Summary
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.
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.
Recommendations
Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director:
Team:
Phone:
Joseph A. Christoff
Government Accountability Office: International Affairs and Trade
(202) 512-8979
Recommendations for Executive Action
Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to 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.
Agency Affected: Department of State
Status: Open
Comments: The agency indicated in its agency comments or letter to relevant Congressional committees, 60 days after report issuance, that it concurred with the recommendation and planned to take action to implement it. The agency took certain actions, but GAO does not regard these as fully responsive. In August 2008, the Department of State told GAO that the U.S. embassy in Iraq had drafted an outline for an integrated National Energy Strategy document and presented it to the Government of Iraq for its consideration. GAO is monitoring or reviewing agency actions to implement the recommendation. GAO has ongoing work in this area.
Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to 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.
Agency Affected: Department of State
Status: Open
Comments: 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. Regarding this particular recommendation, 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.
Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to 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.
Agency Affected: Department of State
Status: Open
Comments: 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. On this particular recommendation, 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.
Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to set milestones and assign resources to expedite efforts to develop adequate ministry budgeting, procurement, and financial management systems.
Agency Affected: Department of State
Status: Open
Comments: 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. Regarding this particular recommendation, 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.
Recommendation: The Secretary of State, in conjunction with relevant U.S. agencies and in coordination with the donor community, should work with the Iraqi government and particularly the Ministries of Oil and Electricity to 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 Affected: Department of State
Status: Open
Comments: 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. Regarding this particular recommendation, 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.
