IRAQ - The Energy Sector.

The downstream oil sector was devastated during the January-February 1991 war by severe damages resulting from ballistic missiles and aerial bombardment. The refineries, lube plants, storage depots and water treatment facilities

were hit. Oil and LPG retail outlets were damaged as

well. But the Iraqi authorities started reconstruction soon after the war and facilities were rapidly rebuilt, although with poor equipment and spare parts, so that basic demands for all products in the local market could be met. Compromise on quality was necessary because of the shortage of chemicals resulting from the embargo.

Currently, the local market in Iraq is divided into three segments. These are the northern and southern no-fly zones, and the central zone which alone is fully controlled by the regime of President Saddam Hussein. The northern no- fly zone lies above the 36th parallel and the southern zone lies below the 33rd parallel. The latter was extended upward from the 32nd parallel on Sept. 4, 1996, in a move by the Clinton administration to punish Saddam for joining the military offensive of the Kurdish Democratic Party (KDP) to control the Kurdish north of Iraq in late August 1996. Iraq as a whole lies between the 29th parallel in the south and the 37.5th parallel in the north.

The local market consumes about 465,000-500,000 b/d of refined products. The vast majority of this is consumed in the central zone. The southern zone, which functions as a safe haven for Iraqi Shiites under allied air patrols, is the most impoverished part of Iraq. Demand in this no-fly zone is low, compared to the northern zone where there is a greater degree of economic activity.

In the central region, energy demand is more than before the Gulf war. This is partly because the price of a gallon of petrol became the cheapest in the world in subsequent years. It is estimated that this zone consumes about 450,000-480,000 b/d. But the rise in demand is not uniform across the household, industrial and power sectors.

Household demand has grown more rapidly than in the case of industries and power sectors. This is because, increasingly, factories and power plants have to operate way below capacity or shut down due to lack of spare parts. At present industries are operating at about 10% of their pre-war capacity.

During the US-British air war on Dec. 16-20, 1998, the Basra oil refinery was hit. The damage did not affect the central region, which is supplied by the refineries of Daura and Baiji. But the damage caused the smuggling of oil products to be suspended for weeks, until the refinery was repaired. Most of Basra refinery's output is for smuggling through the Gulf, to Turkey via Kurdistan, and to Jordan through the western province (see DT 19).

Power plants are working at less than 50% of capacity because spare parts are not available and the government cannot afford to purchase them. As a result, while demand has increased, the power cuts have become more frequent than in the previous years.

Under the expanded oil-for-aid deal, the UN in late January 1999 released a bit more than $81m for the Baghdad government to buy equipment and spare parts to increase power supplies and to upgrade oil pumping.

The bulk of the power generation purchases, $74.9m in gas turbines, was to come from China. In 1998, Baghdad was allowed to buy $70m worth of power equipment from a Russian company. In late 1996, Baghdad was allocated $36m for the purchase of spare parts for power supply in 1997, which only covered 4% of the national grid's requirements.

Lack of spare parts had begun to have an effect on the power sector by late 1995. The problem came into the open in January 1996 as the media urged power plants not to cut supplies to hospitals, with households complaining of power cuts lasting up to 10 hours. But power cuts affecting households at times in 1998 lasted more than 10 hours.

Big numbers of people have since late 1995 turned to the use of private generator sets as a result. In most cases these were reconditioned and re- assembled sets, parts of which were smuggled in from Turkey and Jordan. State TV has since been urging Iraqis to reduce power use and warned that those siphoning off electricity would be punished.

Iraq outlined its perspective on domestic demand for oil products as part of a paper presented by the oil ministry at a Baghdad oil/gas seminar on March 11- 12, 1995. The paper pointed out that domestic consumption of oil products, lubricants and LPG had shown continuous growth from 1970 to 1990. During that period consumption of gasoline had increased from about 9,500 b/d to 73,500 b/d, gasoil had risen from 10,400 b/d to 70,900 b/d and kerosine had nearly tripled from 12,700 to 34,200 b/d.

The paper estimated future demand, "using the analysis of the consumption figures during the previous 25 years and taking into account the detrimental effect of the embargo".

In March 1999 sources at the Iraqi oil ministry said the paper's forecasts for the years 2000 to 2010 were still valid, as follows (in '000 t/y):

                IRAQI PETROLEUM CONSUMPTION

Year     LPG    Gasoline  Mid.Dis  Lubes    Wax     Grease  Asphalt
1995     1540     2920     5000     260     2930      8200     400
2000     2150     3390     6070     300     3380      9470    1050
2005     2230     4560     8750     350     3820     10750    1200
2010     2590     5210     9790     390     4260     12030    1350