Auditors say Iraq cannot account for 618,000mt of fuel oil output

Auditors say Iraq cannot account for 618,000mt of fuel oil output

New York (Platts)--24May2005


Independent auditors have been unable to account for over 618,000mt of fuel
oil produced in Iraq in the latter part of 2004, and Iraqi officials have
failed to provide any adequate explanation on what happened to the oil.
According to a report by the auditing firm KPMG, which was hired by the UN's
International Advisory and Monitoring Board, the value of the missing oil was
around $69-mil. The report, which was released late Monday, said that auditors
were unable to account through domestic consumption, reinjection or export
618,203mt of fuel oil produced in Iraq between Jun 29 and Dec 31, 2004. "The
implication is that fuel oil produced was greater than consumed and exported,"
the report said. The US-led Coalition Provisional Authority handed back
sovereignty to Iraq at the end of June 2004. The KPMG report noted that,
"Consistent with these unreconciled quantities, recorded export sales of fuel
oil decreased by 561,596mt when compared with the prior period. We were not
provided with a satisfactory explanation for these matters."

Iraqi oil exports are handled exclusively by the country's State Oil Marketing
Organization, which is required to deposit the vast majority of proceeds of
oil sales to the Development Fund for Iraq, with just 5% going to the
compensation fund for victims of Iraq's 1990 invasion of Kuwait. In trying to
explain what happened to the missing barrels, the KPMG report said CPA
officials believed the oil was smuggled out of Iraq. "Despite the key internal
controls put in place by the Ministry of Oil, SOMO and the former CPA, the
Government of Iraq believes that in the absence of a fully operational
metering system, it is not possible to determine the volume of all exports of
petroleum and petroleum products" since it assumed sovereignty in late June
2004.

The auditors also found that SOMO is having problems in collecting from
unnamed Asian customers for about $1.5-bil worth of fuel oil that had letters
of credit issued in early 2004. Despite providing the unnamed bank and
customer with documentation under the letters of credit, "Payment has been
refused by the correspondent bank and the customer. SOMO is pursuing these
funds," according to the audit report. The KPMG report also noted that until
the end of last year, the newly sovereign Iraqi government had spent over
$453-mil on its oil sector, with the vast majority of the spending,
$337,027,000, going toward oil product imports. Spending on infrastructure
restoration totaled $83,919,000, while security costs were $20,128,000. Iraq
also spent $12,207,000 on emergency repairs for its pipeline system. Most of
the spending was actually down from what CPA spent between the beginning of
2004 and the hand-over of sovereignty, when oil product imports totaled
$1.891-bil, and emergency pipeline repairs cost $74,643,000, the audit said.

This story was first published in Platts real-time news and market reporting
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