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Oil

Before the recent conflict, Iraq produced some 2.5 million barrels of petroleum each day. With the lifting of the UN Embargo put in place after the last Gulf War, the Iraqi oil industry has the potential and promise to generate fully 95 percent of the nation's foreign exchange earnings, stabilizing its economy and future.

The Army Corps of Engineers is leading Task Force Restore Iraqi Oil (RIO). The TF RIO mission is to restore the oil production, oil refining and gas processing capability to pre-war levels for the benefit of the Iraqi people. The mission includes humanitarian assistance. RIO is providing emergency supplies of gasoline, LPG and other petroleum products to distribution points operated by the Iraqi Ministry of Oil for use by the Iraqi people. Exceeding their project goals, the Iraqi Ministry of Oil and TF RIO, working together, have brought crude production up to over 2 million barrels per day.

The future of Iraq's oil industry has been a topic of much conversation prior to, during and following the ousting of Saddam Hussein. The US administration is counting on a vibrant oil industry to provide and pay for the reconstruction of the country. This desire to raise funds will be relieved, as a limited resumption of exports begins sometime midsummer, marked by the opening of the al-Faw oil terminal.

In late May 2003, the United Nations gave the United States and Britain broad authority to govern Iraq, including the oil industry. This control is in the form of an advisory board, which is presently running Iraqi's oil industry. The board, operated similarly to a corporation and the entire industry has a mix of US military, US government-appointed officials serving as advisers, and Iraqis manning the ministries and oil installations.

Personnel:

  • Philip J. Carroll, a former Shell Oil chief executive is presently the chairman of the advisory board.
  • Fadhil Othman, who has 20 years of experience in the Iraqi Oil industry, has been appointed as vice chairman.
  • Thamir Ghadhban is the acting oil minister.
  • Nabil Lammoza has been appointed Director of Planning at the Iraqi Oil Ministry,
  • Hashimal-Khersan former head of Iraq's northern upstream operations may be appointed to the board as well as
  • Ali Rajeb Hassan is presently deputy director of Iraq's State Oil Marketing Organization, however he is expected to step down.

The U.S. has dropped most trade sanctions against Iraq and moved to protect the country's oil revenue from legal claims.

There are two major oil regions in Iraq. The southern region consists of 12 producing oil fields and northern region consists of 10 producing oil fields and 2 producing gas fields. The Rumalia fields in the south and the Kirkuk fields in the north produce approximately 70% of the country's crude oil and natural gas production. The large GOSPs associated with the oil fields separate the gas from the oil, and additional stabilization plants in the north remove toxic hydrogen sulfide gas.

A system of pipelines throughout the country transports crude oil and gas from the wells through the GOSPs and pump stations to the refineries and gas processing plants or to export terminals. Product pipelines of varying sizes transport LPG, benzene, and diesel to the distribution points and export outlets. The network includes strategic pipelines to transfer large volumes for domestic use and export pipelines for transporting to Turkey, Syria, and marine platforms in the Arabian Gulf.

There are three major refineries in Basrah, Baghdad, and Bayji, accounting for 70% of the refined product production in the country. Several smaller modular refineries, "topping plants" are situated in key areas throughout the country. These topping plants produce gasoline, LPG, kerosene, diesel, and various industrial lubricants to meet specific local and regional needs.

Elements of the infrastructure work in concert to create a carefully balanced, inter-dependent operation. Water is a key resource for oil production. Water is used to wash the salt from the crude and to inject into the underground reservoir for pressure maintenance. An important and closely related interface is the electrical power system, which requires crude oil or natural gas to power the generating plants. A failure of one component in the system creates a related problem elsewhere in the system. For example, the electrical power grid is dependent upon fuel from the oil and gas system while the oil field production facilities require electrical power to produce the fuel.

Production

Iraq is slowly beginning to bring oil production back up to pre-war levels. Prior to the war, Iraq was producing approximately 2.5 million barrels of oil per day. During the war oil production dropped to zero. Current production is approximately 800,000 barrels per day with production reaching export levels sometime in June or July at around 1.5 million barrels per day. This is possible largely because Iraq's oilfields were seized almost entirely intact with a lack of electricity and other utilities as the primary source of post-conflict production problems.

The northern fields around the city of Kirkuk are presently producing the majority of current output, about 600,000 barrels per day, with the remaining production coming from the fields surrounding Basra.

Iraq is currently relying on the oil refinery near Baghdad for the bulk of refining. Iraq has two other refineries that are presently unable to export. The Baijy refinery near the Kirkuk oilfields has suffered looting and electricity shortages. The Basra refinery in the south is operational, albeit severely below capacity. Exports are expected to resume from al-Faw oil terminal, which loads oil on to supertankers.

Contracts

Thamir Ghadhban has recently stated that "Any contract will be dealt with on its merits and in due time. We will open the door for foreign investment, but according to a formula that safeguards the interests of the Iraqi people. It will still be a win-win for both sides." This is said to include a systematic review of all contracts awarded during the Hussein regime's rule of Iraq. Presently the only post-conflict oil-related contracts have been US awarded contracts. Kellogg Brown & Root, a subsidary of Halliburton, has that contract for short-term oil field repair.

On October 29, 2003 the U.S. Army Corps of Engineers announced that it had amended a solicitation for two contracts for future work restoring the Iraqi oil infrastructure to pre-war production levels. The Corps will award the contracts at a later date. The delay will allow the Corps to increase contract capacity within the scope of the full and open competitive contracts. The two new contracts complete the pre-war acquisition plan to replace the non-competitive contract.

While these requirements will increase the contract capacity, they will not change the scope of work. The award is now expected to occur in 30 to 60 days to give offerors an opportunity to revise their proposals and allow the Corps to evaluate these revisions. Two contracts will be awarded through full and open competition. The Corps has always planned to replace the non-competitive contract awarded in March to Kellogg Brown and Root with a competitive contract.

DoD Mission for Repair and Continuity of Operations Of the Iraqi Oil Infrastructure

THE MISSION

Prior to the commencement of hostilities in March 2003, the Department of Defense (DoD) had planned for the repair and continuity of operations of the Iraqi oil infrastructure. This planning encompassed the full range of activities that might need to be performed to restore or continue the operation of this industry, which is of vital importance to the health of the Iraqi economy.

The U.S. considered such contingency planning necessary because of Saddam Hussein's actions in Kuwait in 1991, when Iraqi forces damaged 750 wells. That destruction resulted in an environmental disaster as well as a tremendous blow to Kuwait's oil production capability. The U.S. had grounds to believe Saddam was planning to destroy Iraq's own oil infrastructure in the event of hostilities. Such destruction, especially if it extended beyond oil wells to pipelines, pumping stations, or other elements of the infrastructure, could have drastically reduced the Iraqi oil industry's capability to produce income on which the Iraqi people depend. Destruction of the oil fields would result in potential loss of $20 to $30 billion a year in oil revenues for Iraq, as well as an estimated cost of between $30 and $40 billion to recreate the infrastructure.

When the war began, some wells were sabotaged and set ablaze by Saddam Hussein's forces, but coalition forces were successful in securing most oil fields and infrastructure before major damage could occur. The Department put its planning to use immediately, and the well fires were extinguished and the associated environmental damage was limited. The results of ongoing assessments of the condition of oil facilities throughout the country will determine what actions need to be taken to repair and restore the oil infrastructure. These activities may include extinguishing oil fires; assessing the condition of oil-related infrastructure; cleaning up oil spills or other environmental damage at oil facilities; engineering design and repair or reconstruction of damaged infrastructure; assisting in making facilities operational; distribution of petroleum products; and assisting the Iraqis in resuming Iraqi oil company operations.

PLANNING FOR THE MISSION

The planning effort was done by Brown & Root Services (BRS) under a task order issued under the Army's Logistics Civil Augmentation Program (LOGCAP) contract. The government contracted with BRS to perform the planning effort because BRS is the Army's contractor for the Logistics Civil Augmentation Program (LOGCAP). The LOGCAP contract is used to develop plans to address such requirements of Combatant Commanders. When a specific plan is needed, a task order is issued under the contract. The current LOGCAP contract was awarded to BRS on December 14, 2001, after a competitive source selection process. This is the third LOGCAP contract in a series of LOGCAP contracts that have provided capability to support global contingencies since 1992. The first LOGCAP contract was held by BRS from 1992-1996. The second LOGCAP contract was awarded after competition to DynCorp from 1997-2002. The latest competition resulted in the December 2001 award of the third LOGCAP to BRS.

The Commander, CENTCOM, identified a requirement for contingency planning for repairing and providing for continuity of operations of the Iraqi oil infrastructure. This included planning for extinguishing oil well fires and assessing damage to oil facilities in the immediate aftermath of hostilities. The competitively awarded LOGCAP contract is used to develop plans to address such requirements of Combatant Commanders. When a specific plan is needed, a task order is issued under the LOGCAP contract.

The Army Field Support Command also issued a letter contract to the planning contractor, BRS, that was primarily for pre-positioning of fire fighting equipment and the staffing and training of damage assessment teams that could be ready to deploy on short notice. This effort was necessary to enable rapid response to oil well fires. The estimated cost plus fixed fee of this contract is $37.5 million.

EXECUTION OF THE MISSION

The Secretary of Defense designated the Army as Executive Agent for this mission, and the Secretary of the Army assigned it to the Corps of Engineers. Its job is to do what is necessary to provide for repair and continuity of operations of the Iraqi oil infrastructure. The U.S. hopes the vast majority of Iraqi oil industry workers, widely respected for their skill and industriousness, will continue to perform their jobs. Iraqi workers are being actively recruited to return to their jobs, and more than 1,000 have done so to date.

To carry out this mission, the Corps of Engineers will rely in large part on contractors with the needed expertise and specialized resources. In this initial phase, the prime contractor involved, Brown & Root Services, of Houston, TX, (a division of Kellogg, Brown & Root (KBR)) is the contractor that developed the contingency plans for the government. Only the contractor that developed these complex plans could commence implementing them on extremely short notice.

Given this reality, the Corps of Engineers put in place a "bridge" contract with Brown & Root, which is being used for an interim period as a bridge to competition. The contract with Brown & Root is an Indefinite Delivery/Indefinite Quantity (ID/IQ) contract that enables the government to immediately obtain, through the placement of task orders, the specific services it needs to execute contingency plans. The Corps of Engineers will limit orders under this contract to only those services necessary to support the mission in the near term.

The total value of the "bridge" contract with Brown & Root will be the sum of the values of the orders placed under it. Thankfully, there was relatively little damage resulting from sabotage and hostilities, but years of neglect and post-hostility looting have taken a toll. Specialized teams are assessing the condition of oil facilities; to date, assessments are completed or have been undertaken on roughly 25 percent of the Southern oil field infrastructure. It is not yet possible to predict how much of what kind of work will be required in the near term to enable operation of the infrastructure such that Iraq's needs are met. (For example, a near-term need is for the infrastructure to be able to satisfy domestic demand for fuel products such as propane for cooking and diesel fuel for running generators. This alone requires the infrastructure to produce oil, have it flow to refineries, have refineries operate, and have the country's internal fuel distribution process work.) As of May 6, 2003, five orders have been placed totaling $76.8 million. Under these orders, the contractor has been required to first, before hostilities began, mobilize fire fighting, damage assessment and oil spill assessment and response teams to train and rehearse safe shut-down procedures with military maneuver elements, and design long lead time equipment. After the beginning of hostilities, the contractor was tasked to extinguish fires, respond to oil spills, assess damage, perform emergency repairs, and provide life support facilities and services to contractor and government employees working on the project.

The government's strategy has been to compete the execution effort at the earliest reasonable opportunity consistent with the needs of the mission. The government will solicit competitive proposals to provide the broad range of services that may need to be performed to support this mission in the months ahead. The contracts awarded as a result of this competition will replace the "bridge" contract now in place with BRS. It is anticipated that multiple contracts will be awarded.

The fact that the Department was planning for the possibility that it would need to repair and provide for continuity of operations of the Iraqi oil infrastructure was classified until March 2003. This prevented earlier acknowledgement or announcement of potential requirements to the business community.



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