    Rebuilding Iraq: Integrated Strategic Plan Needed to Help Restore
    Iraq's Oil and Electricity Sectors (15-MAY-07, GAO-07-677).

    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.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-677
        ACCNO:   A69665
      TITLE:     Rebuilding Iraq: Integrated Strategic Plan Needed to Help
    Restore Iraq's Oil and Electricity Sectors
         DATE:   05/15/2007
      SUBJECT:   Critical infrastructure
    	     Crude oil
    	     Electric energy
    	     Federal aid to foreign countries
    	     Federal funds
    	     Foreign governments
    	     Iraq War and reconstruction
    	     Oil resources
    	     Strategic planning
    	     Electric power generation
    	     Electric power transmission
    	     Crude oil pipeline operations
    	     Budgeting
    	     International organizations
    	     Iraq
    	     Iraq Relief and Reconstruction Fund

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    GAO-07-677

         * [1]Results in Brief
         * [2]Background
         * [3]The United States, Iraq, and Donors Have Funded Reconstructi

              * [4]United States Has Spent Billions in U.S. and Iraqi Funds to

                   * [5]United States Has Spent Billions to Support
                     Reconstruction o
                   * [6]U.S. Agencies Spent Billions in Iraqi Funds on Oil and
                     Elect

              * [7]Billions of Additional Dollars Needed to Rebuild Oil and Ele

                   * [8]Billions of Additional Dollars Are Needed to Fund the
                     Rebuil
                   * [9]Iraq's Oil and Electricity Ministries Have Not Spent
                     Existin

              * [10]Iraq Has Not Made Full Use of International Financial Assist

         * [11]Iraq's Oil and Electricity Production Goals Have Not Been Me

              * [12]U.S. Oil and Electricity Goals Have Not Been Met

                   * [13]Iraq's Crude Oil Production and Exports Have Not Met
                     Goals
                   * [14]Iraq's Crude Oil Production May Be Overstated
                   * [15]Iraq's Electricity Production Has Not Met Goals or
                     Increasin

              * [16]Most Major U.S. Projects Completed, but Iraq Faces Difficult

         * [17]Major Challenges Hinder Efforts to Meet Iraq's Oil and Elect

              * [18]Poor Security Conditions Have Slowed Reconstruction and Incr
              * [19]Corruption, Smuggling, and Other Illicit Activities Impact R
              * [20]Inadequate Legal and Regulatory Framework and Financial Mana
              * [21]Lack of Integrated Energy Planning Creates Inefficiencies an

         * [22]Conclusions
         * [23]Recommendations for Executive Action
         * [24]Agency Comments and Our Evaluation
         * [25]Appendix I: Objectives, Scope, and Methodology
         * [26]Appendix II: Comments from the Department of State
         * [27]Appendix III: GAO Contact and Staff Acknowledgments

              * [28]GAO Contact
              * [29]Acknowledgments

                   * [30]Order by Mail or Phone

    May 2007

    REBUILDING IRAQ

    Integrated Strategic Plan Needed to Help Restore Iraq's Oil and
    Electricity Sectors

    GAO-07-677

    On June 22, 2007, the Web version of this report was reissued to reflect
    changes to enemy-initiated attack data provided by the Defense
    Intelligence Agency. On June 13, 2007, DIA notified GAO that its April
    2007 attack data were incorrect because it had excluded attacks from a new
    subordinate command established on April 1, 2007. According to DIA,
    Multi-National Division-Center did not properly forward its April attack
    data because of inadequate reporting procedures; it has since corrected
    the problem. Accordingly, enemy attacks in April totaled approximately
    4,900 rather than the 4,500 previously reported (see page 34). We also
    revised the corresponding narrative to show the average number of daily
    attacks increasing from 157 in March 2007 to 163 in April 2007 (see page
    33).

    Contents

    Letter 1

    Results in Brief 2
    Background 6
    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 12
    Iraq's Oil and Electricity Production Goals Have Not Been Met, Oil
    Production Figures May Be Overstated, and Iraq Faces Difficulties
    Sustaining Infrastructure 21
    Major Challenges Hinder Efforts to Meet Iraq's Oil and Electricity Needs
    33
    Conclusions 43
    Recommendations for Executive Action 43
    Agency Comments and Our Evaluation 44
    Appendix I Objectives, Scope, and Methodology 51
    Appendix II Comments from the Department of State 55
    Appendix III GAO Contact and Staff Acknowledgments 58
    Tables
    Table 1: Status of Appropriation Funds Apportioned to the Oil and
    Electricity Sectors, as of September 30, 2006 13
    Table 2: Iraqi Funds Used for U.S. Oil and Electricity Sectors, as of
    December 31, 2005 15
    Table 3: U.S. Goals and 2006 Averages for Iraq Oil Sector 24
    Table 4: U.S. Goals and 2006 Averages for Iraq Electricity Sector 28

    Figures

    Figure 1: Overview of Oil Network 7
    Figure 2: Crude Oil Production Levels in Iraq, 1970-2005 9
    Figure 3: Overview of Electricity Network 10
    Figure 4: 2006 Ministry of Oil and Electricity Spending by Major Category,
    as of November 2006 18
    Figure 5: Iraqi Reported Crude Oil Production, Exports, and U.S. Goals,
    June 2003 through December 2006 23
    Figure 6: Comparison of IRMO and EIA Data on Iraq's Crude Oil Production
    26
    Figure 7: Peak Electricity Generation and Demand in Iraq, May 2005 to
    December 2006 29
    Figure 8: Enemy-Initiated Attacks against the Coalition and Its Iraqi
    Partners 34
    Figure 9: Downed Transmission Tower in Iraq 35
    Figure 10: Attack on Oil Pipeline 36

    Abbreviations

    CERP Commander's Emergency Response Program
    CPA Coalition Provisional Authority
    DAD Donor Assistance Database
    DFI Development Fund for Iraq
    DOD Department of Defense
    EIA Energy Information Administration
    EPPS Electrical Power Security Service
    GRD Gulf Regional Division
    IDA International Development Assistance
    IMF International Monetary Fund
    IRFFI International Reconstruction Fund Facility for Iraq
    IRMO Iraq Reconstruction Management Office
    IRRF Iraq Relief and Reconstruction Fund
    LPG liquefied petroleum gas
    mbpd million barrels per day
    mscfd million standard cubic feet per day
    mw megawatt
    mwh megawatt hours
    PCO Project and Contracting Office
    SIB Strategic Infrastructure Battalions
    SIGIR Special Inspector General for Iraq Reconstruction
    tpd tons per day
    UN United Nations
    UNDP United Nations Development Programme
    USAID United States Agency for International Development

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office
    Washington, DC 20548

    May 15, 2007

    Congressional Committees

    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.1 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.2
    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.

    1These figures include the Iraq Relief and Reconstruction Funds provided
    in the Emergency Wartime Supplemental Appropriations Act, 2003, P.L.
    108-11, and in the Emergency Supplemental Appropriations Act for Defense
    and for the Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106,
    which are known as IRRF 1 and IRRF 2, respectively.

    2In this report, the oil sector, which is under the direction of Iraq's
    Ministry of Oil, refers broadly to crude oil, associated natural gas
    production and exports, and petroleum products (such as gasoline) that are
    refined in Iraq or imported.

    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.3

    Results in Brief

    While billions have been provided to rebuild Iraq's oil and electricity
    sectors, Iraq's future needs are significant and sources of funding
    uncertain. For fiscal years 2003 through 2006, the United States made
    available about $7.4 billion and spent about $5.1 billion to rebuild the
    oil and electricity sectors. The United States spent an additional $3.8
    billion in Iraqi funds on the two sectors, primarily on oil and
    electricity sector contracts administered by U.S. agencies. However,
    according to various estimates and officials, Iraq will need billions of
    additional dollars to rebuild, maintain, and secure Iraq's oil and
    electricity sectors. The Ministry of Electricity estimates that about $27
    billion will be needed to meet the sector's future rebuilding
    requirements; a comparable estimate has not been developed by the Ministry
    of Oil. Since the majority (about 70 percent) of U.S. funds has been
    spent, the Iraqi government and the international donor community
    represent important sources of potential funding. However, prospects of
    such funding are uncertain. First, the Oil and Electricity Ministries have
    encountered difficulties spending capital improvement budgets because of
    weaknesses in budgeting, procurement, and financial management. As of
    November 2006, the Ministry of Oil had spent less than 3 percent of its
    $3.5 billion 2006 capital budget to improve Iraq's oil facilities. Second,
    Iraq has not made full use of potential international contributions and it
    is unclear what additional financial commitments, if any, will be provided
    to Iraq's oil and electricity sectors as part of a new international
    compact (agreement), according to U.S. officials. As of March 2007, donors
    had committed $580 million in grants for the electricity sector and had
    offered loans for oil and electricity projects; however, Iraq has not
    accessed these loans in part due to concerns about its high debt burden.

    3GAO, Rebuilding Iraq: Governance, Security, Reconstruction, and Financing
    Challenges, [31]GAO-06-697T (Washington, D.C.: Apr. 25, 2006); Rebuilding
    Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S.
    Goals, [32]GAO-06-788 (Washington, D.C.: July 11, 2006); Rebuilding Iraq:
    More Comprehensive National Strategy Needed to Help Achieve U.S. Goals and
    Overcome Challenges, [33]GAO-06-953T (Washington, D.C.: July 11, 2006);
    and Securing, Stabilizing, and Rebuilding Iraq: Key Issues for
    Congressional Oversight, [34]GAO-07-308SP (Washington, D.C.: Jan. 9,
    2007).

    Despite 4 years of effort and the substantial resources devoted to
    restoring Iraq's oil and electricity sectors, production in both sectors
    has consistently fallen below U.S. program goals. Key U.S. goals for the
    oil sector are to reach a crude oil production capacity of 3 million
    barrels per day (mbpd) and crude oil export levels of 2.2 mbpd, and to
    increase production capacity and stock levels of refined fuels. However,
    State Department data indicate that actual crude oil production and
    exports averaged, respectively, about 2.1 mbpd and 1.5 mbpd in 2006, and
    refined fuel production and stock levels did not meet the goals set. In
    addition, IRMO's estimate of Iraq's oil production levels may be
    overstated since inadequate metering does not allow precise measurement of
    crude oil production. The U.S. goal for electrical peak generation
    capacity is 6,000 megawatts (mw); however, electricity in Iraq averaged
    4,280 mw of peak generation per day in 2006, about 3,950 mw short of
    demand in 2006. The Iraqi government projects that it will not be able to
    fully meet the demand for electricity until 2009. However, these
    projections assume that the Ministry of Electricity will be assured of a
    stable supply of the fuel needed for electricity generation, which has
    been lacking in the past due to poor coordination between the Oil and
    Electricity Ministries. Some improvements in current crude oil and
    electricity production levels may be achieved once the Army Corps of
    Engineers Gulf Region Division (GRD) finalizes its remaining oil and
    electricity projects, which are scheduled for completion by April 2008.
    However, these projects have experienced continued delays, undermining
    prospects for meeting U.S. production goals. Additionally, 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 required the use of
    fuel oils that resulted in increased maintenance costs and decreased power
    output.

    A variety of security, corruption, legal, and planning challenges have
    impeded U.S. and Iraqi efforts to restore Iraq's oil and electricity
    sectors. These challenges have made it difficult to achieve the current
    crude oil production and export goals that are central to Iraq's
    government revenues and economic development. In the electricity sector,
    these challenges have made it difficult to achieve a reliable Iraqi
    electrical grid that provides power to all other infrastructure sectors
    and promotes economic activity. The U.S. reconstruction effort was
    predicated on the assumption that a permissive security environment would
    exist. However, the deteriorating security environment continues to place
    workers and infrastructure at risk while protection efforts have been
    insufficient. Corruption, smuggling, and other illicit activities result
    in revenue losses and low cost recovery. Widespread corruption and
    smuggling reduce revenues that could be collected through the legal sale
    of refined oil products such as gasoline. According to State Department
    officials and reports, about 10 percent to 30 percent of refined fuels is
    diverted to the black market or is smuggled out of Iraq and sold for a
    profit. Moreover, the lack of an effective metering system within the
    electricity sector hinders efforts to accurately measure consumption and
    deter theft. Furthermore, according to U.S. and World Bank officials, the
    government also lacks an adequate legal and regulatory framework,
    including comprehensive hydrocarbon legislation that would govern
    distribution of future oil revenues and granting of exploration rights.
    Until this framework is established, it will be difficult to attract the
    billions of dollars in additional foreign investment needed to modernize
    Iraq's oil sector and ensure that the government has the oil revenues
    essential for future reconstruction and reconciliation. 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. According to the U.S.
    government, about $4 billion in potential revenues are lost each year
    through inefficient energy production practices, such as the flaring of
    natural gas, underscoring the need for such a plan.

    This report makes several recommendations, including that the Secretary of
    State, in conjunction with relevant U.S. agencies and in coordination with
    the donor community, work with the Ministries of Oil and Electricity to
    (1) develop an integrated energy strategy for the oil and electricity
    sectors that identifies, among other items, key goals and priorities,
    future funding needs, and steps for enhancing ministerial coordination;
    (2) set milestones and assign resources to expedite efforts to establish
    an effective metering system for both the oil and electricity sectors; (3)
    improve the existing legal and regulatory framework, for example, by
    developing fair and equitable hydrocarbon legislation, regulations, and
    implementing guidelines; (4) set milestones and assign resources to
    expedite efforts to develop adequate budgeting, procurement, and financial
    management systems; and (5) implement a viable donor mechanism to secure
    funding for Iraq's future oil and electricity rebuilding needs.

    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 of the Department of State, any U.S. agency, or
    the international donor community. State also commented that U.S. agencies
    are already taking several actions consistent with our recommendations. We
    recognize that these actions are ultimately the responsibility of the
    Iraqi government. However, it is clear that the U.S. government wields
    considerable influence in overseeing Iraq stabilization and rebuilding
    efforts. We also acknowledge that State has made some efforts to address
    the issues that led to our recommendations and have refined our report
    accordingly. However, we believe additional actions are warranted given
    the lack of progress that has been made over the last 4 years in achieving
    Iraq reconstruction goals. Also, some of State's 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
    and that the practical effectiveness of this effort will depend on whether
    the cell is able to obtain buy-in from the two Iraqi ministries. However,
    since the details of the strategy have not been released, it is still
    unclear whether this strategy will fully address 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. The uncertainty
    over ministry buy-in also underscores the importance of State working
    closely with other U.S. agencies, the government of Iraq, and the
    international donor community in crafting a new energy sector strategic
    plan.

    Background

    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.

    Figure 1: Overview of Oil Network

    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 2005.4 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.

    4The first year of data that the U.S. Department of Energy's Energy
    Information Administration (EIA) reports for Iraq is 1970.

    Figure 2: Crude Oil Production Levels in Iraq, 1970-2005

    Note: Data on Iraq's crude oil production include lease condensates. Lease
    condensates are hydrocarbons that are gaseous underground but become
    liquid above ground and are subsequently commingled with the crude oil.
    Therefore, the actual values for Iraq's crude oil production would be
    slightly lower if lease condensates were excluded from the data.

    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.5 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.

    5UN/World Bank, Joint Iraq Needs Assessment (Baghdad, Iraq: Oct. 2003).

    Figure 3: Overview of Electricity Network

    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.6 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.

    6GAO, Rebuilding Iraq: More Comprehensive National Strategy Needed to Help
    Achieve U.S. Goals, [35]GAO-06-788 (Washington, D.C.: July 2006).

    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

    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.

    United States Has Spent Billions in U.S. and Iraqi Funds to Support
    Reconstruction

    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.

      United States Has Spent Billions to Support Reconstruction of Iraq's Oil and
      Electricity Sectors

    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.

    Table 1: Status of Appropriation Funds Apportioned to the Oil and
    Electricity Sectors, as of September 30, 2006

    Dollars in millions
                                                              Funding
    Source of
    fundsa/authority        Agency/program     Apportioned Obligated  Expended
    Oil sector
    2003 Iraq Relief and    DOD/Restore Iraq        $166.0    $166.0    $166.0
    Reconstruction Fund     Oil
    (IRRF 1)/ P.L. 108-11
    The Natural Resources   DOD/ Restore Iraq        802.0     800.6     797.7
    Risk Remediation Fund   Oil
    (NRRRF)/ P.L. 108-11
    2004 Iraq Relief and    DOD                    1,724.7   1,604.6   1,163.0
    Reconstruction Fund
    (IRRF 2)/ P.L. 108-106
    Total oil                                     $2,692.7  $2,571.2  $2,126.7
    Electricity sector
    IRRF 1/ P.L. 108-11     DOD / Restore           $300.0    $299.9    $299.9
                               Iraq Electricity
                               USAID/ Restore             Not       Not       Not
                               Critical             available available available
                               Infrastructureb
    IRRF 2/ P.L. 108-106    DOD                    3,403.0   3,260.1   1,966.0
                               USAID                    836.6     836.6     741.9
    Commander's Emergency   DOD                      163.6     163.6       Not
    Response Program for                                             available
    FY2004-06 (CERP)c /P.L.
    108-106, P.L. 108-287,
    P.L. 109-13,
    P.L.109-148, P.L.
    109-234
    Total electricity                             $4,703.2  $4,560.2  $3,007.8
    Total                                         $7,395.9  $7,131.4  $5,134.5

    Sources: DOD, USAID, and State Department's Iraq Reconstruction and
    Management Office data.

    aAccording to the DOD comptroller's office, although some military
    construction funds also were used for reconstruction efforts, they were
    not apportioned by sector. Further, about $1.1 million of Operations and
    Maintenance, Army funds were initially apportioned, obligated, and
    expended for electricity projects. Also, $285 million in emergency
    supplemental funds were made available for cross-sector operations and
    maintenance sustainment of key U.S.-funded infrastructure.

    bAccording to USAID, IRRF 1 funds under its Restore Critical
    Infrastructure program were not apportioned by sector. Under this
    cross-sector reconstruction program, about $995 million was apportioned
    and obligated and about $939 million was disbursed as of September 30,
    2006.

    cDOD and its executing agency, the U.S. Army, were unable to provide
    complete data for U.S.-appropriated CERP funding for the electricity
    sector. Under CERP, DOD commits funds to projects once identified. DOD
    does not track sector commitments after the year of the corresponding
    appropriation. Thus, any updated data on amounts apportioned, obligated,
    or expended by sector are not available and not reflected in this table.

    Funding for electricity included about $164 million for the Commander's
    Emergency Response Program (CERP) during fiscal years 2004 to 2006.7
    Additional funding for CERP has been provided under the Department of
    Defense 2007 Appropriations Act,8 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.

      U.S. Agencies Spent Billions in Iraqi Funds on Oil and Electricity
      Reconstruction Activities

    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 regime9 and oil
    revenues in the Development Fund for Iraq (DFI).10 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.11 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, 2004.12 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.

    7Funding for CERP was made available in the following legislation:
    Emergency Supplemental Appropriations Act for Defense and for the
    Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106; Department of
    Defense Appropriations Act, 2005, P.L. 108-287; Emergency Supplemental
    Appropriations Act for Defense, the Global War on Terror, and Tsunami
    Relief, 2005, P.L. 109-13; Department of Defense, Emergency Supplemental
    Appropriations to Address Hurricanes in the Gulf of Mexico, and Pandemic
    Influenza Act, 2006, P.L. 109-148; and Emergency Supplemental
    Appropriations Act for Defense, the Global War on Terror, and Hurricane
    Recovery, 2006, P.L. 109-234.

    8P.L. 109-289.

    9"Vested assets" refers to former Iraqi regime assets held in U.S.
    financial institutions that the President confiscated in March 2003 and
    vested in the U.S. Treasury. The United States froze these assets shortly
    before the first Gulf War. The U.S.A. PATRIOT Act of 2001 amended the
    International Emergency Economic Powers Act to empower the President to
    confiscate, or take ownership of, certain property of designated entities,
    including these assets, and vest ownership in an agency or individual. The
    President has the authority to use the assets in the interests of the
    United States. In this case, the President vested the assets in March 2003
    and made these funds available for the reconstruction of Iraq in May 2003.
    "Seized assets" refers to former regime assets seized within Iraq.

    10On May 22, 2003, the UN adopted Security Council Resolution 1483, which
    noted the establishment of the DFI to be used for the economic
    reconstruction and repair of Iraq's infrastructure, among other purposes.
    Under the resolution, 95 percent of oil proceeds are to be deposited into
    the DFI.

    Table 2: Iraqi Funds Used for U.S. Oil and Electricity Sectors, as of
    December 31, 2005

    Oil sector                        Disbursed
    Development Fund for Iraq    $2,709,267,000
    Seized funds                     95,000,000
    Vested funds                          7,000
    Total for oil sector         $2,804,274,000
    Electricity sector
    Development Fund for Iraq    $1,014,674,000
    Seized funds                      2,975,000
    Vested funds                     12,925,000
    Total for electricity sector $1,030,574,000
    Total                        $3,834,848,000

    Source: GAO analysis based on data from CPA, DOD, and the independently
    audited DFI Statement of Cash Receipts and Payments, as reported to the
    Iraqi government and the International Advisory Monitoring Board.

    Notes: Current independent auditor's data for the DFI are as of December
    31, 2005. The results of the independent audit of 2006 funds have not yet
    been released. Sector activities include the DFI purchase of about $2,241
    million in petroleum products and $50 million in generated electricity
    from other countries. Disbursed figures do not include DFI funds provided
    through the CERP and other small programs, which also support
    reconstruction activities.

    11According to an independent audit of the DFI, U.S. agencies did not
    maintain a complete and accurate database of outstanding contractual
    commitments for contracts signed by the former CPA. See Ernst & Young,
    Management Letter for Development fund for Iraq for the Period from July
    1, 2005, to December 31, 2005 (July 10, 2006).

    12The CPA turned DFI stewardship over to the new Iraqi government in June
    2004. According to State Department estimates, about $18 billion in oil
    revenue had been deposited into the DFI since the transition from the CPA
    to the interim Iraqi government, as of May 31, 2005.

    Billions of Additional Dollars Needed to Rebuild Oil and Electricity Sectors,
    but Future Iraqi Funding Is Uncertain

    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.

      Billions of Additional Dollars Are Needed to Fund the Rebuilding of the Oil
      and Electricity Sectors

    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.

      Iraq's Oil and Electricity Ministries Have Not Spent Existing Funds for
      Infrastructure Improvements and Future Iraqi Funds Are Uncertain

    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 2006.13
    We are examining U.S. efforts to work with the Iraqi ministries regarding
    ministry budget execution issues in greater detail in another ongoing
    review.

    13While the limited spending by various Iraqi ministries in certain areas,
    such as capital projects, is a known issue and receiving attention from
    U.S. advisors, we cannot verify the precision of these numbers. For the
    purpose of this report, we only use these data to identify limited
    spending as a potential challenge for Iraq should it rely on its
    ministries' own budgets to fund future reconstruction projects. IRMO also
    stated that the Ministry of Electricity obligation rate was 78 percent.
    However, IRMO did not provide supporting documentation nor did it provide
    obligation data for the Ministry of Oil.

    Figure 4: 2006 Ministry of Oil and Electricity Spending by Major Category,
    as of November 2006

    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 process14 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.15

    14According to the State Department, the Contracting Committee requirement
    for about a dozen signatures to approve electricity and oil contracts
    exceeding $10 million further slows a bureaucratic process.

    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.

    15World Bank, Operation Procurement Review (June 2005).

    Iraq Has Not Made Full Use of International Financial Assistance and Prospects
    for Future Funding Are Uncertain

    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,16 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.17 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.18 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.19

    16The established mechanism for channeling multilateral assistance to Iraq
    is the International Reconstruction Fund Facility for Iraq (IRFFI), which
    is composed of two trust funds, one run by the UN Development Group and
    the other by the World Bank Group.

    17The Iraqi government collects self-reported donor funding data through
    its Donor Assistance Database (DAD). Iraqi and U.S. government and
    international donor country officials agree that DAD is incomplete.
    According to the Department of State and SIGIR officials, the Ministry of
    Planning's DAD, supported by the UN Development Programme (UNDP),
    continues to improve as an assistance management tool to track donor
    assistance.

    18Department of State, Quarterly Update to Congress; 2207 Report
    (Washington, D.C.: Jan. 2007).

    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.

    Iraq's Oil and Electricity Production Goals Have Not Been Met, Oil Production
    Figures May Be Overstated, and Iraq Faces Difficulties Sustaining Infrastructure

    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.

    U.S. Oil and Electricity Goals Have Not Been Met

    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.

    19GAO, Securing, Stabilizing, and Rebuilding Iraq: Key Issues for
    Congressional Oversight, [36]GAO-07-308SP (Washington, D.C.: Jan. 2007).

      Iraq's Crude Oil Production and Exports Have Not Met Goals

    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.20 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.

    20U.S. goals differ from the government of Iraq and IMF targets. According
    to the State Department, as of January 2007, Iraq's production goal is 2.1
    mbpd and its export goal is 1.7 mbpd.

    Figure 5: Iraqi Reported Crude Oil Production, Exports, and U.S. Goals,
    June 2003 through December 2006

    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.21
    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.

    21In Iraq, most natural gas and liquefied petroleum gas production is
    associated with production of crude oil. As crude oil is pumped from the
    ground and processed, natural gas and liquefied petroleum gas are also
    produced. Refined petroleum products are produced in refineries in Iraq
    from crude oil sent through pipelines from the oil fields or are imported
    from other countries since Iraq's refinery capacity does not currently
    meet national needs.

    Table 3: U.S. Goals and 2006 Averages for Iraq Oil Sector

                                                                 2007 Average, as
                                                                 of February 28,
    Metric                      U.S. Goal   2006 Average      2007
    Crude oil production        3.0 mbpd    2.1 mbpd          1.9 mbpd
    (million barrels per day)   (capacity)
    Crude oil exports (million  2.2 mbpd    1.5 mbpd          1.4 mbpd
    barrels per day)
    Natural gas production      800 mscfd   730 mscfd         N/A
    (million standard cubic     (capacity)
    feet per day)
    LPG production (tons per    3,000 tpd   1,709 tpd         N/A
    day)                        (capacity)
    National stock levels of    15 days for Diesel: 5 days    Diesel: 3.5 days
    refined fuels: diesel,      each fuel   Kerosene: 10 days Kerosene: 4 days
    kerosene, gasoline, LPG                 Gasoline: 3 days  Gasoline: 2 days
                                               LPG: 5 days       LPG: 1 days

    Source: GAO analysis based on State Department and Defense Department
    data.

      Iraq's Crude Oil Production May Be Overstated

    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.22 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.23 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.

    22EIA uses its own analysis and a variety of sources, including Dow Jones,
    the Middle East Economic Survey, the Petroleum Intelligence Weekly, the
    International Energy Agency (IEA), the Monthly Oil Market Report from
    OPEC, the Oil & Gas Journal, Platts, and Reuters.

    23Re-injecting crude oil, and more commonly heavy fuel oil (residual oil),
    back into wells is one way to maintain pressure in the wells for
    extraction. However, this also can damage the wells and reduce the value
    of the remaining reserves.

    Figure 6: Comparison of IRMO and EIA Data on Iraq's Crude Oil Production

    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.

      Iraq's Electricity Production Has Not Met Goals or Increasing Demand

    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.24 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.

    24The State Department set a goal to attain 6,000 mw peak generation
    capacity by July 2006. The State Department also set a goal of 6,137 mw
    average peak daily supply for the summer of 2006, which was also not met.

    Table 4: U.S. Goals and 2006 Averages for Iraq Electricity Sector

                                                                 2007 Average, as
                                                                 of February 28,
    Metric                    U.S. Goal      2006 Average     2007
    Peak generation           6,000 mw       4,280 mw         3,803 mw
                                 (capacity)
    Average daily generation  110,000 mwh    94,665 mwh       84,796 mwh
    Hours of power nationwide 12 hours (hrs) Nationwide: 11.0 Nationwide: 8.6
    and in Baghdad                           hrs Baghdad: 5.9 hrs Baghdad: 5.1
                                                hrs              hrs

    Source: GAO analysis based on State Department's Iraq Reconstruction and
    Management Office data.

    The State Department also aimed to reach 110,000 megawatt hours (mwh)25 of
    average daily generation in 2005 and 2006 (see fig. 7).26 However, average
    daily peak generation for 2006 reached 94,665 mwh, also below the goal.

    25A megawatt hour is a measure of energy production or consumption equal
    to megawatts produced or consumed for 1 hour.

    26The State Department set an 110,000 mwh average daily generation goal
    for the summer of 2005. For the summer of 2006, the State Department set a
    goal of 127,000 mwh. However, the State Department continues to use the
    110,000 mwh goal to track weekly progress. According to the State
    Department, generally goals have been announced and changed without a
    formal process.

    Figure 7: Peak Electricity Generation and Demand in Iraq, May 2005 to
    December 2006

    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).27 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

    27Reporting average daily load (megawatt hours) is a better measure of how
    much power is produced for the national grid because it measures
    generation over a period of time, rather than the peak (megawatt) for the
    day.

    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.

    Most Major U.S. Projects Completed, but Iraq Faces Difficulties Sustaining U.S.
    Rebuilding Efforts

    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).28 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.

    28See Emergency Supplemental Appropriations Act for the Defense and
    Reconstruction of Iraq and Afghanistan, 2004, P.L. 108-106.

    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.

               o 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.
               o 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.29 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.

    			  Major Challenges Hinder Efforts to Meet Iraq's Oil and Electricity
    			  Needs

               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.

    			  Poor Security Conditions Have Slowed Reconstruction and Increased
    			  Costs

               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.

    29"Workover" is a term used to describe operations on a completed
    production well to clean, repair, and maintain the well for the purposes
    of increasing or restoring production.

    Figure 8: Enemy-Initiated Attacks against the Coalition and Its Iraqi
    Partners

    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.

    Figure 9: Downed Transmission Tower in Iraq

    Figure 10: Attack on Oil Pipeline

    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.30 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.31

    30GAO, Rebuilding Iraq: Status of Funding and Reconstruction Efforts,
    [37]GAO-05-876 (Washington, D.C.: July 28, 2005).

    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.32 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 EPSS33 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,34 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.

    31GAO, Rebuilding Iraq: Status of DOD's Reconstruction Program,
    [38]GAO-07-30R (Washington, D.C.: Dec. 15, 2006).

    32The Special Inspector General for Iraq Reconstruction (SIGIR),
    Unclassified Summary of SIGIR's Review of Efforts to Increase Iraq's
    Capability to Protect Its Energy Infrastructure, SIGIR-06-038 (Washington,
    D.C.: Sept. 27, 2006).

    33In March 2004, the United States awarded a $19 million contract to train
    and equip Iraq's Electrical Power Security Service to protect electrical
    infrastructure, including power plants, transmission lines, and Ministry
    of Electricity officials. Although the program was designed to train 6,000
    guards over a 2-year period, fewer than 340 guards had been trained when
    the contact was terminated early.

    34Anthony Cordesman, Center for Strategic and International Studies, Iraqi
    Force Development and the Challenge of Civil War: the Critical Problems
    and Failures the U.S. Must Address If Iraqi Forces Are to Eventually Do
    the Job (Washington, D.C.: Nov. 30, 2006).

    Corruption, Smuggling, and Other Illicit Activities Impact Revenues and Cost
    Recovery

    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,35 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.

    35According to State Department officials, the most recent fuel prices
    were increased on January 5 and March 20, 2007.

    Inadequate Legal and Regulatory Framework and Financial Management Systems
    Hinder Progress

    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 regions36 and regional oil companies the right to draw
    up contracts with foreign companies for exploration and development of new
    oil fields.37 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,38
    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.

    36According to an English translation of the draft law, "region" is
    defined as the Region of Kurdistan or any other region formed after
    issuance of the law in the Republic of Iraq, according to the constitution
    of Iraq.

    37According to State Department officials, the draft law arranges for the
    re-establishment of the Iraqi National Oil Company, which would have
    control over currently producing oil fields. The development of currently
    non-producing fields would be subject to an open bidding process. Contract
    negotiations for these fields would be the responsibility of the regional
    authorities and would be based on production and development plans,
    bidding rules, and model contracts set by a new Federal Oil and Gas
    Council. The Council would also be responsible for final approval of
    contracts. The Council would be the final arbitrator and would approve all
    Ministry of Oil strategies and policies.

    38According to State Department officials, companion legislation will
    include laws that address the reconstitution of the National oil company,
    reorganization of the Ministry of Oil, and division of oil revenues.

    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, 2006.39 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.40
    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.

    39U.S. Department of State, Section 1227 Report on Iraq (Washington, D.C.:
    Jan. 5, 2007).

    Lack of Integrated Energy Planning Creates Inefficiencies and Could Hinder
    Future Rebuilding Efforts

    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.

    40The World Bank and UN report that the economic performance of oil
    exporters is often inferior to that of resource-poor countries. This is
    often explained by the influence of oil wealth on governance and by the
    harmful real exchange rate effects on the non-oil sector and uncertainty
    created by volatile oil prices.

    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.

    Conclusions

    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.

    Recommendations for Executive Action

    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.

    Agency Comments and Our Evaluation

    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.

    Joseph A. Christoff
    Director
    International Affairs and Trade

    List of Congressional Committees

    The Honorable Daniel K. Inouye
    Chairman
    The Honorable Ted Stevens
    Ranking Member
    Subcommittee on Defense
    Committee on Appropriations
    United States Senate

    The Honorable Patrick J. Leahy
    Chairman
    The Honorable Judd Gregg
    Ranking Member
    Subcommittee on State, Foreign Operations, and Related Programs
    Committee on Appropriations
    United States Senate

    The Honorable Carl Levin
    Chairman
    The Honorable John S. McCain
    Ranking Member
    Committee on Armed Services
    United States Senate

    The Honorable Joseph R. Biden, Jr.
    Chairman
    The Honorable Richard G. Lugar
    Ranking Member
    Committee on Foreign Relations
    United States Senate

    The Honorable Joseph I. Lieberman
    Chairman
    The Honorable Susan M. Collins
    Ranking Member
    Committee on Homeland Security and Governmental Affairs
    United States Senate

    The Honorable John P. Murtha, Jr.
    Chairman
    The Honorable C.W. Bill Young
    Ranking Member
    Subcommittee on Defense
    Committee on Appropriations
    House of Representatives

    Nita M. Lowey
    Chair
    Frank R. Wolf
    Ranking Member
    Subcommittee on State, Foreign Operations, and Related Programs
    Committee on Appropriations
    House of Representatives

    The Honorable Ike Skelton
    Chairman
    The Honorable Duncan L. Hunter
    Ranking Member
    Committee on Armed Services
    House of Representatives

    The Honorable Tom Lantos
    Chairman
    The Honorable Ileana Ros-Lehtinen
    Ranking Member
    Committee on Foreign Affairs
    House of Representatives

    The Honorable Henry A. Waxman
    Chairman
    The Honorable Tom Davis
    Ranking Member
    Committee on Oversight and Government Reform
    House of Representatives

    The Honorable John F. Tierney
    Chairman
    The Honorable Christopher Shays
    Ranking Member
    Subcommittee on National Security and Foreign Affairs
    Committee on Oversight and Government Reform
    House of Representatives

    Appendix I: Objectives, Scope, and Methodology

    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. 1 As agreed with Department of
    State officials, we obtained data and information on bilateral
    contributions from their quarterly report to Congress2 and the Iraqi
    Ministry of Planning's Development Assistance Database (DAD).3 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.

    1The UN Development Fund Iraq Trust Fund and World Bank Trust Fund make up
    the International Reconstruction Fund Facility for Iraq (IRFFI). Data and
    information for UNDP and World Bank funds and programs are provided
    separately on the IRFFI Web site (see http://www.irffi.org ).

    2The Department of State, Quarterly Update to Congress; 2207 Report
    (Washington, D.C.: Oct. 2006).

    3The Iraqi Ministry of Planning Donor Assistance Database is available at
    http://www.mop-iraq.org/dad .

    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.

    Appendix II: Comments from the Department of State

    Appendix III: GAO Contact and Staff Acknowledgments

    GAO Contact

    Joseph Christoff (202) 512-8979 or christoffj@gao.gov

    Acknowledgments

    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.

    (320383)

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    Highlights of [50]GAO-07-677 , a report to Congressional Committees

    May 2007

    REBUILDING IRAQ

    Integrated Strategic Plan Needed to Help Restore Iraq's Oil and
    Electricity Sectors

    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.

    [51]What GAO Recommends

    This report recommends that the Secretary of State, in conjunction with
    relevant U.S. agencies and international donors, work with Iraqi
    ministries to develop an integrated energy strategy. State commented that
    the Iraqi government, not the U.S. government, is responsible for taking
    action on GAO's recommendations. GAO believes that these recommendations
    are still valid given the billions made available for Iraq's energy sector
    and the U.S. government's influence in overseeing Iraq's rebuilding
    efforts.

    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.

    Iraqi Reported Crude Oil Production, Exports, and U.S. Goals, June 2003
    through December 2006

    Report to Congressional Committees

    United States Government Accountability Office

    GAO

    May 2007

    REBUILDING IRAQ

    Integrated Strategic Plan Needed to Help Restore Iraq's Oil and
    Electricity Sectors

    GAO-07-677

    On June 22, 2007, the Web version of this report was reissued to reflect
    changes to enemy-initiated attack data provided by the Defense
    Intelligence Agency. On June 13, 2007, DIA notified GAO that its April
    2007 attack data were incorrect because it had excluded attacks from a new
    subordinate command established on April 1, 2007. According to DIA,
    Multi-National Division-Center did not properly forward its April attack
    data because of inadequate reporting procedures; it has since corrected
    the problem. Accordingly, enemy attacks in April totaled approximately
    4,900 rather than the 4,500 previously reported (see page 34). We also
    revised the corresponding narrative to show the average number of daily
    attacks increasing from 157 in March 2007 to 163 in April 2007 (see page
    33).

    References

    Visible links
      31. http://www.gao.gov/cgi-bin/getrpt?GAO-06-697T
      32. http://www.gao.gov/cgi-bin/getrpt?GAO-06-788
      33. http://www.gao.gov/cgi-bin/getrpt?GAO-06-953T
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-07-308SP
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-788
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-07-308SP
      37. http://www.gao.gov/cgi-bin/getrpt?GAO-05-876
      38. http://www.gao.gov/cgi-bin/getrpt?GAO-07-30R
      50. http://www.gao.gov/cgi-bin/getrpt?GAO-07-677
    *** End of document. ***