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GENERAL
S/1998/330

LETTER DATED 15 APRIL 1998 FROM THE SECRETARY-GENERAL
ADDRESSED TO THE SECURITY COUNCIL

 

Pursuant to paragraphs 12 and 13 of Security Council resolution 1153 (1998) of 20 February 1998, I have the honour to submit to the Security Council the executive summary of the report of the group of experts established pursuant to paragraph 12 of the resolution to determine, in consultation with the Government of Iraq, whether Iraq is able to export petroleum or petroleum products sufficient to produce the total sum referred to in paragraph 2 of the resolution, not exceeding a total of US$ 5.256 billion (see annex). The group of experts visited Iraq from 12 to 22 March 1998 and were accompanied by two United Nations oil overseers. The full report of the group of experts is being made available to the members of the Council.

After the adoption of Security Council resolution 1153 (1998), I was informed by the Government of Iraq that it had no objection to increasing revenues from the sale of its petroleum. The Government emphasized, however, that in view of the present technically precarious condition of the structure for the production, processing and transportation of its petroleum, and in view of the extremely low level of petroleum prices at present, it was not at all possible to guarantee that Iraq had the capacity to achieve the increase in production required to realize the maximum sum indicated in the resolution.

According to the Government, assuming that the requirements for spare parts and repairs are met urgently, the new sum will not exceed $4 billion, and it is highly probable that it will be between $3.5 billion and $4 billion. It may be recalled that the price per barrel was $18 when the Memorandum of Understanding was first implemented, compared with the present price of $10.50 per barrel for Iraqi crude oil.

In paragraph 13 of its resolution 1153 (1998), the Security Council requested the Secretary-General to report to it if Iraq was unable to export petroleum or petroleum products sufficient to produce the total sum ($5.256 billion) and, following consultations with the relevant United Nations agencies and the Iraqi authorities, to make recommendations for the expenditure of the sum expected to be available, consistent with the distribution plan referred to in paragraph 5 of the resolution.

The group of experts is less optimistic than the Government of Iraq is regarding the Government's capacity to meet the $4 billion target during the period envisaged. Its overall impression is that the oil industry of Iraq is in a lamentable state and that the developed oilfields have had their productivity seriously reduced, some irreparably, during the past two decades. In its view, the oil processing and treatment facilities, refineries and storage terminals in the country have been severely damaged and continue to deteriorate, and that this deterioration, particularly in the oilfields, will accelerate until significant action is taken to contain and relieve the problems. The group of experts has strong doubts that the production profile of 3 million barrels per day, as projected by the Government, will be sustainable for the period envisaged. It has also stated that a sharp increase in production without concurrent expenditure on spare parts and equipment would severely damage oil-containing rocks and pipeline systems, and would be against accepted principles of "good oilfield husbandry".

According to the group of experts, should the current average price of $10.50 per barrel for Iraqi crude oil remain unchanged, based on the existing export capacity of 1.6 million barrels per day, revenues in the amount of only $3 billion could be achieved during a 180-day period, starting in June 1998, provided the spare parts required are ordered immediately. During a 180-day period starting in December 1998, Iraq could export 1.7 million barrels a day, generating $3.9 billion based on a price of $12.50 per barrel.

The two United Nations oil overseers who accompanied the group of experts have also indicated that the Iraqi oil industry is in desperate need of spare parts in order to comply with the provisions of Security Council resolution 1153 (1998). They share the view of the group of experts that the request by the Ministry of Oil for $300 million for spare parts - $210 million for upstream operations and $90 million for downstream operations - is reasonable and that it reflects only the most essential and urgent needs of the Iraqi oil industry.

The list of the spare parts needed is provided in annex IV to the report of the group of experts. The United Nations oil overseers have indicated that the current condition of the "downstream" storage and transportation sectors of the Iraqi oil industry seriously affects the ability to produce petroleum and petroleum products for export under the provisions of the programme. The group of experts is presently carrying out a comprehensive review of the list of spare parts provided by the Government with a view to fully verifying the price, delivery time and relevance of all the items concerned. Owing to time constraints, the review could not be completed before the present letter was finalized, although it is expected to be completed very soon. Once the review has been completed, copies of the list with comments thereon by the experts will be made available to the Security Council Committee established by Council resolution 661 (1990) of 6 August 1990.

The group of experts visited suitable warehouses in both the northern and southern parts of Iraq, and has provided in the main report details of the methodology of monitoring the arrival, storage and utilization of the spare parts. The two United Nations oil overseers share the view of the group of experts in that regard.

In view of the determination made that under the existing circumstances Iraq is unable to export petroleum or petroleum products sufficient to produce the total sum of $5.256 billion referred to in resolution 1153 (1998), it is recommended that the Security Council decide that the authorization given to States by paragraph 1 of its resolution 986 (1995) of 14 April 1995 shall permit the import of petroleum and petroleum products originating in Iraq, including financial and other essential transactions directly relating thereto, sufficient to produce a sum, in the next 180-day period, of up to $4 billion, on the understanding that as and when the increased funds become available, they will be utilized on a priority basis as reflected in the approved distribution plan prepared pursuant to paragraph 5 of resolution 1153 (1998). As the revenues generated will depend not only on increased exports of oil but also on the market price of oil exported, the Council may in addition wish to decide to review further the level of the sum authorized during its interim review of the report of the Secretary-General to be submitted pursuant to paragraph 10 of resolution 1153 (1998), also taking into account the progress made in the ordering and arrival of spare parts and repairs.

With respect to spare parts, it may be recalled that in paragraph 12 of its resolution 1153 (1998), the Security Council expressed its readiness to take a decision, on the basis of the recommendations of the Secretary-General, regarding authorization of the export of the necessary equipment to enable Iraq to increase the export of petroleum or petroleum products and to give the appropriate direction to the Committee established by resolution 661 (1990). I wish to recommend to the Council that it authorize the export to Iraq of the equipment necessary to enable Iraq to increase most urgently the export of petroleum or petroleum products. As indicated above, the total cost of the spare parts and equipment needed is estimated at $300 million ($210 million for upstream requirements and $90 million for downstream requirements). For covering the cost of the spare parts and equipment, the Council may wish to apply the procedures outlined in paragraph 10 of resolution 986 (1995).

In order to expedite the approval process for the spare parts and equipment, it is recommended to the Security Council that it consider the possibility of authorizing the United Nations oil overseers to approve contracts for spare parts, once the list is reviewed and finalized by the Security Council Committee, pursuant to the same procedures currently applied for oil contracts, on the understanding that the required expertise and technical support will be made available to the oil overseers, as appropriate. An effective monitoring of spare parts, from approval to delivery in Iraq, storage and utilization, will be ensured. Should this recommendation be acceptable to the Council, I will submit to the Security Council Committee, after the comprehensive review of the list of spare parts referred to above, details for the monitoring of spare parts inside Iraq.

At my invitation, a delegation from Iraq led by the Minister of Foreign Affairs, His Excellency Mr. Mohammed Said Al-Sahaf, visited New York from 9 to 13 March 1998 to review with the Secretariat the implementation of resolution 1153 (1998) and the preparation of the distribution plan. At present, consultations are under way between the United Nations and the technical ministries in Iraq regarding the preparation of the draft distribution plan. After the Security Council's decision on the level of the sum to be available in the next phase for the humanitarian programme, the Government of Iraq will submit the draft distribution plan for my consideration and approval.

I should like to take this opportunity to thank the members of the group of experts, the United Nations oil overseers and Saybolt Nederland B.V. for their valuable contribution as well as to the Government of Iraq for its full cooperation with the group of experts.

Executive Summary of the Experts Report - (PDF format)