Nuclear Nonproliferation: Status of Heavy Fuel Oil Delivered to North
Korea Under the Agreed Framework (Letter Report, 09/30/1999,
GAO/RCED-99-276).

Pursuant to a congressional request, GAO investigated issues related to
the implementation of the U.S./North Korean Agreed Framework, focusing
on the: (1) status of heavy fuel oil funding and the deliveries to North
Korea undertaken pursuant to the Agreed Framework; and (2) controls in
place to prevent the diversion of heavy fuel oil from heating and
electricity generation to other purposes not specified in the Agreed
Framework and any limitations in these controls that would allow North
Korea to divert heavy fuel oil.

GAO noted that: (1) as of July 31, 1999, 1.9 million tons of heavy fuel
oil had been delivered to North Korea at an approximate cost of $222
million; (2) for the first 3 years of the Agreed Framework's
implementation, shipments to North Korea did not occur on a regular and
predictable schedule because the Korean Peninsula Energy Development
Organization (KEDO) did not always have sufficient funding to pay for
heavy fuel oil deliveries; (3) for the past 2 years, shipments of heavy
oil to North Korea have been made more regularly because of increased
contributions from the organization's members and decreasing commodity
and freight prices; (4) because of rising freight and commodity prices,
a KEDO official stated that the organization would need about $10
million in additional funding above existing or promised contributions
in order to pay for the remaining 1999 heavy fuel oil deliveries; (5)
the Department of State and KEDO, with the cooperation of North Korea,
have implemented a monitoring system at the seven heating and electrical
generation plants that use KEDO-supplied heavy fuel oil; (6) the purpose
of this monitoring system is to ensure that the heavy fuel oil is used
only for heating and electricity generation at the seven power plants;
(7) KEDO's portion of the system consists of meters to measure fuel
flow, recorders that compile daily and cumulative flow data, and
periodic monitoring visits to each plant; (8) power outages and poor
quality of North Korea's electrical power supply have affected the
operation of the monitoring equipment; (9) KEDO's monitoring system
alone is not designed to provide complete assurance that the heavy fuel
oil delivered to North Korea is being used as prescribed by the Agreed
Framework; (10) there are no arrangements with North Korea for
monitoring the large quantities of heavy fuel oil in storage or in
transit to the plants consuming the heavy fuel oil; (11) however, the
U.S. government uses other national technical means to supplement KEDO's
monitoring equipment to provide additional confidence that the heavy
fuel oil is being used for heating and electricity generation; (12)
State officials have acknowledged that there is some evidence that
perhaps 5 percent of the heavy fuel oil has been used for unauthorized
purposes; and (13) according to State, there is no clear evidence of any
significant diversion to unauthorized purposes of the 500,000 metric
tons of heavy fuel oil delivered annually to North Korea.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-99-276
     TITLE:  Nuclear Nonproliferation: Status of Heavy Fuel Oil
	     Delivered to North Korea Under the Agreed Framework
      DATE:  09/30/1999
   SUBJECT:  Nuclear proliferation
	     Arms control agreements
	     Electric power transmission
	     International relations
	     Fuels
	     Energy consumption
	     Powerplants
IDENTIFIER:  North Korea
	     Agreed Framework Between the United States and the
	     Democratic People's Republic of Korea

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Cover
================================================================ COVER

Report to the Chairman, Committee on International Relations, House
of Representatives

September 1999

NUCLEAR NONPROLIFERATION - STATUS
OF HEAVY FUEL OIL DELIVERED TO
NORTH KOREA UNDER THE AGREED
FRAMEWORK

GAO/RCED-99-276

Nuclear Nonproliferation

(141338)

Abbreviations
=============================================================== ABBREV

  GAO - General Accounting Office
  KEDO - Korean Peninsula Energy Development Organization
  MW(e) - megawatt electric

Letter
=============================================================== LETTER

B-283603

September 30, 1999

The Honorable Benjamin A.  Gilman
Chairman, Committee on
 International Relations
House of Representatives

Dear Mr.  Chairman: 

During the early 1990s, North Korea's nuclear program was suspected
of producing nuclear material capable of being fashioned into nuclear
weapons.  To address this threat and ease tensions on the Korean
Peninsula, the United States and North Korea signed an agreement
known as the Agreed Framework on October 21, 1994.\1 Under this
agreement, North Korea agreed to freeze the construction and
operation of its existing nuclear reactors and related facilities, to
eventually dismantle this equipment, and to comply with the
international Treaty on the Non-Proliferation of Nuclear Weapons.  In
exchange, the United States pledged to help North Korea acquire two
light-water nuclear reactors for electricity generation by arranging
for their construction through an international consortium, the
Korean Peninsula Energy Development Organization (KEDO).\2
Furthermore, to offset the energy forgone by the freeze on North
Korea's nuclear reactors, the United States pledged to arrange
through the organization for deliveries of 500,000 metric tons of
heavy fuel oil annually until the first reactor was completed.\3 An
agreement on the actual schedule for delivering the reactors has not
yet been concluded.  The Agreed Framework provides that the fuel oil
is to be used for heating and electricity generation.  However,
reports have alleged that North Korea has diverted some of this heavy
fuel oil for purposes not specified in the Agreed Framework,
including resale abroad. 

This is our fourth report on issues related to the implementation of
the Agreed Framework.\4 As agreed with your office, the report
discusses (1) the status of heavy fuel oil funding and deliveries to
North Korea undertaken pursuant to the U.S./North Korean Agreed
Framework and (2) the controls in place to prevent the diversion of
heavy fuel oil from heating and electricity generation to other
purposes not specified in the Agreed Framework and any limitations in
these controls that would allow North Korea to divert heavy fuel
oil.\5

--------------------
\1 ï¿½Agreed Framework Between the United States of America and the
Democratic People's Republic of Korea.ï¿½ The Democratic People's
Republic of Korea is commonly known as North Korea. 

\2 KEDO was established on Mar.  9, 1995, by the governments of
Japan, the Republic of Korea (South Korea), and the United States. 
The governments of Argentina, Australia, Canada, Chile, the Czech
Republic, Finland, Indonesia, New Zealand, and Poland have since
joined the organization.  In Sept.  1997, the European Atomic Energy
Communityï¿½an organization of the European Unionï¿½joined KEDO and, with
Japan, South Korea, and the United States, became a member of its
Executive Board.  The organization's activities are funded primarily
by members' contributions. 

\3 A KEDO consultant (Management Strategies, Inc.) estimates that in
1996, 500,000 metric tons represented 45 percent of North Korea's
total annual heavy fuel oil needs. 

\4 Our three earlier reports are entitled Nuclear Nonproliferation: 
Implications of the U.S./North Korean Agreement on Nuclear Issues
(GAO/RCED/NSIAD-97-8, Oct.  1, 1996), Nuclear Nonproliferation: 
Implementation of the U.S./North Korean Agreed Framework on Nuclear
Issues (GAO/RCED/NSIAD-97-165, June 2, 1997), and Nuclear
Nonproliferation:  Difficulties in Accomplishing IAEA's Activities in
North Korea (GAO/RCED-98-210, July 7, 1998). 

\5 A forthcoming GAO report addresses your concerns about alleged
diversions of U.S.  donations of food aid to North Korea through the
World Food Program. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

As of July 31, 1999, 1.9 million metric tons of heavy fuel oil had
been delivered to North Korea at an approximate cost of $222 million. 
For the first 3 years of the Agreed Framework's implementation,
shipments to North Korea did not occur on a regular and predictable
schedule because KEDOï¿½the organization that has arranged and paid for
the majority of the heavy fuel oil shipmentsï¿½did not always have
sufficient funding to pay for heavy fuel oil deliveries.  For the
past 2 years, shipments of heavy fuel oil to North Korea have been
made more regularly because of increased contributions from the
organization's members and decreasing commodity and freight prices. 
Because of a recent rise in commodity and freight prices, a KEDO
official stated that the organization would need about $10 million in
additional funding above existing or promised contributions in order
to pay for the remaining 1999 heavy fuel oil deliveries. 

The State Department and KEDO, with the cooperation of North Korea,
have implemented a monitoring system at the seven heating and
electrical generation plants that use KEDO-supplied heavy fuel oil. 
The purpose of this monitoring system is to ensure that the heavy
fuel oil is used only for heating and electricity generation at the
seven power plants.  KEDO's portion of the system consists of meters
to measure fuel flow, recorders that compile daily and cumulative
flow data, and periodic monitoring visits to each plant.  Power
outages and the poor quality of North Korea's electrical power supply
have affected the operation of the monitoring equipment.  KEDO's
monitoring system alone is not designed to provide complete assurance
that the heavy fuel oil delivered to North Korea is being used as
prescribed by the Agreed Framework.  For example, there are no
arrangements with North Korea for monitoring the large quantities of
heavy fuel oil in storage or in transit to the plants consuming the
heavy fuel oil.  However, the U.S.  government uses other national
technical means to supplement KEDO's monitoring equipment to provide
additional confidence that the heavy fuel oil is being used for
heating and electricity generation.  State Department officials have
acknowledged that there is some evidence that perhaps 5 percent of
the heavy fuel oil has been used for unauthorized purposes.  However,
according to State, there is no clear evidence of any significant
diversion to unauthorized purposes of the 500,000 metric tons of
heavy fuel oil delivered annually to North Korea. 

   BACKGROUND
------------------------------------------------------------ Letter :2

Under the Agreed Framework, KEDO will purchase and supply North Korea
with two light-water reactors with a combined total generating
capacity of approximately 2,000 megawatts of electrical power to
replace a graphite-moderated, 5-megawatt electric (MW(e)) power
reactor; two unfinished graphite-moderated reactorsï¿½a 50-MW(e) power
reactor and a 200-MW(e) power reactorï¿½and related facilities,
including a plutonium-reprocessing facility and a fuel rod
fabrication facility.  The United States pledged to arrange to
provide alternative energy to North Korea in the form of heavy fuel
oil for heating and electricity generation. 

Heavy, or residual, fuel oil is used for thermal heating, in power
generation facilities, and as fuel for ships.  According to
Department of Defense officials, the quantities of other fuels, such
as gasoline, diesel, or kerosene, that can be extracted from heavy
fuel oil are very small compared with the quantities that can be
extracted from crude oil and other petroleum products.  Further
refining processes would be needed to extract such fuels from the
heavy fuel oil. 

In June 1995, the United States and North Korea agreed that 150,000
metric tons of heavy fuel oil would be provided in the year ending
October 20, 1995 (1 year after the signing of the Agreed Framework),
and that deliveries totaling 500,000 metric tons would be made for
each 12-month period thereafter until the first reactor was
delivered.  As stipulated in the Agreed Framework, the target date
for completing the first reactor was 2003.  However, an agreement on
the actual schedule for delivering the reactors has not yet been
concluded, and, as a result, the duration of the oil purchases and
deliveries is not yet known. 

Initially, 500,000 metric tons of heavy fuel oil represented the
amount of fuel that could be consumed annually at one North Korean
facility, the Sonbong Thermal Power Plant, which produces electricity
for North Korea's North Hamgyong Province and thermal heat (steam)
for the surrounding villages.  This initial estimate was produced by
calculating the amount of heavy fuel oil the Sonbong plant would
consume if it operated at 100-percent capacity.  However, the Sonbong
plant has been operating at approximately 40-percent capacity, which,
according to KEDO's contractor (Fluor Daniel, Inc.), should be
considered normal for a North Korean power plant of Sonbong's age. 
Since June 1995, the United States and North Korea have agreed to
expand the number of facilities allowed to consume heavy fuel oil. 
Currently, seven North Korean power and thermal facilities are
consuming heavy fuel oil supplied by KEDO (see fig.  1).  In addition
to Sonbong, the Chongjin, Pukchang, Pyongyang, East Pyongyang, and
Suncheon thermal power plants are approved to consume KEDO-supplied
heavy fuel oil.  In addition, Nyongbyon, the site of most of North
Korea's frozen nuclear facilities, consumes heavy fuel oil in a small
thermal plant used seasonally for district heating.  Profiles of each
of the facilities consuming this heavy fuel oil appear in appendix I. 
KEDO has purchased the heavy fuel oil on the open market from
companies in Japan, Singapore, and South Korea using funds available
from contributions from 24 countries (including the United States)
and the European Atomic Energy Community. 

   Figure 1:  North Korean Ports
   Receiving and Facilities
   Consuming KEDO-Supplied Heavy
   Fuel Oil

   (See figure in printed
   edition.)

   Notes:  1.  Since Oct.  1994,
   of the 1.9 million metric tons
   of heavy fuel oil delivered to
   North Korea, 1.2 million metric
   tons have been delivered to the
   port at Sonbong and 700,000
   metric tons have been delivered
   to the ports of Nampo and
   Songrim.

   (See figure in printed
   edition.)

   2.  The Sonbong and Chongjin
   thermal power plants are
   supplied with heavy fuel oil
   from the port at Sonbong. 
   Nampo/Songrim supplies the East
   Pyongyang, Pukchang, and
   Suncheon thermal power plants
   and the Nyongbyon Thermal
   Plant.  From Jan.  through July
   1996, the Pyongyang Thermal
   Power Plant was supplied with
   heavy fuel oil from the port at
   Sonbong.  Since that time,
   Pyongyang has been supplied
   from Nampo/Songrim.

   (See figure in printed
   edition.)

   STATUS OF HEAVY FUEL OIL
   FUNDING AND DELIVERIES TO NORTH
   KOREA
------------------------------------------------------------ Letter :3

As of July 31, 1999, 1.9 million metric tons of heavy fuel oil had
been delivered to North Korea at a cost of $222 million (see table
1).  Under an initial arrangement, in January 1995, the U.S. 
government provided approximately 50,000 metric tons of heavy fuel
oil to North Korea approximately 2 months before KEDO was
established.  The $5.5 million cost of this shipment was paid with
Department of Defense funding appropriated for emergency and
extraordinary expenses.  KEDO has arranged all subsequent shipments
to North Korea and paid the remaining costs of $216.5 million for
heavy fuel oil using (1) $207 million contributed to the organization
and available for heavy fuel oil purchases and (2) loans made to
finance such purchases.  Since the organization was created in March
1995, the United States has contributed $148 million to it.  Of this
total, KEDO has used $133 million for heavy fuel oil and $15 million
for its own administrative expenses.  The remaining $74.5 million in
contributions available for heavy fuel oil purchases have come from
the European Atomic Energy Community, Australia, and 21 other
countries (see fig.  2).\6 In addition, Japan has contributed $19
million to KEDO in the form of a collateral fund to be used as needed
to pay for financing KEDO's expenses in case of a liquidity
shortfall.  This fund has been used to support loans made to finance
heavy fuel oil purchases. 

                                Table 1
                
                  Quantity and Costs of Heavy Fuel Oil
                               Deliveries

                                Quantity delivered
Heavy fuel oil delivery year      (in metric tons)          Total cost
------------------------------  ------------------  ------------------
1995 (Jan. 1995-Oct. 1995)                 150,393         $15,793,000
1996 (Nov. 1995-Oct. 1996)                 500,000          67,353,000
1997 (Nov. 1996-Jan. 1998)                 500,327          64,956,000
1998 (Feb. 1998-Feb. 1999)                 499,910          48,695,000
1999 (Mar. 1999-July 1999)                 246,777          25,549,000
======================================================================
Total                                    1,897,407        $222,346,000
----------------------------------------------------------------------
Notes:  1.  Deliveries and costs for 1995 include a 50,000-metric-ton
delivery whose $5.5 million cost was paid by the Department of
Defense. 

2.  After 1995, under an agreement reached by North Korea and the
United States, 500,000 metric tons of heavy fuel oil is to be
delivered annually by Oct.  21.  Because funding has been uncertain,
KEDO has been unable to reach the 500,000-metric-ton annual allotment
by Oct.  21 except in 1996.  Shipments to meet the 1997 allotment
extended until Jan.  1998, and deliveries for the 1998 allotment
extended until Feb.  1999. 

Source:  GAO's analysis of data from KEDO. 

   Figure 2:  Contributions to
   KEDO Available for Heavy Fuel
   Oil Purchases as of July 31,
   1999

   (See figure in printed
   edition.)

>Notes:  1.  Total contributions to KEDO available for heavy fuel oil
purchases equal $207.4 million. 

2.  Japan's contribution of $19 million to KEDOï¿½in the form of a
collateral fund to be used as needed to pay for financing KEDO's
expenses in case of a liquidity shortfallï¿½is not included in the
contributions above.  This fund has been used to support loans made
to finance heavy fuel oil purchases. 

3.  The United States' contribution does not include the $5.5 million
paid for heavy fuel oil deliveries before KEDO was created in Mar. 
1995 or the $15.1 million contributed to KEDO for its administrative
expenses. 

Source:  GAO's analysis of data from KEDO. 

The total costs of $222 million for providing heavy fuel oil to North
Korea have been distributed as follows: 

  -- Approximately $215 million has been paid for commodity costs (to
     purchase heavy fuel oil) and freight costs (generally, to ship
     the heavy fuel oil from Japan, South Korea, or Singapore to
     North Korea). 

  -- Approximately $4 million has been paid in interest on credit
     extended from heavy fuel oil suppliers or on bank loans secured
     through the $19 million loan collateral fund contributed by
     Japan. 

  -- The remaining approximately $3 million has been paid for
     demurrage chargesï¿½costs incurred when KEDO-contracted vessels
     delivering heavy fuel oil to North Korea are unable to discharge
     their cargo at the ports within the contracted period of time. 

--------------------
\6 The contributions were made to KEDO's heavy fuel oil account or
its account for unrestricted or other purposes. 

      PAST DELIVERIES OF HEAVY
      FUEL OIL TO NORTH KOREA WERE
      IRREGULAR
---------------------------------------------------------- Letter :3.1

In the first 3 years of the Agreed Framework's implementation,
shipments to North Korea did not occur on a regular and predictable
schedule because KEDO did not always have sufficient funding to pay
for deliveries.  KEDO's Executive Board establishes the schedule and
amounts of the individual heavy fuel oil deliveries after determining
(1) its ability to pay for those deliveries out of received or
promised contributions to the organization and (2) North Korea's
heavy fuel oil consumption and storage capacities.  From August 1995
to October 1998, monthly shipments varied widely.  In some months,
KEDO made no deliveries while in 1 monthï¿½October 1996ï¿½it delivered a
total of 103,500 metric tons (or over one-fifth of the annual
requirement). 

North Korea has complained about KEDO's inability to make regular
heavy fuel oil shipments.  North Korean officials have strongly
argued that the organization should state that it would deliver the
heavy fuel oil by a specific date and provide a schedule of all
upcoming heavy fuel oil deliveries, including those for future years. 
The irregularity of shipments has also led to delays and additional
costs to the organization.  According to KEDO, North Korean ports are
not well equipped to handle large quantities of incoming oil in a
timely manner and have only limited storage and transportation
capabilities.  These conditions have led to delays by KEDO's
suppliers in discharging their cargo, resulting in additional
shipping costs to KEDO totaling approximately $3 million.  Delays
have also occurred because of adverse weather and last-minute
requests by North Korea for changes to delivery locations. 

      RECENT HEAVY FUEL OIL
      DELIVERIES HAVE BEEN MORE
      REGULAR
---------------------------------------------------------- Letter :3.2

We reported in June 1997 that, while KEDO could provide a broad base
of financial support for implementing aspects of the Agreed
Framework, it owed, as of May 1, 1997, about $46 million in bank
loans and credit extended by heavy fuel oil suppliers.  Consequently,
the organization had insufficient funds available to meet future oil
commitments.\7 Since that time, KEDO's financial situation has
improved, and, according to KEDO officials, its total debt for heavy
fuel oil has been reduced to $21 million, consisting of loans
supported by the $19 million collateral fund contributed by Japan and
a $2 million loan from KEDO's administrative fund.  After January
1998, KEDO incurred lower costs to purchase and ship heavy fuel oil
for over a year.  From a high of over $136 per metric ton in October
1996, commodity and freight costs fell to under $86 in February 1999
(see fig.  3).  However, these costs rose to $123 per metric ton in
August 1999.  Increased contributions from the United States, the
European Atomic Energy Community, and other members have allowed KEDO
to pay for heavy fuel oil shipments in cash rather than on credit
from heavy fuel oil suppliers.  In 1997, the interest on such credit
amounted to over $2.2 million.  Since June 1998, however, KEDO has
paid for heavy fuel oil shipments in cash or through loans drawn
against the $19 million collateral fund contributed by Japan,
reducing these interest costs. 

   Figure 3:  Commodity and
   Freight Cost Per Metric Ton of
   Heavy Fuel Oil, October
   1995-August 1999

   (See figure in printed
   edition.)

Source:  GAO's analysis of data from KEDO. 

According to KEDO officials, the organization's stronger financial
condition has also increased the regularity of heavy fuel oil
shipments to North Korea.  In February 1999, for the first time, KEDO
provided North Korea with a provisional schedule for heavy fuel oil
deliveries for the 1999 delivery period (from late Mar.  1999 through
Oct.  1999).  This schedule was provided ï¿½with the understanding that
the precise timing will depend upon the availability of funding,
which .  .  .  is subject to [the] approval of the legislatures of
the countries that provide that funding.ï¿½ According to KEDO, more
regular heavy fuel oil deliveries have allowed North Korea to better
accommodate the shipments and have thus reduced the costs associated
with shipping delays.  In addition, KEDO and North Korea agreed in
October 1997 that deliveries would not be scheduled until it could be
assured that each delivery could be unloaded in a timely fashion,
further reducing delays and the costs associated with them.  With
lower commodity, freight, interest, and demurrage costs, KEDO's total
costs for heavy fuel oil dropped from $135 per metric ton of heavy
fuel oil in 1996 to $104 per metric ton in the first 7 months of
1999, a total reduction of 23 percent. 

--------------------
\7 See Nuclear Nonproliferation:  Implementation of the U.S./North
Korean Agreed Framework on Nuclear Issues (GAO/RCED/NSIAD-97-165,
June 2, 1997). 

      KEDO'S ABILITY TO MAKE
      REMAINING 1999 HEAVY FUEL
      OIL DELIVERIES IS UNCERTAIN
---------------------------------------------------------- Letter :3.3

Although KEDO's finances have improved, uncertainties remain about
the organization's ability to meet this year's obligations.  Funding
this year's remaining deliveries is dependent on receiving an
expected $14 million contribution from the European Union before
October 1999.  In addition, future costs for heavy fuel oil purchases
cannot be estimated with any degree of confidence because the prices
for oil commodities on the world market can differ significantly from
their historical levels.  As figure 3 shows, commodity and freight
prices have risen sharply since February 1999 and these increases may
hamper the organization's ability to fund the remaining 1999
deliveries.  A KEDO official stated that the organization could find
itself nearly $10 million short before completing this year's
500,000-metric-ton allocation.  This shortfall would likely be made
up by seeking additional contributions from KEDO's members. 

   CONTROLS IN PLACE TO DETECT
   DIVERSION OF HEAVY FUEL OIL TO
   PURPOSES NOT PRESCRIBED IN THE
   AGREED FRAMEWORK
------------------------------------------------------------ Letter :4

To provide assurance that the heavy fuel oil supplied is being used
for heating and electricity generation as stipulated in the Agreed
Framework, KEDO, on the basis of agreements it reached with the State
Department, began to establish a heavy fuel oil monitoring system in
mid-1995.  This monitoring system consists of flow meters and data
recorders installed at each of the sites that consume heavy fuel oil
supplied by the organization to measure and record the flow of oil at
each facility.  In addition, KEDO and its contractorï¿½Fluor Daniel,
Inc.ï¿½conduct periodic monitoring visits to North Korea to maintain
the flow meter system and retrieve the data stored in the data
recorders.  Power outages and the poor quality of North Korea's
electrical power supply have affected the reliability of the
monitoring equipment.  There are also no arrangements with North
Korea for monitoring the large quantities of heavy fuel oil in
storage or in transit to the plants consuming the heavy fuel oil.  An
outage of KEDO's monitoring equipment from January-April 1999 at the
facility consuming the largest amount of KEDO-supplied heavy fuel oil
illustrates these problems.  However, the U.S.  government also uses
other national technical means to complement KEDO's system, thereby
providing additional confidence that the heavy fuel oil is used for
heating and electricity generation.  State Department officials have
acknowledged that there is some evidence that perhaps 5 percent of
the heavy fuel oil has been used for unauthorized purposes.  However,
according to State, there is no clear evidence of any significant
diversion to unauthorized purposes of the 500,000 metric tons of
heavy fuel oil delivered annually to North Korea. 

      THE HEAVY FUEL OIL
      MONITORING SYSTEM IS
      DESIGNED TO DETECT AND DETER
      THE DIVERSION OF HEAVY FUEL
      OIL
---------------------------------------------------------- Letter :4.1

According to KEDO, the U.S.  government designed the overall
monitoring system to (1) detect significant diversions by North Korea
of KEDO-provided heavy fuel oil to military or other prohibited uses,
(2) detect to the extent possible smaller diversions of KEDO-supplied
heavy fuel oil, and (3) deter North Korea from attempting such
diversions.  According to understandings reached with the State
Department, the organization's responsibility for the monitoring
system consists of (1) installing the flow meters and related
monitoring equipment and collecting the data from that equipment, (2)
visiting the facilities to service the equipment and exchange
relevant information with North Korean technicians, (3) receiving
information from North Korea on where the heavy fuel oil delivered to
each North Korean port is intended to be consumed, and (4) meeting
regularly with North Korea to further exchange views and collect
information on the system's operation. 

As part of its monitoring system at the facilities consuming heavy
fuel oil supplied by the organization, KEDO uses two types of flow
meters: 

  -- Ultrasonic meters, which measure fuel flow rates using sound
     waves passed through oil pipes, are in use at four of the
     thermal power plants that consume KEDO-supplied heavy fuel oil. 

  -- Coriolis meters, which directly measure the amount of fuel
     flowing through oil pipes, are in use at the other three plants. 

Ultrasonic flow meters were installed at the Sonbong Thermal Power
Plant in August 1995.  After the State Department approved the
consumption of KEDO-supplied heavy fuel oil at the six additional
plants, KEDO installed fuel flow meters at each facility to track oil
usage.  As of April 1, 1999, the costs to install and maintain the
equipment were about $2.4 million and were paid for out of funds
available for KEDO's heavy fuel oil purchases. 

In March 1997, KEDO began installing data recording equipment capable
of maintaining an historical record of meter readings to provide
additional confidence in the accuracy of the readings provided by
North Korea.  Appendix I contains details on the specific features of
the monitoring system at each of the North Korean plants that consume
heavy fuel oil supplied by KEDO. 

KEDO receives the following three types of data from North Korea: 

  -- North Korean personnel compile readings from the flow meters and
     fax them biweekly to KEDO. 

  -- Consumption data based on measurements taken by North Korea of
     the amount of heavy fuel oil drawn out of each plant's oil
     supply system and holding tanks are also faxed to KEDO biweekly. 

  -- The original printouts from KEDO's data recorders, showing daily
     and cumulative consumption of heavy fuel oil, are mailed to the
     organization within 3 weeks of the end of the biweekly reporting
     period. 

In addition, the data recorders that the organization began
installing in March 1997 at each of the plants consuming
KEDO-supplied heavy fuel oil maintain a daily consumption history in
solid-state memory.  Fluor Daniel, Inc., KEDO's contractor, retrieves
the historical data during regular monitoring visits, analyzes the
data, and provides the organization with monthly and annual summaries
of these analyses.  KEDO then shares these reports with the State
Department.  In addition, Fluor Daniel assists KEDO in fulfilling its
responsibilities by acquiring, installing, and maintaining components
of the flow meter system. 

KEDO officials also accompany the contractor on monitoring visits to
North Korea to maintain the flow meter system's equipment and
retrieve the data stored in the data recorders.  These announced
visits typically take place two or three times per year, with the
exact dates and schedules agreed upon by KEDO and North Korea.  KEDO
officials stated that early logistic problems and difficulties
completing required work in the mutually agreed-upon time have been
overcome.  North Korea has been cooperative during these trips, and,
while some irregularities (e.g., unexplained invalid readings on the
flow meter displays) have been noted by KEDO and Fluor Daniel field
teams, there has been no evidence that North Korean personnel have
interfered with the monitoring equipment.  KEDO eventually hopes to
increase the number of monitoring visits to four or six per year. 

In addition, to complement KEDO's monitoring system, the U.S. 
government uses national technical means to ensure that the heavy
fuel oil is being used for heating and electricity generation. 

      PROBLEMS HAVE LIMITED THE
      RELIABILITY OF KEDO'S
      MONITORING SYSTEM
---------------------------------------------------------- Letter :4.2

KEDO has experienced problems with its heavy fuel oil monitoring
system.  Monitoring equipment installed at each of the seven sites
consuming KEDO-supplied heavy fuel oil has been subject to outages at
various times since the system was installed.  Neither KEDO nor Fluor
Daniel has found evidence of tampering with the equipment that could
have caused these outages.  Rather, both organizations have
attributed these problems to the poor quality of the electrical power
(i.e., a widely fluctuating electrical frequency) available in North
Korea.  In 1998, these outages were more prevalent at plants where
smaller amounts of heavy fuel oil are consumed.  For example, at both
the Sonbong and Pukchang thermal power plants, which together
consumed 71 percent of the heavy fuel oil delivered, the KEDO
monitoring system was operative 96 percent and 100 percent of the
time, respectively, in 1998.  The worst outages of the KEDO
monitoring system occurred at Pyongyang, whose monitoring system was
inoperative for 46 percent of the year, and at Chongjin, whose
monitoring system did not operate at all during 1998.  KEDO estimates
that Pyongyang consumed 16 percent of the heavy fuel oil in 1998
while Chongjin consumed 5 percent.  Power-conditioning equipment that
was initially installed to compensate for the frequency fluctuations
in the electrical power supplied to the monitoring equipment at the
sites did not completely alleviate the problem.  This equipment has
since been replaced by more advanced equipment that KEDO hopes will
allow the monitoring system to operate continuously. 

In 1998, the first full year for which systematic analysis of the
data on the operation of KEDO's monitoring system was completed, the
system's reliability varied.  As figure 4 shows, monitoring systems
at the plants consuming KEDO-supplied heavy fuel oil were operational
for varying periods of time throughout the year.  In addition, in
April 1999, the monitoring equipment KEDO had installed at the
Pyongyang Thermal Power Plant was destroyed by a fire in the plant's
control room.  New equipment was installed in July 1999.  During such
outages, KEDO must rely on consumption figures reported by North
Korean plant operators using measurement equipment that, KEDO states,
is primitive by Western standards. 

   Figure 4:  Outages of KEDO's
   Monitoring System in North
   Korean Plants Consuming Heavy
   Fuel Oil During 1998

   (See figure in printed
   edition.)

Notes:  1.  1998 was the first full year for which systematic
analysis of the data on the operation of KEDO's monitoring system was
completed. 

2.  KEDO estimates that North Korea consumed a total of 445,000
metric tons of heavy fuel oil in 1998. 

3.  Nyongbyon operates as a heating facility during the winter months
only.  KEDO's monitoring equipment is not powered when the plant is
inoperative. 

Source:  GAO's analysis of data from KEDO. 

In addition, the accuracy of the ultrasonic flow meters installed
initially at four of the seven plants (Sonbong, Chongjin, Pyongyang,
and Pukchang) declines when lower amounts of heavy fuel oil flow
through the facilities' oil pipes.  According to KEDO officials,
low-flow conditions do not occur at Sonbong and Chongjin.  At
Pyongyang and Pukchang, however, low-flow conditions can occasionally
occur and could affect the accuracy of the ultrasonic flow meters. 
Although such conditions could lessen the accuracy of the consumption
data produced at these plants, the total error at any single facility
would be in the range of 1 to 3 percent of the heavy fuel oil
consumed at that plant.  Coriolis meters, which are more accurate
under these lower-flow conditions, have been installed at Suncheon,
East Pyongyang, and Nyongbyon.  Plans to replace the remaining
ultrasonic flow meters with Coriolis meters have been curtailed
because, according to KEDO officials, the existing ultrasonic flow
meters at the facilities are sufficiently accurate, given the
relatively infrequent occurrence of low-flow conditions at the
Pyongyang and Pukchang plants.  In any case, North Korea refused to
allow the ultrasonic meters at Pyongyang to be replaced with Coriolis
meters, stating that it could not allow the power plant to be shut
down for the time required to complete the installation.\8

The early monitoring equipment installed at North Korean plants was
not designed to maintain a complete history of heavy fuel oil
consumption.  The flow meters did not have solid-state memory that
kept a record of consumption.  Furthermore, the time and date of the
data printouts that North Korea mailed to KEDO were not stamped by
the equipment, reducing the reliability of the printouts as a means
of verifying heavy fuel oil consumption during a specific period of
time at an individual plant.  After discussing possible solutions to
this problem with North Korea in 1996, KEDO began installing the
previously discussed improved data-recording equipment in March 1997
at each of the seven locations that consume heavy fuel oil.  In
addition to producing daily printouts of flow meter data, these
recorders retain consumption data in solid-state memory, which KEDO
teams can download to computers during monitoring visits.  In 1998,
the data were used to develop a comprehensive database of daily heavy
fuel oil consumption for the first time. 

Upgraded power conditioners should, KEDO believes, correct the
problems with the poor quality of North Korea's electric power and
its effects on KEDO's monitoring equipment.  In addition, the
installation of data recorders has increased the organization's
confidence in its consumption data.  However, KEDO's system alone is
not designed to provide complete assurance that the heavy fuel oil
delivered to North Korea is being used as prescribed by the Agreed
Framework.\9 There are no arrangements with North Korea for
monitoring the large quantities of KEDO-supplied heavy fuel oil in
storage or in transit to the facilities where it will be consumed.\10
According to a State Department report, North Korea has acknowledged
storing a large quantity of KEDO-supplied heavy fuel oil in response
to the irregularity of heavy fuel oil deliveries.  Using consumption
data reported by North Korea, as of the end of June 1999, about
110,000 metric tons of heavy fuel oil, or 22 percent of North Korea's
annual allotment and nearly 6 percent of the total heavy fuel oil
delivered to North Korea from January 1995 to July 1999, was being
stored (see fig.  5).  According to KEDO officials, the heavy fuel
oil is being stored in a large number of storage tanks and excavated
open storage pits at the delivery ports and at the plants where the
heavy fuel oil is being consumed.  In addition, there is no
arrangement specifying that North Korea segregate KEDO-supplied heavy
fuel oil from the heavy fuel oil North Korea obtains from other
suppliers.  Furthermore, monitoring equipment is not installed on the
numerous railcars and pipelines used to transport the heavy fuel oil
from the delivery ports to storage and from storage to the plants
where the heavy fuel oil is to be consumed.  KEDO is thus unable to
track the heavy fuel oil from the time it is unloaded from delivery
vessels at Sonbong, Nampo, or Songrim to the time it passes through
the flow meters at the plants where it is eventually consumed.  KEDO,
during its monitoring visits, has observed storage facilities at the
seven plants; however, it cannot confirm that these are the only
facilities where KEDO-supplied heavy fuel oil is being stored. 

   Figure 5:  KEDO-Supplied Heavy
   Fuel Oil in Storage, August
   1995-June 1999

   (See figure in printed
   edition.)

Note:  The quantity of heavy fuel oil in storage is estimated by
subtracting North Korea's reported consumption from the quantity of
heavy fuel oil delivered. 

Source:  GAOï¿½s analysis of data from KEDO. 

--------------------
\8 Ultrasonic meters, which are attached to the outside of oil pipes,
can be installed without interrupting a power plant's operations,
while Coriolis meters, whose installation entails cutting and welding
oil pipes, requires that the power plant cease operations until the
installation is complete. 

\9 As previously discussed, the U.S.  government uses national
technical means to complement KEDO's monitoring system so as to
provide additional assurance that the heavy fuel oil supplied to
North Korea is being used for heating and electricity generation. 

\10 According to State Department officials, when the monitoring
system was designed, monitoring of storage facilities was considered
but rejected as impractical, since it would require dedicated storage
tanks for KEDO-supplied heavy fuel oil and would add little to the
capability of the monitoring system. 

      EARLY 1999 OUTAGE OF
      EQUIPMENT AT SONBONG
      ILLUSTRATES PROBLEMS WITH
      KEDO'S MONITORING SYSTEM
---------------------------------------------------------- Letter :4.3

According to KEDO, since 1995, the Sonbong Thermal Power Plant has
consumed over half of the heavy fuel oil supplied by the
organization.  KEDO's monitoring equipment became inoperative on
January 18, 1999, because of the poor quality of the electrical power
available at the power plant.  The problem was corrected on April 26,
1999, when KEDO installed an upgraded power-conditioning unit and was
able to restart the monitoring equipment.  During this outage lasting
over 3 months, the only data showing the consumption of heavy fuel
oil at Sonbong were provided by North Korea.  These data were based
on the levels of heavy fuel oil in Sonbong's storage facilities. 
However, since KEDO has no monitoring equipment installed at these
storage facilities, it could not verify this information. 

During this period, North Korea reported that heavy fuel oil was
being consumed at levels substantially exceeding those historically
recorded at Sonbong (see fig.  6).  According to a Fluor Daniel
representative, the plant typically operates only one or two of the
three boilers at the same time at the facility, and at least one of
those boilers operates at less than maximum levels.  The
representative characterized the consumption data reported by North
Korea during the monitoring equipment outage as historical highs for
Sonbong as a whole, noting that such consumption would have required
all three boilers to operate continuously at close to the highest
levels ever recorded for each of them.  For example, during the 6
months before the outage of KEDO's monitoring equipment, the average
consumption of heavy fuel oil reported by North Korea was
approximately 10,700 metric tons biweekly, or over 3,500 metric tons
per boiler.  During the 3 months when the organization's monitoring
equipment was not operating, the average consumption of heavy fuel
oil reported by North Korea increased by 62 percent to over 17,300
metric tons biweekly, or nearly 5,800 metric tons per boiler.  After
the repair of KEDO's equipment was completed on April 26, 1999, North
Korea's reported consumption dropped to an average of 11,500 metric
tons biweekly, or over 3,800 metric tons per boiler through the end
of June. 

   Figure 6:  North Korea's
   Reported Biweekly Consumption
   of Heavy Fuel Oil at Sonbong
   Thermal Power Plant, January
   1996-June 1999

   (See figure in printed
   edition.)

Notes:  1.  North Korea's reported consumption during the Jan. 
18-Apr.  26, 1999, period when KEDO's monitoring equipment was
inoperative is shown in black. 

2.  A similar period of reported high consumption, from Apr.-July
1996, occurred before KEDO had installed data recorders at the
Sonbong facility.  Verifying these consumption data would involve
detailed analysis of flow meter printouts from the period.  These
printouts did not have the time or date stamped by the equipment.  To
date, neither KEDO nor Fluor Daniel has performed this analysis. 

Source:  GAO's analysis of data from KEDO. 

When KEDO officials inquired about this increase in reported
consumption during the outage and the sudden return to nearly normal
consumption after the equipment was restored to operation, North
Korean officials responded that a lack of hydropower during the
winter months required increased consumption of heavy fuel oil to
generate electricity.  However, the failure of KEDO's monitoring
equipment leaves no way for the organization to verify this. 
Consumption during the winters of 1996, 1997, and 1998 did not show a
similar large increase.  In addition, North Korean officials reported
that some of the heavy fuel oil leaked out of an open storage pit. 
Since North Korean consumption data are based on storage levels,
leakage from the facilities would cause errors in consumption data,
according to the North Korean officials responding to KEDO's inquiry. 
However, with no monitoring equipment installed to determine the
amount of oil in these storage facilities, KEDO could not confirm
that this leakage contributed to the discrepancy.  According to State
Department officials, U.S.  and KEDO officials plan to pursue this
questionable consumption through talks with their North Korean
counterparts. 

      THE STATE DEPARTMENT HAS
      CONFIDENCE THAT THE HEAVY
      FUEL OIL HAS LARGELY BEEN
      USED AS PRESCRIBED BY THE
      AGREED FRAMEWORK
---------------------------------------------------------- Letter :4.4

KEDO officials stated that the organization's responsibility to track
heavy fuel oil consumption extends only to the installation,
maintenance, and collection of data from the flow meter system at
each of the facilities consuming KEDO-supplied heavy fuel oil and to
periodic visits to each of these sites.  According to KEDO officials,
the United States is responsible for any other monitoring (e.g.,
monitoring of heavy fuel oil in North Korea's storage facilities or
in transit to the power plants) and for determining whether any
diversion has taken place.  KEDO officials stated that they currently
have no plans, nor do they have the resources, to expand the
organization's monitoring regime beyond its current level.  KEDO
officials also emphasized that, to date, neither they nor the
organization's contractor has found evidence indicating an effort on
North Korea's part to subvert KEDO's monitoring system. 

The State Department reported to the Congress in March 1999 that
KEDO's monitoring arrangements, along with other U.S.  national
technical means, give the Department confidence that the heavy fuel
oil supplied by the organization has largely been used in the manner
prescribed by the Agreed Framework.  State Department officials have
acknowledged that there is some evidence that perhaps 5 percent of
the heavy fuel oil has been used for unauthorized purposes.  However,
according to State, there is no clear evidence of any significant
diversion to unauthorized purposes of the 500,000 metric tons of
heavy fuel oil delivered annually to North Korea. 

State Department officials believe that the current level of
monitoring using KEDO's equipment and the U.S.  government's national
technical means is sufficient to ensure that the heavy fuel oil
delivered to North Korea is not diverted to military uses or sold
abroad.  They reiterated that heavy fuel oil is not useful for
purposes other than heating and electricity generation.  While it is
theoretically possible to extract other types of fuel from this oil,
State Department officials stated the process would be so inefficient
that there would be little incentive to do so.  The current
monitoring regime, the officials said, serves as a good tool to
ensure that North Korea is abiding by its commitments to the United
States. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :5

We provided a draft of this report to KEDO and the Department of
State for their review and comment.  KEDO and State Department
officials, including the Deputy Assistant Secretary for East Asian
and Pacific Affairs, generally agreed with the report's findings and
provided comments to improve the technical accuracy of the report
that we incorporated as appropriate. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To obtain information for this report, we reviewed and analyzed the
Agreed Framework and subsequent agreements, applicable U.S.  laws,
reports of congressional hearings, and supporting material provided
by the State Department under the certification requirements imposed
on U.S.-provided aid to North Korea.  We also reviewed and analyzed
documentation provided to us by KEDO, including heavy fuel oil
delivery, consumption, and storage data; KEDO annual reports; monthly
and annual consumption data summaries prepared by KEDO's contractor,
Fluor Daniel, Inc.; KEDO Executive Board resolutions; and reports
submitted by KEDO officials and Fluor Daniel personnel following
their monitoring trips to North Korea.  In addition, we reviewed a
report prepared by Management Strategies, Inc., an independent
consultant, on monitoring the use of KEDO-supplied heavy fuel oil. 
We also interviewed cognizant officials from the Department of State,
KEDO, and Fluor Daniel, Inc.  Given our past difficulties in
obtaining North Korea's views, we did not attempt to contact
officials from North Korea.  We conducted our review from May 1999
through September 1999 in accordance with generally accepted
government auditing standards. 

As agreed with your office, we plan no further distribution of this
report until 30 days after the date of this letter.  At that time, we
will send copies to the appropriate congressional committees; the
Honorable Madeleine K.  Albright, Secretary of State; the Honorable
William S.  Cohen, Secretary of Defense; L.  Desaix Anderson, the
Executive Director of KEDO; and other interested parties. 

If you have any questions about this report, please call me at (202)
512-3841 or Gene Aloise at (202) 512-6870.  Other key contributors to
this assignment were Ryan T.  Coles and Victor J.  Sgobba. 

Sincerely yours,

(Ms.) Gary L.  Jones
Associate Director, Energy, Resources,
 and Science Issues

PROFILES OF NORTH KOREAN
POWER/THERMAL FACILITIES CONSUMING
KEDO-SUPPLIED HEAVY FUEL OIL AND
KEDO-INSTALLED MONITORING SYSTEMS
=========================================================== Appendix I

                                                           Estimated
                                                           storage         Share of total
                                                           capacity        heavy fuel
                 Generating      Number                    (metric tons    consumption
                 capacity        of        Number/type of  of heavy fuel   (Aug. 1995-
Facility         (MW(e))         boilers   flow meters     oil             June 1999)
---------------  --------------  --------  --------------  --------------  --------------
Chongjin         150             4         4 ultrasonic    21,200          5 percent
Thermal Power                              flow meters     (includes
Plant                                      installed on    20,000 at
                                           the heavy fuel  nearby
                                           oil supply      Kimchaek iron
                                           line at each    and steel
                                           boiler          works)

East Pyongyang   150             3         6 Coriolis-     1,000           2 percent
Thermal Power                              type flow
Plant                                      meters
                                           installed on
                                           the heavy fuel
                                           oil supply and
                                           return lines
                                           at each boiler

Nyongbyon        Used            3         3 Coriolis-     2,000           1 percent
Thermal Plant    seasonally for            type flow
                 district                  meters
                 heating/no                installed on
                 power output              the heavy fuel
                                           oil supply
                                           lines at each
                                           boiler

Pukchang         1,500           16 (1     4 ultrasonic    12,000          15 percent
Thermal Power                    set of 6  flow meters
Plant                            boilers   installed on
                                 and 1     the common
                                 set of    heavy fuel oil
                                 10        supply and
                                 boilers)  return lines
                                           on each set of
                                           boilers

Pyongyang        500             14        2 ultrasonic    17,000          15 percent
Thermal Power                              flow meters     (includes
Plant                                      installed on    estimated
                                           the common      15,000 in
                                           heavy fuel oil  open-pit
                                           supply and      storage)
                                           return lines
                                           that serve the
                                           entire plant

Sonbong Thermal  200             3         3 ultrasonic    225,000         59 percent
Power Plant                                flow meters     (includes
                                           installed on    10,000 at
                                           the heavy fuel  power plant,
                                           oil supply      90,000 at
                                           line at each    nearby
                                           boiler          refinery tank
                                                           farm, and an
                                                           estimated
                                                           125,000 in
                                                           open-pit
                                                           storage)

Suncheon         200             4         8 Coriolis-     1,000           2 percent
Thermal power                              type flow
plant                                      meters
                                           installed on
                                           the heavy fuel
                                           oil supply and
                                           return lines
                                           at each boiler
-----------------------------------------------------------------------------------------
Notes:  1.  Sonbong Thermal Power Plant is oil fired.  Nyongbyon
Thermal Plant is used only for steam heating.  The other power plants
are coal plants modified to burn a mixture of coal and heavy fuel
oil. 

2.  Each facility consuming KEDO-supplied heavy fuel oil also has a
data recorder installed that prints a daily consumption report and
logs accumulated consumption data to a solid-state history memory
every 6 hours.  Every facility except for Nyongbyon also has upgraded
power-conditioning units installed to compensate for the unreliable
and poor-quality power sources available at the sites.  Nyongbyon
operates only during the winter months, and KEDO officials plan to
install an upgraded power-conditioning unit before the plant begins
operation for the season at the end of 1999. 

3.  In addition to the storage available at each facility, storage
capacity of 9,000 metric tons is available at the port of Nampo and
of 11,000 metric tons at the port of Songrim. 

4.  Estimates of the design specifics of the above North Korean
facilities and heavy fuel oil storage capacity are based on data
provided by North Korea to KEDO. 

Source:  GAO's presentation of data from KEDO. 

*** End of document. ***