Security, corruption delay Iraqi oil sector rebuilding: agency

Dubai (Platts)--1Aug2006

Iraq's oil construction progress has remained hampered by the volatile
security situation, corruption and poor project implementation needed to build
crude output to sustainable pre-war levels, the US agency responsible for
auditing US-led Iraqi reconstruction said in a report published Monday.
"The volatile security situation and limited provisions for sustainment
continue to be challenges for developing the sector," the Office of the
Special Inspector General for Iraq Reconstruction, said in its July quarterly
Report.
"Corruption threatens not only Iraq's capacity to fund new capital
investments but also its ability to sustain and increase production," the
SIGIR report said.
Oil production, which hovered at around 2 million b/d throughout 2005 and
most of the first half of 2006, reached 2.5 million b/d in mid-June, but in
the following two weeks fell to 2.35 and 2.23 million b/d, SIGIR said.
SIGIR said 95% of US funds for the oil sector had been allocated but only
60% used. During this reporting period, $180 million was spent, bringing the
cumulative total spent on oil infrastructure to $1 billion.

UNFINISHED RIVER CROSSINGS, PIPELINE WORK
US-funded construction activities have focused mainly on production and
have strived to rehabilitate transmission, refining and gas facilities. But
many projects remain unfinished, leading to billions of dollars in lost
revenue, SIGIR said.
The report looked at the Kirkuk-Baiji pipeline project--including the
Al-Fatah pipeline river crossing, three canal crossings and a 50-kilometer (30
mile) new pipeline. The project work aimed to boost output capacity from
500,000 b/d to 800,000 b/d in the north.
"However, the project has experienced delays caused by security problems
at the Zegeton and Riyadh canal crossings," the report said.
"Construction delays with the canal crossings and pipeline resulted in
the loss of approximately $14.8 billion of potential revenue for the Iraqi
government because the increased capacity for moving oil was unavailable," the
report added.
The US Army Corps of Engineers issued the task order to US' Kellogg Brown
and Root for the design, construction and quality management of the pipeline
and river crossings. Iraq's State Company for Oil Projects was tasked with
carrying out construction of the pipeline.
Project work was set for completion by March 31, 2004, but by August 2004
USACE was forced to terminate the KBR task order because the $75.7 million
allocated for the Al-Fatah river crossing segment was exhausted with only 28%
of the work completed.
In November 2004, the US' Project Contracting Office in Baghdad, the
organization now responsible for managing US-led rebuilding projects at the US
Embassy, awarded the completion of the river crossing at Al Fatah and the
three canal crossings to Australian's Parsons Iraq Joint Venture.
"The three canal crossings were scheduled to be completed by November
2005 under this contract," the SIGIR report said. "However, the Kirkuk
Irrigation Canal Crossing was not completed until April 2006, and the Riyadh
and Zegeton Canal Crossings have yet to be completed." SIGIR "found no
reasonable assurances" that the remaining crossings would be finished.

QUALITY OF WORK UNKNOWN
The US government also ended KBR's responsibility for the quality
management of SCOP's pipeline construction work in 2004. "As a result, little
is known about the quantity and quality of the non-canal crossing portion of
the 50-km pipeline," SIGIR said.
Iraq's Northern Oil Company--the end user and operator of the
pipeline--believes that the remaining portion of the pipeline is complete and
operational. "This has not been validated, but a PCO oil document indicated
that the NOC has identified at least 14 defects in the pipeline that require
repair," the report said.
Other key projects in southern Iraq also remain unfinished, hindering
exports, production and limiting government revenue.
The Basra Oil Terminal task order, comprising 13 projects, was 39%
complete as of June 30, 2006, SIGIR said. Four of these projects have been
completed, including repairs and refurbishment to four loading arms, which
will provide total loading capacity of 6 million b/d.
The Basra terminal metering system project, which was reported to be 30%
complete last quarter, made little progress this quarter because the
subcontractor was delayed in mobilizing, the report said.
"As a result, the project is now 33% complete, and it is scheduled to be
finished by December 31, 2006," SIGIR said. "The lack of progress implementing
this metering system undermines the effort to combat corruption and smuggling
in this economically crucial sector."
--Glen Carey, glen_carey@platts.com

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