Rebuilding Iraq
Serious Challenges Impair Efforts to Restore Iraq's Oil Sector and Enact Hydrocarbon Legislation Gao ID: GAO-07-1107T July 18, 2007Rebuilding Iraq's oil sector is 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. This testimony addresses (1) the U.S. goals for Iraq's oil sector and progress in achieving these goals, (2) key challenges the U.S. government faces in helping Iraq restore its oil sector, and (3) efforts to enact and implement hydrocarbon legislation. This statement is based on our May 2007 report and updated data, where appropriate.
Despite 4 years of effort and $2.7 billion in U.S. reconstruction funds, Iraqi oil output has consistently fallen below U.S. program goals. In addition, the State Department's data on Iraq's oil production may be overstated since data from the U.S. Department of Energy show lower production levels--between 100,000 and 300,000 barrels less per day. Inadequate metering, re-injection, corruption, theft, and sabotage account for the discrepancy, which amounts to about $1.8 to $5.5 billion per year. Comprehensive metering of Iraq's oil production has been a long-standing problem and continuing need. Poor security, corruption, and funding constraints continue to impede reconstruction of Iraq's oil sector. The deteriorating security environment places workers and infrastructure at risk while protection efforts have been insufficient. Widespread corruption and smuggling reduce oil revenues. Moreover, Iraq's needs are significant and future funding for the oil sector is uncertain as nearly 80 percent of U.S. funds for the oil sector have been spent. Iraq's contribution has been minimal with the government spending less than 3 percent of the $3.5 billion it approved for oil reconstruction projects in 2006. Iraq has yet to enact and implement hydrocarbon legislation that defines the distribution of oil revenues and the rights of foreign investors. Until this legislation is enacted and implemented, it will be difficult for Iraq to attract the billions of dollars in foreign investment it needs to modernize the sector. As of July 13, 2007, Iraq's cabinet has approved only one of four separate but interrelated pieces of legislation--a framework that establishes the structure, management, and oversight. Another part is in draft and two others are not yet drafted. Poor security, corruption, and the lack of national unity will likely impede the implementation of this legislation.
GAO-07-1107T, Rebuilding Iraq: Serious Challenges Impair Efforts to Restore Iraq's Oil Sector and Enact Hydrocarbon Legislation
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Testimony:
Before the Subcommittee on the Middle East and South Asia and the
Subcommittee on International Organizations, Human Rights, and
Oversight, Committee on Foreign Affairs, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EDT:
Wednesday, July 18, 2007:
Rebuilding Iraq:
Serious Challenges Impair Efforts to Restore Iraq's Oil Sector and
Enact Hydrocarbon Legislation:
Statement of Joseph A. Christoff, Director:
International Affairs and Trade:
GAO-07-1107T:
GAO Highlights:
Highlights of GAO-07-1107T, a testimony to the Subcommittee on the
Middle East and South Asia and Subcommittee on International
Organizations, Human Rights, and Oversight; Committee on Foreign
Affairs, House of Representatives
Why GAO Did This Study:
Rebuilding Iraq‘s oil sector is 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.
This testimony addresses (1) the U.S. goals for Iraq‘s oil sector and
progress in achieving these goals, (2) key challenges the U.S.
government faces in helping Iraq restore its oil sector, and (3)
efforts to enact and implement hydrocarbon legislation. This statement
is based on our May 2007 report and updated data, where appropriate.
What GAO Found:
Despite 4 years of effort and $2.7 billion in U.S. reconstruction
funds, Iraqi oil output has consistently fallen below U.S. program
goals. In addition, the State Department‘s data on Iraq‘s oil
production may be overstated since data from the U.S. Department of
Energy show lower production levels”between 100,000 and 300,000 barrels
less per day. Inadequate metering, re-injection, corruption, theft, and
sabotage account for the discrepancy, which amounts to about $1.8 to
$5.5 billion per year. Comprehensive metering of Iraq‘s oil production
has been a long-standing problem and continuing need.
Poor security, corruption, and funding constraints continue to impede
reconstruction of Iraq‘s oil sector. The deteriorating security
environment places workers and infrastructure at risk while protection
efforts have been insufficient. Widespread corruption and smuggling
reduce oil revenues. Moreover, Iraq‘s needs are significant and future
funding for the oil sector is uncertain as nearly 80 percent of U.S.
funds for the oil sector have been spent. Iraq‘s contribution has been
minimal with the government spending less than 3 percent of the $3.5
billion it approved for oil reconstruction projects in 2006.
Iraq has yet to enact and implement hydrocarbon legislation that
defines the distribution of oil revenues and the rights of foreign
investors. Until this legislation is enacted and implemented, it will
be difficult for Iraq to attract the billions of dollars in foreign
investment it needs to modernize the sector. As of July 13, 2007,
Iraq‘s cabinet has approved only one of four separate but interrelated
pieces of legislation”a framework that establishes the structure,
management, and oversight. Another part is in draft and two others are
not yet drafted. Poor security, corruption, and the lack of national
unity will likely impede the implementation of this legislation.
Figure: Comparison of State and Energy Department Data on Iraq's Crude
Oil production:
[See PDF for Image]
Source: GAO analysis of Iraq Ministry of Oil data collected by the
State Department and U.S. Energy Information Administration.
[End of figure]
What GAO Recommends:
In our May 2007 report, we recommended that the Secretary of State, in
conjunction with international donors, work with Iraqi ministries to
develop an integrated energy strategy, expedite efforts to establish an
effective oil metering system, and enact and implement fair and
equitable hydrocarbon legislation. 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 to date and the U.S.
government‘s influence in Iraq.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1107T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Joseph A. Christoff at
(202) 512-8979 or christoffj@gao.gov.
[End of section]
Mr. Chairmen and Members of the Subcommittees:
I am pleased to be here today to discuss U.S. efforts to rebuild Iraq's
oil sector and Iraq's efforts to enact hydrocarbon legislation.
The oil sector is critical to Iraq's economy, accounting for over half
of Iraq's gross domestic product and over 90 percent of its revenues.
The timely and equitable distribution of these revenues is essential to
Iraq's ability to provide for its needs, including the reconstruction
of a unified Iraq.
The Iraqi government inherited oil infrastructure that was greatly
deteriorated due to the previous regime's neglect; international
sanctions; and years of conflict, looting, and vandalism. For fiscal
years 2003 through 2006, the U.S. government made available about $2.7
billion in reconstruction funds to help restore Iraq's crude oil
production and exports. The United States spent an additional $2.8
billion in Iraqi funds on the oil sector through the end of 2005;
however, these funds were used primarily to purchase petroleum products
because Iraq does not have adequate domestic refining capability.
My testimony discusses (1) U.S. goals for Iraq's oil sector and
progress in achieving these goals, (2) key challenges the U.S.
government faces in helping Iraq restore its oil sector, and (3)
efforts to enact and implement hydrocarbon legislation.
This statement is based on our May 2007 report[Footnote 1] and updated
data, where appropriate. To accomplish our report objectives, we
reviewed and analyzed U.S., Iraqi, donor government, United Nations
(UN), International Monetary Fund (IMF), and World Bank reports and
data. During 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 also analyzed data on Iraqi oil production from
the Department of State and the Department of Energy's Energy
Information Administration (EIA). This work was conducted in accordance
with generally accepted government auditing standards.
Summary:
Despite 4 years of effort and $2.7 billion in U.S. reconstruction
funds, Iraqi oil output has consistently fallen below the U.S. goals of
producing 3 million barrels per day (mbpd) and exporting 2.2 mbpd. For
2006, State Department data show that crude oil production and exports
averaged 2.1 mbpd and 1.5 mbpd, respectively. However, the State
Department's data on Iraq's oil production may be overstated since data
from the U.S. Department of Energy show lower production levels--
between 100,000 and 300,000 barrels fewer each day. Inadequate
metering, reinjection, corruption, theft, and sabotage account for the
discrepancy, which amounts to $5 million to $15 million daily, or about
$1.8 billion to $5.5 billion per year. Comprehensive metering of Iraq's
oil production has been a long-standing problem and continuing need.
Poor security, corruption, and funding constraints continue to impede
reconstruction of Iraq's oil sector. The U.S. reconstruction effort was
predicated on the assumption that a permissive security environment
would exist. However, a deteriorating security environment continues to
place workers and infrastructure at risk while protection efforts have
been insufficient. Widespread corruption and smuggling continue to
reduce oil revenues. According to State Department officials and
reports, about 10 percent to 30 percent of refined fuels is diverted to
the black market or smuggled out of Iraq and sold for a profit.
Moreover, Iraq's needs are significant and future funding for the oil
sector is uncertain as nearly 80 percent of the U.S. funds for the oil
sector have been spent. Iraq's contribution to improving its
infrastructure has been minimal with the government spending less than
3 percent of the $3.5 billion it approved for oil reconstruction
projects in 2006. Further, the international community has not provided
any grants to develop the oil sector, and Iraq has not accessed nearly
$500 million in loans from international contributions to the oil
sector. U.S. and international officials stated that international
donors have not provided funds for the oil sector because they expected
that Iraq and the private sector would provide the needed resources.
Iraq has yet to enact and implement comprehensive hydrocarbon
legislation that defines the distribution of future oil revenues and
the rights of foreign investors. Until this legislation is enacted and
implemented, it will be difficult for Iraq to attract the billions of
dollars in foreign investment it needs to modernize the oil sector.
According to the State Department, as of July 13, 2007, Iraq's cabinet
had approved only one of four separate but interrelated pieces of
legislation--hydrocarbon framework legislation that establishes
structure, management, and oversight for the sector. This draft
legislation is currently being considered by Iraq's parliament (Council
of Representatives). A second piece of legislation, the revenue-sharing
legislation, has been drafted but not approved by Iraq's cabinet
(Council of Ministers). Two other pieces of legislation that would
restructure the Ministry of Oil and establish an Iraq National Oil
Company have not been drafted. According to a State Department and a
Kurdistan Regional Government (KRG) official, the passage and
implementation of all four laws is essential to achieve increased
transparency, accountability, and revenue management. However, poor
security, corruption, and lack of unity and trust will likely impede
the implementation of the legislation.
In our May 2007 report, we recommended that the Secretary of State work
with the Iraqi government and particularly with the Ministries of Oil
and Electricity to (1) develop an integrated energy strategy for the
oil and electricity sectors; (2) expedite efforts to establish an
effective metering system for the oil sector; (3) develop fair and
equitable hydrocarbon legislation, regulations, and implementing
guidelines; (4) 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 our prior 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. However, the
U.S. government wields considerable influence in overseeing Iraq
stabilization and rebuilding efforts.
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 Iraq's Oil Network:
[See PDF for image]
Sources: GAO analysis; photo (U.S. Army Corps of Engineers).
[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 2006.
Figure 2: Crude Oil Production Levels in Iraq, 1970 through 2006:
[See PDF for image]
Source: GAO analysis of data from the U.S. Department of Energy, Energy
Information Administration.
[End of figure]
Iraq's crude oil production reached 3.5 mbpd, its highest annual
average, 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 Gulf War began the following year when
Iraq invaded Kuwait. 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 the 5 years preceding the
2003 U.S. invasion of Iraq, crude oil production averaged 2.3 mbpd. In
2003, crude oil production dropped again to a low of about 1.3 million
barrels per day (annual average) but then rebounded.
Iraq's Oil Production Goals Have Not Been Met and Oil Production
Figures May Be Overstated:
Despite U.S. and Iraqi government efforts to reconstruct Iraq's key
economic sector, oil production has consistently fallen below U.S.
program goals. In addition, production levels may be overstated and
measuring them precisely is challenging due to limited metering and
poor security. Comprehensive metering has been an outstanding goal of
the United States, the international community, and the Iraqi
government.
U.S. Oil Goals Have Not Been Met:
Key reconstruction goals for Iraq's oil sector, including those for
crude oil production and exports, and refined fuel production capacity
and stock levels, have not been met. U.S. goals for the oil sector
include reaching an average crude oil production capacity of 3 million
barrels per day (mbpd) and crude oil export levels of 2.2
mbpd.[Footnote 2] However, in 2006, actual crude oil production and
exports averaged, respectively, about 2.1 mbpd and 1.5 mbpd. Figure 3
compares Iraq's oil production and exports with U.S. goals (the data
for this figure are presented in appendix I). As the figure shows,
production and exports for the first five months of 2007 were still
below U.S. 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.[Footnote
3]
Figure 3: Iraqi Reported Crude Oil Production and Exports and U.S.
Goals, June 2003 through May 2007:
[See PDF for image]
Source: GAO analysis of Iraq Ministry of Oil data collected by State
Department.
[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. 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. To increase the
stocks of petroleum products and their availability 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 been reducing subsidies for refined oil
products, which raises the prices consumers pay. In the past, refined
oil products in Iraq had been highly subsidized, which led 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.
Iraq's Crude Oil Production May Be Overstated:
Iraq's crude oil production statistics may be overstated. We compared
the State Department's statistics to those published by the EIA, which
are based on alternate sources.[Footnote 4] 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 reports
that Iraqi oil production was about 100,000 to 300,000 barrels per day
lower than the amounts the State Department reported. At an average
price of $50 per barrel, this is a discrepancy of $5 million to $15
million per day, or $1.8 billion to $5.5 billion per year. Figure 4
shows these two data sets over the time period (June 2003 to March
2007) for which data from both State and EIA were available. The data
for this figure are presented in appendix I.
Figure 4: Comparison of State Department and EIA Data on Iraq's Crude
Oil Production:
[See PDF for image]
Source: GAO analysis of Iraq Ministry of Oil data collected by the
State Department and U.S. Energy Information Administration data.
[End of figure]
According to EIA, several factors may account for the discrepancy. One
factor is the lack of storage facilities for crude oil in Iraq. Crude
oil that cannot be processed by refineries or exported is reinjected
into the ground.[Footnote 5] Another factor affecting the discrepancy
may be differences in the frequency and timing of the data. The State
Department's data are reported daily in real time, while EIA produces
monthly data that have 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, the State Department 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.
Metering of Oil Production and Distribution Network Has Been a Long-
standing but Unmet Goal:
Reliable information on Iraqi's oil production is further complicated
by the lack of metering. According to a State Department 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 the flow
through pipelines and relying on reports from onsite 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 implementation has been delayed. 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. According to IAMB, in June 2004,
the CPA had approved a budget to replace, repair, and calibrate the
metering system on Iraq's oil pipeline network. However, the oil
metering contract was not completed due to security and technical
issues. In June 2006, 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. Shell would advise the ministry on
the establishment of a system to measure the flow of oil, gas, and
related products within Iraq and in 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 in July 2007.
Security, Corruption, and Funding Challenges Hinder Reconstruction
Efforts:
The U.S. government and Iraq face several key challenges in improving
Iraq's oil sector. 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 and smuggling have diverted government revenues
potentially available for rebuilding efforts. Third, future funding
needs for reconstruction of Iraq's oil sector are significant, but the
source of these funds is uncertain.
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 May 2003,
overall security conditions in Iraq have deteriorated and grown more
complex, as evidenced by the increased numbers of attacks (see fig. 5).
The average number of daily attacks in June 2007 was about the same
level as the prior high of about 180 attacks per day that occurred in
October 2006 around the time of Ramadan. Overall, the average number of
daily attacks was about 50 percent higher in June 2007 than in June
2006.[Footnote 6]
Figure 5: Enemy-Initiated Attacks against the Coalition, Iraqi Security
Forces, and Civilians (May 2003 through June 2007):
[See PDF for image]
Source; GAO analysis of DIA-reported Multi-National Force-Iraq data,
June 2007.
Note: Attacks against infrastructure account for less than 1 percent of
enemy-initiated attacks.
[End of figure]
The deteriorating security environment has led to project delays and
increased costs. Insurgents have destroyed key oil infrastructure,
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.
For example, according to the Army Corps of Engineers, 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. The Corps noted that if the lines and plant
were in operation today, an additional 500,000 barrels per day could be
produced in northern Iraq.
The U.S. government has developed a number of initiatives to protect
the oil infrastructure and transfer this responsibility to the Iraqi
government.[Footnote 7] Such efforts include fortifying the
infrastructure and improving the capabilities of rapid repair teams and
protection security forces such as the Oil Protection Force and the
Strategic Infrastructure Battalions (SIB). The U.S. government has
paired these security forces with coalition partners and has trained
and equipped the SIBs. However, U.S. officials stated that the
capability and loyalty of some of these units are questionable.
According to Department of Defense (DOD) and Center for Strategic and
International Studies reports,[Footnote 8] these security forces have
been underpaid, underequipped, and poorly led, and are sometimes
suspected of being complicit in interdiction and smuggling. Additional
information on the nature and status of these efforts and the SIBs is
classified.
Corruption and Smuggling Reduce Oil Revenues:
U.S. and international officials have noted that corruption in Iraq's
oil sector is pervasive. In 2006, the World Bank and the 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 by skimming profits from
black marketers, according to U.S. embassy documents. According to a
June 2007 DOD report, a variety of criminal, insurgent, and militia
groups engage in the theft and illicit sale of oil to fund their
activities. For example, DOD reported that as much as 70 percent of the
fuel processed at Bayji was lost to the black market--possibly as much
as $2 billion a year. As a result, the Iraqi Army assumed control of
the entire Bayji refinery, and equipment is being installed to prevent
siphoning.
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 several times, significantly reducing the subsidy for many
fuel products. The Iraqi government intends to continue the price
increases during 2007 and 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.
Future Funding Needs Are Significant but Funding Sources Are Uncertain:
While billions have been provided to rebuild Iraq's oil sector, Iraq's
future needs are significant and sources of funding are uncertain. For
fiscal years 2003 through 2006, the United States made available about
$2.7 billion, obligated about $2.6 billion, and spent about $2.1
billion to rebuild Iraq's oil sector. According to various estimates
and officials, Iraq will need billions of additional dollars to
rebuild, maintain, and secure its oil sector. Since the majority of
U.S. funds have been spent, the Iraqi government and international
community represent important sources of potential future funding.
However, the Iraqi government has not fully spent the capital project
funds already allocated to the oil sector in Iraq's 2006 budget. In
2006, Iraq planned to spend more than $3.5 billion for capital projects
in the oil sector. This amount accounted for about 98 percent of the
Ministry of Oil's total budget ($3.6 billion) that year. As of December
2006, the end of Iraq's fiscal year, only 3 percent of oil sector
capital project funds had been spent.[Footnote 9] While Iraq's
inability to spend its capital budget may not directly affect U.S.-
funded projects, U.S. investment alone is not adequate for the full
reconstruction and expansion of the oil sector. Therefore, Iraq's
continued difficulties in spending its capital budget could hamper
efforts to attain its current reconstruction goals.
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 Department 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 the State Department and DOD, personnel turnover within the
ministries, fear of corruption charges, and an onerous contract
approval process[Footnote 10] have caused delays in contract approval
and capital improvement expenditures.
Furthermore, the Iraqi government has not made full use of potential
international loans, and future donor funding for the oil sector
remains uncertain. Donors other than the United States have not
provided any grants to develop the oil sector, and the Iraqi government
had not taken advantage of $467 million in loans from Japan to develop
a crude oil export facility and upgrade a refinery. According to U.S.
and international officials, donor funding has been limited because of
an expectation that sufficient funds would be provided through Iraq's
oil revenues and private investors.
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, particularly for the oil sector. Launched in May
2007, the compact was intended to secure additional funding for Iraq's
oil, electricity, and other sectors. However, the extent to which the
compact will stimulate international assistance for the oil sector
remains uncertain.
Challenges Impede Efforts to Enact and Implement Comprehensive
Hydrocarbon Legislation:
The World Bank reports that additional incentives are needed to
stimulate oil production and investment, including 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. Iraq has yet to enact and implement
comprehensive hydrocarbon legislation that would define the
distribution of future oil revenues and the rights of foreign
investors. According to U.S. officials, until such legislation is
passed and implemented, it will be difficult for Iraq to attract the
billions of dollars in foreign investment it needs to modernize the oil
sector.
As of July 13, 2007, the Iraqi government was in various stages of
drafting and enacting four separate, yet interrelated, pieces of
legislation: hydrocarbon framework legislation that establishes the
structure, management, and oversight for the sector; revenue-sharing
legislation (the draft "Law of Financial Resources"); legislation
restructuring the Ministry of Oil; and legislation establishing the
Iraq National Oil Company (INOC). According to the State Department, to
be enacted as law, the four pieces of legislation must be approved by
Iraq's cabinet (Council of Ministers), vetted through the Shura
council,[Footnote 11] and then submitted by the cabinet to a vote by
Iraq's parliament (Council of Representatives). If the laws are passed,
they are then made publicly available in the Iraqi government's
official publication, known as the Official Gazette. Figure 6 shows the
status of the four proposed pieces of legislation as of July 1, 2007.
Figure 6: Status of Iraq's Hydrocarbon Legislation, July 1, 2007:
[See PDF for image]
Source: GAO based on information from the State Department and
Kurdistan Regional Government.
Note: According to a State Department official, as of July 13, 2007,
the annexes may have been dropped from the hydrocarbon framework
legislation because agreement could not be reached on the allocation of
petroleum fields and exploration areas. It remains uncertain how this
reportedly contentious issue will be resolved.
[End of figure]
The draft hydrocarbon framework is the furthest along in the
legislative process and is currently before Iraq's parliament,
according to a State Department and a KRG official. According to these
officials, it provides an overall framework but lacks key details that
will be addressed in the financial resources and other legislation. The
UN reported in early June 2007 that there had been no decision on
whether the hydrocarbon framework legislation would be voted on as a
part of a larger energy package with annexes and supporting legislation
or voted on separately. The KRG has published the negotiated "agreed-
to" text for the revenue-sharing legislation, which has not yet been
approved by the cabinet. Negotiated text of the draft legislation for
restructuring the Ministry of Oil and establishing INOC have yet to be
developed and published. According to a State Department and KRG
officials, the passage and implementation of all four pieces of
legislation is essential to achieve increased transparency,
accountability, and revenue management.
Moreover, enacting and implementing hydrocarbon legislation and
subsequent regulations and procedures will likely be impeded by some of
the same challenges, such as poor security and corruption, that affect
achieving program goals and reconstruction of the oil sector. According
to U.S. officials, sectarian attacks and the lack of national unity and
trust have resulted in competing sectarian interests and wariness of
foreign investment. Also, according to U.S. officials, opportunities to
profit from corruption and smuggling reduce the incentive for greater
transparency and accountability in oil resource management. U.S.
officials recognize that significant implementation challenges will
remain once the draft legislation is enacted into law.
Conclusion:
As we recently reported, the United States has spent billions of
dollars to rebuild Iraq's oil sector, but billions more will be needed
to surmount the challenges facing Iraq's oil sector. Iraq's oil sector
lacks an effective metering system to measure output, determine revenue
trends, and identify illicit diversions. Opaque laws governing
investment have also limited foreign investment in this critical
sector. The passage of comprehensive Iraqi hydrocarbon legislation
could serve as an important impetus for stimulating additional
investment if and when security conditions improve. The development of
the sector is also hindered by weak government budgeting, procurement,
and financial management systems and limited donor spending. The
absence of an integrated strategic plan that coordinates efforts across
the oil and electricity sectors is essential given their highly
interdependent nature. 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:
In our May 2007 report, we recommended 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
Ministry of Oil 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.
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:
In commenting on a draft of our May 2007 report, the State Department
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. The State Department 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 remains clear that the U.S. government
wields considerable influence in overseeing Iraq stabilization and
rebuilding efforts. We also believe additional actions are warranted
given the lack of progress that has been made over the last 4 years in
achieving Iraq reconstruction goals.
Mr. Chairmen, this concludes my statement. I would be pleased to answer
any questions that you or other Members may have at this time.
GAO Contacts and Acknowledgments:
For questions regarding this testimony, please call Joseph A. Christoff
at (202) 512-8979 or christoffj@gao.gov. Other key contributors to this
statement were Stephen Lord, Assistant Director; Lynn Cothern; Kathleen
Monahan; and Timothy Wedding.
[End of section]
Appendix I: Data on Iraq's Crude Oil Production and Exports:
Table 1 provides the data used in figures 3 and 4 of this testimony.
Department of State data on Iraq's crude oil production and exports are
collected by State Department officials in Iraq through Iraq's Ministry
of Oil. We calculated Iraq's production for domestic consumption (the
amount of oil produced that remains in the country) as the remainder of
Iraq's production of crude oil after exports, based on State
Department's data. Data from the Department of Energy's Energy
Information Administration (EIA) are based on EIA's own analysis and a
variety of sources, including Dow Jones, the Middle East Economic
Survey, the Petroleum Intelligence Weekly, the International Energy
Agency, OPEC's Monthly Oil Market Report, the Oil & Gas Journal,
Platts, and Reuters.
Table 1: Iraq's Oil Production, Exports, Production for Domestic
Consumption (millions of barrels per day):
Month/Year: Jun-03;
State Department Data: Production: 0.596;
State Department Data: Exports: 0.200;
State Department Data: Production for Domestic Consumption: 0.396;
EIA Data: Production: 0.452.
Month/Year: Jul-03;
State Department Data: Production: 0.927;
State Department Data: Exports: 0.322;
State Department Data: Production for Domestic Consumption: 0.605;
EIA Data: Production: 0.572.
Month/Year: Aug-03;
State Department Data: Production: 1.408;
State Department Data: Exports: 0.646;
State Department Data: Production for Domestic Consumption: 0.762;
EIA Data: Production: 1.050.
Month/Year: Sep-03;
State Department Data: Production: 1.705;
State Department Data: Exports: 0.983;
State Department Data: Production for Domestic Consumption: 0.722;
EIA Data: Production: 1.399.
Month/Year: Oct-03;
State Department Data: Production: 2.046;
State Department Data: Exports: 1.149;
State Department Data: Production for Domestic Consumption: 0.897;
EIA Data: Production: 1.749.
Month/Year: Nov-03;
State Department Data: Production: 2.124;
State Department Data: Exports: 1.524;
State Department Data: Production for Domestic Consumption: 0.600;
EIA Data: Production: 1.848.
Month/Year: Dec-03;
State Department Data: Production: 2.278;
State Department Data: Exports: 1.541;
State Department Data: Production for Domestic Consumption: 0.737;
EIA Data: Production: 1.948.
Month/Year: Jan-04;
State Department Data: Production: 2.406;
State Department Data: Exports: 1.537;
State Department Data: Production for Domestic Consumption: 0.869;
EIA Data: Production: 2.103.
Month/Year: Feb-04;
State Department Data: Production: 2.289;
State Department Data: Exports: 1.382;
State Department Data: Production for Domestic Consumption: 0.907;
EIA Data: Production: 2.003.
Month/Year: Mar-04;
State Department Data: Production: 2.421;
State Department Data: Exports: 1.825;
State Department Data: Production for Domestic Consumption: 0.596;
EIA Data: Production: 2.203.
Month/Year: Apr-04;
State Department Data: Production: 2.445;
State Department Data: Exports: 1.804;
State Department Data: Production for Domestic Consumption: 0.641;
EIA Data: Production: 2.303.
Month/Year: May-04;
State Department Data: Production: 2.149;
State Department Data: Exports: 1.380;
State Department Data: Production for Domestic Consumption: 0.769;
EIA Data: Production: 1.903.
Month/Year: Jun-04;
State Department Data: Production: 1.899;
State Department Data: Exports: 1.148;
State Department Data: Production for Domestic Consumption: 0.751;
EIA Data: Production: 1.703.
Month/Year: Jul-04;
State Department Data: Production: 2.210;
State Department Data: Exports: 1.406;
State Department Data: Production for Domestic Consumption: 0.804;
EIA Data: Production: 2.003.
Month/Year: Aug-04;
State Department Data: Production: 2.148;
State Department Data: Exports: 1.114;
State Department Data: Production for Domestic Consumption: 1.034;
EIA Data: Production: 1.803.
Month/Year: Sep-04;
State Department Data: Production: 2.539;
State Department Data: Exports: 1.679;
State Department Data: Production for Domestic Consumption: 0.860;
EIA Data: Production: 2.303.
Month/Year: Oct-04;
State Department Data: Production: 2.435;
State Department Data: Exports: 1.607;
State Department Data: Production for Domestic Consumption: 0.828;
EIA Data: Production: 2.203.
Month/Year: Nov-04;
State Department Data: Production: 1.916;
State Department Data: Exports: 1.351;
State Department Data: Production for Domestic Consumption: 0.565;
EIA Data: Production: 1.703.
Month/Year: Dec-04;
State Department Data: Production: 2.156;
State Department Data: Exports: 1.607;
State Department Data: Production for Domestic Consumption: 0.549;
EIA Data: Production: 1.903.
Month/Year: Jan-05;
State Department Data: Production: 2.076;
State Department Data: Exports: 1.367;
State Department Data: Production for Domestic Consumption: 0.709;
EIA Data: Production: 1.903.
Month/Year: Feb-05;
State Department Data: Production: 2.103;
State Department Data: Exports: 1.431;
State Department Data: Production for Domestic Consumption: 0.672;
EIA Data: Production: 1.903.
Month/Year: Mar-05;
State Department Data: Production: 2.091;
State Department Data: Exports: 1.394;
State Department Data: Production for Domestic Consumption: 0.697;
EIA Data: Production: 1.903.
Month/Year: Apr-05;
State Department Data: Production: 2.121;
State Department Data: Exports: 1.398;
State Department Data: Production for Domestic Consumption: 0.723;
EIA Data: Production: 1.903.
Month/Year: May-05;
State Department Data: Production: 2.127;
State Department Data: Exports: 1.308;
State Department Data: Production for Domestic Consumption: 0.819;
EIA Data: Production: 1.903.
Month/Year: Jun-05;
State Department Data: Production: 2.140;
State Department Data: Exports: 1.440;
State Department Data: Production for Domestic Consumption: 0.700;
EIA Data: Production: 1.903.
Month/Year: Jul-05;
State Department Data: Production: 2.172;
State Department Data: Exports: 1.550;
State Department Data: Production for Domestic Consumption: 0.622;
EIA Data: Production: 2.003.
Month/Year: Aug-05;
State Department Data: Production: 2.153;
State Department Data: Exports: 1.504;
State Department Data: Production for Domestic Consumption: 0.649;
EIA Data: Production: 1.903.
Month/Year: Sep-05;
State Department Data: Production: 2.089;
State Department Data: Exports: 1.609;
State Department Data: Production for Domestic Consumption: 0.480;
EIA Data: Production: 2.053.
Month/Year: Oct-05;
State Department Data: Production: 1.944;
State Department Data: Exports: 1.239;
State Department Data: Production for Domestic Consumption: 0.705;
EIA Data: Production: 1.803.
Month/Year: Nov-05;
State Department Data: Production: 1.981;
State Department Data: Exports: 1.168;
State Department Data: Production for Domestic Consumption: 0.813;
EIA Data: Production: 1.703.
Month/Year: Dec-05;
State Department Data: Production: 1.978;
State Department Data: Exports: 1.071;
State Department Data: Production for Domestic Consumption: 0.907;
EIA Data: Production: 1.653.
Month/Year: Jan-06;
State Department Data: Production: 1.713;
State Department Data: Exports: 1.094;
State Department Data: Production for Domestic Consumption: 0.619;
EIA Data: Production: 1.603.
Month/Year: Feb-06;
State Department Data: Production: 1.829;
State Department Data: Exports: 1.473;
State Department Data: Production for Domestic Consumption: 0.356;
EIA Data: Production: 1.803.
Month/Year: Mar-06;
State Department Data: Production: 2.072;
State Department Data: Exports: 1.325;
State Department Data: Production for Domestic Consumption: 0.747;
EIA Data: Production: 1.903.
Month/Year: Apr-06;
State Department Data: Production: 2.183;
State Department Data: Exports: 1.596;
State Department Data: Production for Domestic Consumption: 0.587;
EIA Data: Production: 1.903.
Month/Year: May-06;
State Department Data: Production: 2.131;
State Department Data: Exports: 1.507;
State Department Data: Production for Domestic Consumption: 0.624;
EIA Data: Production: 1.903.
Month/Year: Jun-06;
State Department Data: Production: 2.221;
State Department Data: Exports: 1.702;
State Department Data: Production for Domestic Consumption: 0.519;
EIA Data: Production: 2.153.
Month/Year: Jul-06;
State Department Data: Production: 2.226;
State Department Data: Exports: 1.685;
State Department Data: Production for Domestic Consumption: 0.540;
EIA Data: Production: 2.203.
Month/Year: Aug-06;
State Department Data: Production: 2.238;
State Department Data: Exports: 1.582;
State Department Data: Production for Domestic Consumption: 0.656;
EIA Data: Production: 2.203.
Month/Year: Sep-06;
State Department Data: Production: 2.348;
State Department Data: Exports: 1.740;
State Department Data: Production for Domestic Consumption: 0.608;
EIA Data: Production: 2.153.
Month/Year: Oct-06;
State Department Data: Production: 2.247;
State Department Data: Exports: 1.511;
State Department Data: Production for Domestic Consumption: 0.737;
EIA Data: Production: 2.103.
Month/Year: Nov-06;
State Department Data: Production: 2.097;
State Department Data: Exports: 1.436;
State Department Data: Production for Domestic Consumption: 0.660;
EIA Data: Production: 2.003.
Month/Year: Dec-06;
State Department Data: Production: 2.156;
State Department Data: Exports: 1.450;
State Department Data: Production for Domestic Consumption: 0.706;
EIA Data: Production: 2.003.
Month/Year: Jan-07;
State Department Data: Production: 1.597;
State Department Data: Exports: 1.292;
State Department Data: Production for Domestic Consumption: 0.305;
EIA Data: Production: 1.753.
Month/Year: Feb-07;
State Department Data: Production: 2.084;
State Department Data: Exports: 1.494;
State Department Data: Production for Domestic Consumption: 0.590;
EIA Data: Production: 2.003.
Month/Year: Mar-07;
State Department Data: Production: 2.073;
State Department Data: Exports: 1.571;
State Department Data: Production for Domestic Consumption: 0.502;
EIA Data: Production: 2.053.
Month/Year: Apr-07;
State Department Data: Production: 2.141;
State Department Data: Exports: 1.491;
State Department Data: Production for Domestic Consumption: 0.650;
EIA Data: Production: [Empty].
Month/Year: May-07;
State Department Data: Production: 2.024;
State Department Data: Exports: 1.631;
State Department Data: Production for Domestic Consumption: 0.393;
EIA Data: Production: [Empty].
Source: State Department and U.S. Energy information.
Note: EIA data on Iraq's crude oil production are available only
through March 2007.
[End of table]
FOOTNOTES
[1] GAO, Rebuilding Iraq: Integrated Strategic Plan Needed to Help
Restore Iraq's Oil and Electricity Sectors, GAO-07-677 (Washington,
D.C.: May 15, 2007).
[2] 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.
[3] 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.
[4] 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.
[5] Reinjecting crude oil--and, more commonly heavy fuel oil (residual
oil)--into wells is one way to maintain pressure in the wells for
extraction. However, this practice can also damage the wells and reduce
the value of the remaining reserves.
[6] While the data on attacks provide a reasonably sound depiction of
security trends, DOD documents and officials acknowledge that these
data provide only a partial picture of violence in Iraq because not all
attacks against civilians and Iraqi security forces are observed by or
reported to coalition forces.
[7] The Special Inspector General for Iraq Reconstruction (SIGIR),
Unclassified Summary of SIGIR's Review of Effort to Increase Iraq's
Capability to Protect Its Energy Infrastructure, SIGIR-06-038
(Washington, D.C., Sept. 27, 2006).
[8] 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). Department of
Defense, Measuring Stability and Security in Iraq (Washington, D.C.:
June 7, 2007).
[9] Although U.S. advisors are aware of various Iraqi ministries'
limited spending in areas such as capital projects, we cannot verify
the precision of these numbers. For the purpose of this testimony, we
only use these data, in conjunction with U.S. advisors' reports, to
identify limited spending as a potential challenge for Iraq should it
rely on its ministries' own budgets to fund future reconstruction
projects.
[10] 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.
[11] According to a State Department official responsible for
monitoring the hydrocarbon legislation, the Shura Council is the
committee to ensure constitutionality and avoid contradictions with the
Iraqi legal system (including Islamic law).
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