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Gasoline Crisis in Iraq

by Pratap ChatterjeeSpecial to CorpWatch
February 8th, 2006

Contract mismanagement and possible corruption in the Iraqi government are fueling a crisis over international gasoline delivery into Iraq. Citing a mountain of unpaid bills, the governments of Turkey and Saudi Arabia have shut off gasoline exports to Iraq. With its options dwindling and beleaguered Iraqis demanding fuel, Baghdad has begun to negotiate with former arch-rival, Iran. Meanwhile, hundreds of irate Iraqi security guards, who work for the gasoline delivery companies, are threatening to protest along the Kuwait border to demand payment.

Government officials in Baghdad and Washington claim that the cause of the gasoline shortage is "insurgent" or "terrorist" activity but the trucking companies say that the problem is often corruption and common criminal activity.

Iraq's gasoline comes from two sources: domestic refineries process a limited amount of the nation's crude into gasoline, but it is imports from neighboring nations that run most of the country's vehicles and generators. Saudi Arabia and Turkey supply more than half of Iraq's domestic needs. In August 2005, after Iraq's debt rose into the millions, Saudi Arabia turned off the spigot. On January 21st, after Baghdad's unpaid bill topped a billion dollars, Turkey stopped loading gasoline for Iraq.

The supply from Kuwait is also drying up. Lloyd-Owen International (LOI), a Florida-based company, had arranged to truck in 1.3 billion liters of gasoline from the Kuwait Petroleum Corporation to gas stations throughout Iraq over the last 19 months. On February 2, Alan Waller, chief executive officer of LOI, stopped supplies to Baghdad because of payment arrears. By this weekend, Iraq's imports had plummeted from the previous norm of 12 million liters a day to three million.

In a strongly worded letter he emailed to this weekend to Thomas Delare, the economic counselor at the United States embassy in Baghdad, Waller wrote: "The government of Iraq is unwilling to pay what is correctly owed us or even meet to discuss and that we cannot get any assistance from the U.S. administration in order to help. As such, I can only step back and pull all my international staff out of Iraq for their own safety and let the Iraqi people deal with the situation in their own way."

Waller claimed that the government of Iraq has illegally canceled his contract and is now negotiating with a different U.S. company, Global Network Transportation, to deliver fuel in Iraq. The non-payment has infuriated the Iraqi security guards on LOI's payroll, who threaten to line 400 trucks along the one-lane highway from Iraq to Kuwait to blockade the border.

In late 2003, local suppliers were charging 96 cents a gallon to purchase and deliver gasoline while Halliburton of Houston, Texas, charged an average of $2.65 a gallon for the same service via its sub-contractor Altanmia Commercial Marketing Company. In spring 2004, shortly before the country was handed over to the Iraqis, the U.S. military said the contract was too expensive and canceled it.

The new Iraqi government then awarded an identical gasoline supply contract to LOI and its partners, Geotech Environmental Services of Kuwait. LOI charged one-seventh of Altanmia's price for delivery, a mere 18 cents a gallon compared to the premium that the military had paid Halliburton previously.

Waller says LOI has delivered 37,000 tankers of gasoline throughout Iraq over the last 19 months "without losing a single tanker to insurgent or terrorist activity," unlike Halliburton's convoys which were frequently attacked. LOI/Geotech's contract was supposed to run through June 2006, but is now in doubt.

Production Slump

To make matters worse, sabotage and cold weather have plunged Iraq's own oil production and refining into crisis. Despite sitting on the world's third biggest oil reserves, Iraq's exports slumped from a high of 2.1 million barrels per day just 1.1 million barrels a day in December, their lowest level since the war in 2003.

This slide, together with the delivery crisis, has led to major gasoline shortages in Baghdad, where vulnerable drivers wait in quarter-mile-long lines. The capital's erratic electricity has exacerbated the problem by forcing people to run to gas-hungry generators to keep the lights on and the air conditioning running in their houses and stores.

No matter what else was wrong under Saddam Hussein, gasoline and kerosene cooking oil were always available and cheap. The U.S. government maintained this policy of supplying gasoline at just 20 cents a gallon, well below its actual cost. But the cash-strapped Iraqi government has recently changed that policy, tripling gasoline prices at the end of the year, under pressure from the International Monetary Fund. This price hike has become a major source of anger but it bought Baghdad a $685 million IMF loan on December 24, 2005.

Contention over the price increase split the ministry of oil, which is supposed to oversee production and distribution. Iraq's oil minister Ibrahim Bahr al-Ulum was first asked to leave his post in late December 2005, when he protested the fuel price increase.

Although al-Ulum returned to his job in early January, a week ago the government again asked him to resign.

Refinery Attacks

Blame for the crisis spreads as easily as oil in a puddle. Government officials in Baghdad and Washington charge that corrupt mid- and low-level officials are collaborating with "insurgents" who have created chaos by attacking domestic fuel convoys and pipelines and siphoning off supplies to sell at a profit.

Ali Allawi, Iraq's finance minister, was quoted in the February 4 New York Times saying that 40 to 50 percent of all oil-smuggling profits in the country are diverted away from the government. By infiltrating senior management positions at the major northern refinery in Baiji and threatening truck drivers, insurgents have been able to tap into pipelines, empty trucks, and sell the oil or gas themselves, he says.

Old fashioned corruption has made matters worse. Theft was rife at the Baiji refinery Radhi Hamza al-Radhi, said the chair of Iraq's Commission on Public Integrity. One example is an Iraqi member of parliament from the Conciliation and Liberation Bloc, Meshaan al-Juburi, who stole money earmarked for armed security he promised to provide, according to the New York Times.

Jubiri's tribe is powerful in Salahuddin Province, through which the oil pipeline from Baiji runs. He has since fled the country and is now believed living in Syria.

In another incident, the director of a major oil storage plant near Kirkuk was arrested this weekend with other employees and several local police officials. They were charged with helping to orchestrate a March 2 mortar attack on the plant, a Northern Oil Company employee told the New York Times.

But Waller told CorpWatch that while "terrorist" groups are responsible for many violent attacks, the main problem is criminal gangs and poor people trying to survive. "This country is like Russia after the fall of the Soviet Union."

"Members of the U.S. military have said on CNN that long fuel lines in Baghdad are due to insurgent activity - not true," the LOI executive says. The real problem is "very simple. Lack of payment is forcing Iraq into chaos and corruption."

Indeed al-Ulum, the former oil minister, told the London-based newspaper Al Hayat late last year that "oil and fuel smuggling networks have grown into a dangerous mafia threatening the lives of those in charge of fighting corruption" according to a BBC translation.

Working on a Resolution

With gasoline supplies dwindling and anger growing, Washington and Baghdad are scrambling to return Iraq to what passes for normal. Iraqi oil ministry officials say that the payments will resume soon. "The oil ministry is working with the government in order to speed up the payment process. There is no problem. It is just a matter of time and the money will be paid," ministry spokesman Asim Jihad told reporters.

U.S. embassy officials are more pessimistic. "I scheduled to have some high level meetings in the next several days with Ministry of Oil officials," Delare wrote to Waller on February 6. "I wish I had encouraging news for you, but despite our efforts to resolve the payments arrears problems, we have had no success so far," the embassy economic counselor in Baghdad added.

In an e-mail update to CorpWatch, Delare added: "The fuel situation is regarded as a very serious matter that is prompting daily contact between embassy and the government at all levels -- from the ambassador and his counterparts to more technical staff and their interlocutors."

But officials in Baghdad do have another fallback plan -- their one-time arch enemy, Iran, which is close to the current Iraqi government. Indeed this subject was discussed as far back as last July when Iraqi Prime Minister Ibrahim al-Jaafari visited Tehran, a prospect that mystifies Waller given the ongoing political disputes between Iran and the U.S. government.

"Due to payment issues and the fuel problems the U.S. backed government of Iraq is now seeking to purchase and import fuel from Iran, and Najaf is the new Iranian capital of Iraq," Alan Waller, chief executive officer LOI, wrote on February 4th, to the U.S. embassy in Baghdad.