Index

Nuclear Nonproliferation: Heavy Fuel Oil Delivered to North Korea Under
the Agreed Framework (Testimony, 10/27/1999, GAO/T-RCED-00-20).

Pursuant to a congressional request, GAO discussed the status of heavy
fuel oil delivered to North Korea under the October 1994 U.S./North
Korean Agreement Framework, focusing on the: (1) status of heavy fuel
oil funding and deliveries to North Korea; and (2) controls in place to
detect 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 for unintended uses.

GAO noted that: (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; (2) for the first 3 years of the Agreed Framework's
implementation, shipments to North Korea were not regular and
predictable because the Korean Peninsula Energy Development Organization
(KEDO)--the organization that has arranged and paid for the majority of
the heavy fuel oil shipments--did not always have sufficient funding to
pay for heavy fuel oil deliveries; (3) 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; (4) however, a recent rise in
oil and freight prices caused the organization to seek additional
funding from the United States in order to pay for this year's remaining
scheduled 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 North Korean heating and electricity-generating
plants that are authorized to use KEDO-supplied heavy fuel oil; (6) the
purpose of this system is to ensure that North Korea uses the heavy fuel
oil only for heating and electricity generation at the facilities; (7)
KEDO's portion of the monitoring system consists of meters that measure
the flow of fuel to oil-fired boilers at the plants, recorders that
compile daily and cumulative information on flow rates, and periodic
monitoring visits to each plant; (8) power outages and the poor quality
of the electrical power available to the plants have affected the
operation of the monitoring equipment; (9) KEDO's monitoring system by
itself 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) however, the U.S. government supplements KEDO's
monitoring system with national technical means to provide additional
confidence that the heavy fuel oil is being used for heating and
electricity generation; (11) State officials have acknowledged that
there is some evidence that North Korea has used perhaps 5 percent (or
75,000 metric tons) of the heavy fuel oil for unauthorized purposes; and
(12) according to State, no clear evidence has emerged of any
significant diversion of the deliveries of heavy fuel oil to North Korea
to unauthorized purposes.

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

 REPORTNUM:  T-RCED-00-20
     TITLE:  Nuclear Nonproliferation: Heavy Fuel Oil Delivered to
	     North Korea Under the Agreed Framework
      DATE:  10/27/1999
   SUBJECT:  Nuclear proliferation
	     Arms control agreements
	     Electric power transmission
	     International relations
	     Fuels
	     Powerplants
	     Energy consumption
	     Electric power generation
	     Nuclear reactors
	     Monitoring
IDENTIFIER:  North Korea
	     Agreed Framework Between the United States and the
	     Democratic People's Republic of Korea

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

Before the Committee on International Relations, House of
Representatives

For Release
on Delivery
Expected at
10 a.m.  EDT
Wednesday
October 27, 1999

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

Statement of Ms.  Gary L.  Jones, Associate Director,
Resources, Community, and Economic Development Division

GAO/T-RCED-00-20

GAO/RCED-00-20T

(141399)

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

  KEDO -
  GAO -
  RCED -

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

We are here today to provide information on the status of heavy fuel
oil delivered to North Korea under the October 1994 U.S./North Korean
Agreed Framework.\1 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.  Our statement, which
is based on our recent report on this topic for the Committee,\2
summarizes (1) the status of heavy fuel oil funding and deliveries to
North Korea and (2) the controls in place to detect 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
for unintended uses. 

In summary, Mr.  Chairman: 

  -- 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 were not regular and
     predictable because the Korean Peninsula Energy Development
     Organization (KEDO)the organization that has arranged and paid
     for the majority of the heavy fuel oil shipmentsdid 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.  However, a recent rise in oil and freight
     prices caused the organization to seek additional funding from
     the United States in order to pay for this year's remaining
     scheduled heavy fuel oil deliveries.

  -- The State Department and KEDO, with the cooperation of North
     Korea, have implemented a monitoring system at the seven North
     Korean heating and electricity-generating plants that are
     authorized to use KEDO-supplied heavy fuel oil.  The purpose of
     this system is to ensure that North Korea uses the heavy fuel
     oil only for heating and electricity generation at the
     facilities.  KEDO's portion of the monitoring system consists of
     meters that measure the flow of fuel to oil-fired boilers at the
     plants, recorders that compile daily and cumulative information
     on flow rates, and periodic monitoring visits to each plant. 
     Power outages and the poor quality of the electrical power
     available to the plants have affected the operation of the
     monitoring equipment.  KEDO's monitoring system by itself 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, neither the U.S.  government nor
     KEDO has 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 supplements KEDO's monitoring system with national
     technical means 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 North Korea has used perhaps 5 percent (or 75,000
     metric tons) of the heavy fuel oil for unauthorized purposes.\3
     According to State, no clear evidence has emerged of any
     significant diversion of the deliveries of heavy fuel oil to
     North Korea to unauthorized purposes. 

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

\2 Nuclear Nonproliferation:  Status of Heavy Fuel Oil Delivered to
North Korea Under the Agreed Framework (GAO/RCED-99-276, Sept.  30,
1999).  We are also planning to issue a classified version of this
report. 

\3 At the time of this estimate, 1.5 million metric tons of heavy
fuel oil had been delivered to North Korea. 

   BACKGROUND
---------------------------------------------------------- Chapter 0:1

In implementing the Agreed Framework, KEDO will purchase and supply
North Korea with two light-water nuclear power reactors with a
combined total generating capacity of approximately 2,000 megawatts
of electrical power.  In exchange, 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.  Until the first reactor is complete, the United
States pledged to arrange to provide alternative energy to North
Korea for heating and electricity generation.  At present, the
schedule for delivering the first reactor has not been concluded. 
The alternative energy is in the form of 500,000 metric tons of
heavy, or residual, fuel oil delivered annually.\4 This type of 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 lighter forms of petroleum, such as gasoline,
diesel fuel, or kerosene, that can be extracted from heavy fuel oil
are very small compared with the quantities that can be extracted
from crude oil or refined petroleum products.  Through agreement with
North Korea, heavy fuel oil supplied by the organization is being
consumed in seven of the country's heating and electrical facilities
(see app.  I). 

--------------------
\4 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. 

   STATUS OF HEAVY FUEL OIL
   FUNDING AND DELIVERIES TO NORTH
   KOREA
---------------------------------------------------------- Chapter 0:2

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.  The United
States paid $5.5 million for an initial shipment of 50,000 metric
tons in 1995 and has since contributed $133 million to KEDO for heavy
fuel oil purchases and $15 million for KEDO's administrative
expenses.  Contributions to KEDO by the European Atomic Energy
Communityan organization of the European Union, Australia, and 21
other countries and loans made to finance heavy fuel oil purchases
paid for the remaining $74.5 million in heavy fuel oil costs (see
app.  II). 

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.  However, in the past 2 years, shipments have become
more regular as the organization's financial condition has improved,
with increased contributions from its members and decreased costs to
purchase and ship the heavy fuel oil.  Because of sharp rises in
heavy fuel oil prices since February 1999 (see app.  III), KEDO
received an additional $18.1 million contribution from the United
States on September 29, 1999, in order to complete this year's
500,000-metric-ton allocation and to begin next year's deliveries. 

   CONTROLS IN PLACE TO DETECT
   DIVERSION OF HEAVY FUEL OIL TO
   PURPOSES NOT PRESCRIBED IN THE
   AGREED FRAMEWORK
---------------------------------------------------------- Chapter 0:3

To provide assurance that the heavy fuel oil supplied by KEDO is
being used for heating and electricity generation as provided in the
Agreed Framework, the organization, on the basis of agreements it
reached with the State Department, established a heavy fuel oil
monitoring system beginning in mid-1995.  This monitoring system
consists of flow meters and data recorders installed at each of the
seven sites that consume heavy fuel oil.  This equipment, which is
supplied and paid for by the organization, measures and records the
daily and cumulative flow of oil at each facility.  KEDO and its
contractorFluor Daniel, Inc.also conduct periodic monitoring visits
to North Korea to maintain the flow meter system and retrieve the
data stored in the data recorders. 

KEDO has experienced recurring 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.  In 1998,
for example, at the Pyongyang Thermal Power Plant, which consumed 16
percent of the total 1998 heavy fuel oil deliveries, monitoring
equipment was inoperative for nearly half the year.  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 at the
facilities.  Power-conditioning equipment that was initially
installed to compensate for the frequency fluctuations 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 addition, 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.\5

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.  Data derived from
consumption statistics reported by North Korea indicate that about
110,000 metric tons of heavy fuel oil was being stored as of the end
of June 1999 (see app.  IV).  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
agreement stipulating that North Korea segregate KEDO-supplied heavy
fuel oil from the heavy fuel oil North Korea obtains from other
suppliers.  Similarly, 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 the North Korean ports to the time it passes through the
flow meters at the plants where it is eventually consumed.  KEDO
officials, during their monitoring visits, have observed storage
facilities at the seven plants; however, they cannot confirm that
these are the only facilities where KEDO-supplied heavy fuel oil is
being stored. 

A January-April 1999 outage of KEDO's monitoring equipment at the
Sonbong Thermal Power Plant--a facility that, according to KEDO, has
consumed over half of the heavy fuel oil supplied by the
organization--illustrates the problems with KEDO's monitoring system. 
During this outage of over 3 months, the only available 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 the
plant's storage facilities.  However, since KEDO has no monitoring
equipment installed at these storage facilities, it could not verify
North Korea's reported statistics.  During this period, North Korea
reported that heavy fuel oil was being consumed at levels
substantially exceeding those historically recorded at Sonbong (see
app.  V).  When the monitoring system was repaired at the end of
April, North Korea's reported consumption returned to normal levels. 
When KEDO officials inquired about this increase in reported
consumption during the outage and the sudden return to normal
consumption, 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 in place to
determine the amount of oil in these storage facilities, KEDO could
not confirm that this leakage had 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. 

KEDO's system alone is not designed to provide complete assurance
that North Korea is using the heavy fuel oil delivered by KEDO as
prescribed by the Agreed Framework.  Although KEDO's monitoring
system has experienced problems, the U.S.  government uses national
technical means to supplement KEDO's equipment to ensure that the
heavy fuel oil is being used for heating and electricity generation. 
The State Department reported to the Congress in March 1999 that
KEDO's monitoring arrangements, along with these 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 (or
75,000 metric tons) of the heavy fuel oil has been used for
unauthorized purposes.  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 heavy fuel oil delivered
to North Korea is not diverted to military uses or sold abroad. 
These officials emphasize that heavy fuel oil is not useful for
purposes other than heating and electricity generation.  While they
admit that it is theoretically possible to extract other types of
fuel from this oil, State Department officials believe that the
process would be so inefficient (i.e., would produce such a small
amount of more useful fuel) that there would be little incentive to
do so.  In their opinion, the current monitoring regime serves as a
good tool to ensure that North Korea is abiding by its commitments to
the United States. 

--------------------
\5 According to State Department officials, when the monitoring
system was designed, monitoring of storage facilities was considered
but rejected as impractical because it would require dedicated
storage tanks for KEDO-supplied heavy fuel oil and would add little
to the capability of the monitoring system. 

-------------------------------------------------------- Chapter 0:3.1

This concludes my formal statement.  If you or other members of the
Committee have any questions, we will be pleased to respond to them. 

   CONTACT AND ACKNOWLEDGMENT
---------------------------------------------------------- Chapter 0:4

For future contacts regarding this testimony, please contact Ms. 
Gary L.  Jones at (202) 512-3841.  Individuals making key
contributions to this testimony included Gene Aloise, Ryan T.  Coles,
and Victor J.  Sgobba. 

NORTH KOREAN PORTS RECEIVING AND
FACILITIES CONSUMING KEDO-SUPPLIED
HEAVY FUEL OIL
=========================================================== Appendix I

   (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. 

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. 

CONTRIBUTIONS TO KEDO AVAILABLE
FOR HEAVY FUEL OIL PURCHASES AS OF
JULY 31, 1999
========================================================== Appendix II

   (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 KEDOin the form of a
collateral fund to be used as needed to pay for financing KEDO's
expenses in case of a liquidity shortfallis 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. 

COMMODITY AND FREIGHT COST PER
METRIC TON OF HEAVY FUEL OIL,
OCTOBER 1995-AUGUST 1999
========================================================= Appendix III

   (See figure in printed
   edition.)

Source:  GAO's analysis of data from KEDO. 

KEDO-SUPPLIED HEAVY FUEL OIL IN
STORAGE, AUGUST 1995-JUNE 1999
========================================================== Appendix IV

   (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:  GAOs analysis of data from KEDO. 

NORTH KOREA'S REPORTED BIWEEKLY
CONSUMPTION OF HEAVY FUEL OIL AT
SONBONG THERMAL POWER PLANT,
JANUARY 1996-JUNE 1999
=========================================================== Appendix V

   (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. 

*** End of document. ***