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Thursday, July 26

Houston, we have liftoff: Iraq privatizes their oil-refining sector.

July 20, 2007: [In Iraq] The black-market cost of fuel held its price at 27,000 Iraqi dinars (US $22) for 20 litres, three times the forecourt price. And day-long queues were again reported at some petrol stations.(1)

July 25, 2007: Last week Iraq again increased its prices for gasoline as part of its obligations to the International Monetary Fund and Paris Club agreements on debt relief and new loans, which are nudging Iraq toward capitalism.

June 2005
The problem, says Iraq's former electricity minister, Aiham al-Sammarae, is not so much the infrastructure as it was earlier. At least two new power plants have been finished, another is under construction and three more are being rehabilitated for a total of 3,500 new megawatts of power. But even those that are finished are not running. The problem: No fuel.

AIHAM AL-SAMMARAE: We have the 1,850 megawatt run by fuel, diesel fuel, and we said during the summer we needed $300 million to buy that fuel. The government failed to give us that money and American, they don't like to spend the money from the donations which they promise us, so we're stuck. [...](2)
Now why would Iraq's government -- or the US, for that matter, have to purchase the fuel, given Iraq's oil production capacity in 2005? The full answer is a typical tale of Iraq's problems since Saddam Hussein invaded Kuwait, which led to the US bombings of the Iraq's infrastructures, which led to years of economic sanctions on Iraq, which led to, which led to, which led -- and finally wheeling all the way back to the creation of the Iraq nation.

So the short answer is that several factors, not simply insurgent attacks on Iraq's oil facilities and pipelines, forced Iraq's government to cough up billions to import fuel and Washington was caught short by the astronomical unforeseen expense. The upshot, like a stone cast into a still pond, was rings of problems leading to other rings of problems.

By the end of 2003, CPA staff had learned to their horror that every attempted solution to any of Iraq's infrastructure problems generated a no-win situation that in turn generated more rings of problems. Nowhere was this phenomenon more evident than in CPA and subsequent Iraq government attempts to scale back Iraq's hopelessly bloated ministry staffs and bring in desperately needed privatization to some of Iraq's key government sectors.

But the great thing about objective reality is that it keeps flogging you to find an exit from a hellish maze. Objective reality, in this case, is 130 degree temperatures in the summer in Baghdad. That means Iraqis must have more electricity, which also means they need more fuel.

Pundita is overjoyed to report that the door out of hell has been pried open by a series of grand compromises. After years of wrangling, on Tuesday Iraq's Parliament approved a law privatizing the country's oil-refining sector. The law will lure investment and stem a fuel shortage. Here is the Earth Times analysis of the law and its ramifications:
The law [...] is a step toward relinquishing government involvement in the refining sector and, when poverty is alleviated, moving Iraqi consumers from state-subsidized to market prices for fuel.

Oil Minister Hussain al-Shahristani told UPI Wednesday from his mobile phone in Baghdad that the government will provide incentives to both domestic and foreign private oil companies whose refinery plans the ministry approves.

"This is a law that will privatize the refining sector in Iraq and allow the private sector, whether it's local or international investments, to be able to invest in refining activities in Iraq, including building refineries," Shahristani said.

The refinery law is not the same as the highly contested oil law, stuck in Parliament, which would govern access to and development of Iraq's vast oil reserves.

Despite its oil wealth, Iraq produces less than 2 million barrels per day -- compared with 2.6 million bpd before the war -- and exports more than three-quarters of it. That income covered more than 90 percent of the 2006 federal budget.

Demand for products such as gasoline, cooking and heating fuel is being met by the maxed-out domestic refineries -- which also suffer from sabotage, fuel smuggling and electrical shortages -- and regular fuel imports.

Earlier this month Iraq put out tenders for 1.3 million gallons of gasoline per day for the second half of this year, as well as tenders for kerosene, gas oil and other cooking and heating fuels. The security situation has caused import problems in the past.

In order to produce more fuel from Iraq's own oil supply, Shahristani said the law allows the ministry to offer private refineries "long-term supply of required crude oil at discount price from the market price on the day of supply." The price will be 1 percent below the price at which the State Oil Marketing Organization is selling the oil.

Shahristani said the deal gets sweeter because importers of Iraqi oil won't have to ship it to refineries outside the country, but make fuels in an established market.

"When you produce your fuel product in country you will not need to import it from outside," Shahristani said, though he also said the companies will be "totally free" to export the fuel if they can make more money doing it.

He said the law requires a certain percentage of Iraqi workers to be hired for a given project, leading to more jobs, more refining capacity and more fuel.

A company must submit a proposal to the Oil Ministry, "either on their own or in partnership with one of the Ministry of Oil companies," Shahristani said.

If approved, the ministry will also offer infrastructure support, sweet land deals and discounted utilities costs, he said, explaining such projects have "reasonable profit margins but not very large and investors have to be encouraged to come to areas like Iraq to start their work."

Shahristani said it is not only the stark security situation that's preventing investment, but Iraq is "an evolving economy from totally centralized to free market, and the economic system has not really developed to a point" that investors are confident in the safety of their investments.

The "new" Iraq as a free-market state isn't the goal of the entire country. It was a priority of the Bush administration, though. As head of the Coalition Provisional Authority, the first occupation administration of Iraq in 2003, Paul Bremer made it a guiding rule, shutting down 192 state-owned businesses where the World Bank estimated 500,000 people were working. The Washington Post reported in May that Deputy Undersecretary of Defense Paul Brinkley recently skirted the U.S. State Department's free-market-or-nothing mandate on Iraq's economy and began the process of reopening the factories.

The oil sector, however, at least upstream, was a harder sell. The debate over the oil law pits those who want strong central government control over oil planning and development against proponents of regional/local control, which would likely lead to more reliance on private companies. There is no overall agreement as to the type of contracts those companies would sign, sparking worries it will be too friendly to foreign companies.

Shahristani said Iraq's gradual move out of refining will let it put more into the upstream sector.

The refining law doesn't include any government sell-off of its state operations "because the country needs fuel products."

"Currently our policy is to keep our government-owned and operated refineries until we are sure the market can be supplied from the private sector," Shahristani said. "As the private sector takes over this activity, the government will be stepping down."

Last week Iraq again increased its prices for gasoline as part of its obligations to the International Monetary Fund and Paris Club agreements on debt relief and new loans, which are nudging Iraq toward capitalism.

Iraq has long subsidized fuel to its citizens. That, in part, is spurring smugglers to take advantage of the high demand, long fuel-station lines and cheap station prices. The government estimated late last year such a black market was routing $700 million a month. The Brookings Institution's Iraq Index estimates available fuel supplies are at about half the "stated goal."

The Planning Ministry estimated earlier this month unemployment averaged between 60 percent and 70 percent, but the government says it will continue decreasing subsidies.

Shahristani said the end decision to erase all fuel subsidies is part of the annual budget process but will likely not happen "until the standard of living of Iraqis is raised until they can afford the international prices
."
1) From BBC report

2) From PBS Newshour Report.
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