Lord, Assistant Director; Lynn Cothern; Howard
Cott; Martin De Alteriis; Etana Finkler; Bruce Kutnick; Kathleen
Monahan; Mary Moutsos; Amy Sheller; Jena Sinkfield; and Timothy Wedding
made key contributions to this report.
(320383):
FOOTNOTES
[1] These figures include the Iraq Relief and Reconstruction Funds
provided in the Emergency Wartime Supplemental Appropriations Act,
2003, P.L. 108-11, and in the Emergency Supplemental Appropriations Act
for Defense and for the Reconstruction of Iraq and Afghanistan, 2004,
P.L. 108-106, which are known as IRRF 1 and IRRF 2, respectively.
[2] In this report, the oil sector, which is under the direction of
Iraq's Ministry of Oil, refers broadly to crude oil, associated natural
gas production and exports, and petroleum products (such as gasoline)
that are refined in Iraq or imported.
[3] GAO, Rebuilding Iraq: Governance, Security, Reconstruction, and
Financing Challenges, GAO-06-697T (Washington, D.C.: Apr. 25, 2006);
Rebuilding Iraq: More Comprehensive National Strategy Needed to Help
Achieve U.S. Goals, GAO-06-788 (Washington, D.C.: July 11, 2006);
Rebuilding Iraq: More Comprehensive National Strategy Needed to Help
Achieve U.S. Goals and Overcome Challenges, GAO-06-953T (Washington,
D.C.: July 11, 2006); and Securing, Stabilizing, and Rebuilding Iraq:
Key Issues for Congressional Oversight, GAO-07-308SP (Washington, D.C.:
Jan. 9, 2007).
[4] The first year of data that the U.S. Department of Energy's Energy
Information Administration (EIA) reports for Iraq is 1970.
[5] UN/World Bank, Joint Iraq Needs Assessment (Baghdad, Iraq: Oct.
2003).
[6] GAO, Rebuilding Iraq: More Comprehensive National Strategy Needed
to Help Achieve U.S. Goals, GAO-06-788 (Washington, D.C.: July 2006).
[7] Funding for CERP was made available in the following legislation:
Emergency Supplemental Appropriations Act for Defense and for the
Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106; Department
of Defense Appropriations Act, 2005, P.L. 108-287; Emergency
Supplemental Appropriations Act for Defense, the Global War on Terror,
and Tsunami Relief, 2005, P.L. 109-13; Department of Defense, Emergency
Supplemental Appropriations to Address Hurricanes in the Gulf of
Mexico, and Pandemic Influenza Act, 2006, P.L. 109-148; and Emergency
Supplemental Appropriations Act for Defense, the Global War on Terror,
and Hurricane Recovery, 2006, P.L. 109-234.
[8] P.L. 109-289.
[9] "Vested assets" refers to former Iraqi regime assets held in U.S.
financial institutions that the President confiscated in March 2003 and
vested in the U.S. Treasury. The United States froze these assets
shortly before the first Gulf War. The U.S.A. PATRIOT Act of 2001
amended the International Emergency Economic Powers Act to empower the
President to confiscate, or take ownership of, certain property of
designated entities, including these assets, and vest ownership in an
agency or individual. The President has the authority to use the assets
in the interests of the United States. In this case, the President
vested the assets in March 2003 and made these funds available for the
reconstruction of Iraq in May 2003. "Seized assets" refers to former
regime assets seized within Iraq.
[10] On May 22, 2003, the UN adopted Security Council Resolution 1483,
which noted the establishment of the DFI to be used for the economic
reconstruction and repair of Iraq's infrastructure, among other
purposes. Under the resolution, 95 percent of oil proceeds are to be
deposited into the DFI.
[11] According to an independent audit of the DFI, U.S. agencies did
not maintain a complete and accurate database of outstanding
contractual commitments for contracts signed by the former CPA. See
Ernst & Young, Management Letter for Development fund for Iraq for the
Period from July 1, 2005, to December 31, 2005 (July 10, 2006).
[12] The CPA turned DFI stewardship over to the new Iraqi government in
June 2004. According to State Department estimates, about $18 billion
in oil revenue had been deposited into the DFI since the transition
from the CPA to the interim Iraqi government, as of May 31, 2005.
[13] While the limited spending by various Iraqi ministries in certain
areas, such as capital projects, is a known issue and receiving
attention from U.S. advisors, we cannot verify the precision of these
numbers. For the purpose of this report, we only use these data to
identify limited spending as a potential challenge for Iraq should it
rely on its ministries' own budgets to fund future reconstruction
projects. IRMO also stated that the Ministry of Electricity obligation
rate was 78 percent. However, IRMO did not provide supporting
documentation nor did it provide obligation data for the Ministry of
Oil.
[14] According to the State Department, the Contracting Committee
requirement for about a dozen signatures to approve electricity and oil
contracts exceeding $10 million further slows a bureaucratic process.
[15] World Bank, Operation Procurement Review (June 2005).
[16] The established mechanism for channeling multilateral assistance
to Iraq is the International Reconstruction Fund Facility for Iraq
(IRFFI), which is composed of two trust funds, one run by the UN
Development Group and the other by the World Bank Group.
[17] The Iraqi government collects self-reported donor funding data
through its Donor Assistance Database (DAD). Iraqi and U.S. government
and international donor country officials agree that DAD is incomplete.
According to the Department of State and SIGIR officials, the Ministry
of Planning's DAD, supported by the UN Development Programme (UNDP),
continues to improve as an assistance management tool to track donor
assistance.
[18] Department of State, Quarterly Update to Congress; 2207 Report
(Washington, D.C.: Jan. 2007).
[19] GAO, Securing, Stabilizing, and Rebuilding Iraq: Key Issues for
Congressional Oversight, GAO-07-308SP (Washington, D.C.: Jan. 2007).
[20] U.S. goals differ from the government of Iraq and IMF targets.
According to the State Department, as of January 2007, Iraq's
production goal is 2.1 mbpd and its export goal is 1.7 mbpd.
[21] In Iraq, most natural gas and liquefied petroleum gas production
is associated with production of crude oil. As crude oil is pumped from
the ground and processed, natural gas and liquefied petroleum gas are
also produced. Refined petroleum products are produced in refineries in
Iraq from crude oil sent through pipelines from the oil fields or are
imported from other countries since Iraq's refinery capacity does not
currently meet national needs.
[22] EIA uses its own analysis and a variety of sources, including Dow
Jones, the Middle East Economic Survey, the Petroleum Intelligence
Weekly, the International Energy Agency (IEA), the Monthly Oil Market
Report from OPEC, the Oil & Gas Journal, Platts, and Reuters.
[23] Re-injecting crude oil, and more commonly heavy fuel oil (residual
oil), back into wells is one way to maintain pressure in the wells for
extraction. However, this also can damage the wells and reduce the
value of the remaining reserves.
[24] The State Department set a goal to attain 6,000 mw peak generation
capacity by July 2006. The State Department also set a goal of 6,137 mw
average peak daily supply for the summer of 2006, which was also not
met.
[25] A megawatt hour is a measure of energy production or consumption
equal to megawatts produced or consumed for 1 hour.
[26] The State Department set an 110,000 mwh average daily generation
goal for the summer of 2005. For the summer of 2006, the State
Department set a goal of 127,000 mwh. However, the State Department
continues to use the 110,000 mwh goal to track weekly progress.
According to the State Department, generally goals have been announced
and changed without a formal process.
[27] Reporting average daily load (megawatt hours) is a better measure
of how much power is produced for the national grid because it measures
generation over a period of time, rather than the peak (megawatt) for
the day.
[28] See Emergency Supplemental Appropriations Act for the Defense and
Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106.
[29] "Workover" is a term used to describe operations on a completed
production well to clean, repair, and maintain the well for the
purposes of increasing or restoring production.
[30] GAO, Rebuilding Iraq: Status of Funding and Reconstruction
Efforts, GAO-05-876 (Washington, D.C.: July 28, 2005).
[31] GAO, Rebuilding Iraq: Status of DOD's Reconstruction Program, GAO-
07-30R (Washington, D.C.: Dec. 15, 2006).
[32] The Special Inspector General for Iraq Reconstruction (SIGIR),
Unclassified Summary of SIGIR's Review of Efforts to Increase Iraq's
Capability to Protect Its Energy Infrastructure, SIGIR-06-038
(Washington, D.C.: Sept. 27, 2006).
[33] In March 2004, the United States awarded a $19 million contract to
train and equip Iraq's Electrical Power Security Service to protect
electrical infrastructure, including power plants, transmission lines,
and Ministry of Electricity officials. Although the program was
designed to train 6,000 guards over a 2-year period, fewer than 340
guards had been trained when the contact was terminated early.
[34] Anthony Cordesman, Center for Strategic and International Studies,
Iraqi Force Development and the Challenge of Civil War: the Critical
Problems and Failures the U.S. Must Address If Iraqi Forces Are to
Eventually Do the Job (Washington, D.C.: Nov. 30, 2006).
[35] According to State Department officials, the most recent fuel
prices were increased on January 5 and March 20, 2007.
[36] According to an English translation of the draft law, "region" is
defined as the Region of Kurdistan or any other region formed after
issuance of the law in the Republic of Iraq, according to the
constitution of Iraq.
[37] According to State Department officials, the draft law arranges
for the re-establishment of the Iraqi National Oil Company, which would
have control over currently producing oil fields. The development of
currently non-producing fields would be subject to an open bidding
process. Contract negotiations for these fields would be the
responsibility of the regional authorities and would be based on
production and development plans, bidding rules, and model contracts
set by a new Federal Oil and Gas Council. The Council would also be
responsible for final approval of contracts. The Council would be the
final arbitrator and would approve all Ministry of Oil strategies and
policies.
[38] According to State Department officials, companion legislation
will include laws that address the reconstitution of the National oil
company, reorganization of the Ministry of Oil, and division of oil
revenues.
[39] U.S. Department of State, Section 1227 Report on Iraq (Washington,
D.C.: Jan. 5, 2007).
[40] The World Bank and UN report that the economic performance of oil
exporters is often inferior to that of resource-poor countries. This is
often explained by the influence of oil wealth on governance and by the
harmful real exchange rate effects on the non-oil sector and
uncertainty created by volatile oil prices.
[41] The UN Development Fund Iraq Trust Fund and World Bank Trust Fund
make up the International Reconstruction Fund Facility for Iraq
(IRFFI). Data and information for UNDP and World Bank funds and
programs are provided separately on the IRFFI Web site (see
http://www.irffi.org).
[42] The Department of State, Quarterly Update to Congress; 2207 Report
(Washington, D.C.: Oct. 2006).
[43] The Iraqi Ministry of Planning Donor Assistance Database is
available at http://www.mop-iraq.org/dad.
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