Rebuilding Iraq: Integrated Strategic Plan Needed to Help Restore Iraq's Oil and Electricity Sectors
Published: 2007-05-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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.  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.
subsections: section_title: Background
paragraphs: 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.
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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. 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.
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. 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.
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. 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.
section_title: 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
paragraphs: 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.
subsections: section_title: United States Has Spent Billions in U.S. and Iraqi Funds to Support Reconstruction
paragraphs: 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.
subsections: section_title: United States Has Spent Billions to Support Reconstruction of Iraq’s Oil and Electricity Sectors
paragraphs: 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.
Funding for electricity included about $164 million for the Commander’s  Emergency Response Program (CERP) during fiscal years 2004 to 2006.  Additional funding for CERP has been provided under the Department of  Defense 2007 Appropriations Act, 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.
section_title: U.S. Agencies Spent Billions in Iraqi Funds on Oil and Electricity Reconstruction Activities
paragraphs: 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 and oil  revenues in the Development Fund for Iraq (DFI). 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. 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. 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.
section_title: Billions of Additional Dollars Needed to Rebuild Oil and Electricity Sectors, but Future Iraqi Funding Is Uncertain
paragraphs: 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.
subsections: section_title: Billions of Additional Dollars Are Needed to Fund the Rebuilding of the Oil and Electricity Sectors
paragraphs: 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.
section_title: Iraq’s Oil and Electricity Ministries Have Not Spent Existing Funds for Infrastructure Improvements and Future Iraqi Funds Are Uncertain
paragraphs: 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. We are examining U.S. efforts to  work with the Iraqi ministries regarding ministry budget execution issues  in greater detail in another ongoing review.
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 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.
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.
section_title: Iraq Has Not Made Full Use of International Financial Assistance and Prospects for Future Funding Are Uncertain
paragraphs: 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, 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. 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. 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.
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.
section_title: Iraq’s Oil and Electricity Production Goals Have Not Been Met, Oil Production Figures May Be Overstated, and Iraq Faces Difficulties Sustaining Infrastructure
paragraphs: 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.
subsections: section_title: U.S. Oil and Electricity Goals Have Not Been Met
paragraphs: 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.
subsections: section_title: Iraq’s Crude Oil Production and Exports Have Not Met Goals
paragraphs: 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. 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.
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, 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.
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. 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. 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.
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.
section_title: Iraq’s Electricity Production Has Not Met Goals or Increasing Demand
paragraphs: 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. 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.
The State Department also aimed to reach 110,000 megawatt hours  (mwh) of average daily generation in 2005 and 2006 (see fig. 7).  However, average daily peak generation for 2006 reached 94,665 mwh, also  below the goal.
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). 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.
section_title: Most Major U.S. Projects Completed, but Iraq Faces Difficulties Sustaining U.S. Rebuilding Efforts
paragraphs: 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). 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. 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.
section_title: Major Challenges Hinder Efforts to Meet Iraq’s Oil and Electricity Needs
paragraphs: 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.
subsections: section_title: Poor Security Conditions Have Slowed Reconstruction and Increased Costs
paragraphs: 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.
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.
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.  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.
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. 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 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, 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.
section_title: Corruption, Smuggling, and Other Illicit Activities Impact Revenues and Cost Recovery
paragraphs: 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, 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.
section_title: Inadequate Legal and Regulatory Framework and Financial Management Systems Hinder Progress
paragraphs: 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 and regional oil companies the right to draw  up contracts with foreign companies for exploration and development of  new oil fields. 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,  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. 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.  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.
section_title: Lack of Integrated Energy Planning Creates Inefficiencies and Could Hinder Future Rebuilding Efforts
paragraphs: 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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.  As agreed with  Department of State officials, we obtained data and information on  bilateral contributions from their quarterly report to Congress and the  Iraqi Ministry of Planning’s Development Assistance Database (DAD). 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.
section_title: Appendix II: Comments from the Department of State
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: 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.