Concerns Arise Over Monitoring Iraq Oil

The international board charged with monitoring Iraq's oil revenue says it is concerned about the lack of equipment measuring how much crude is being extracted and about contracts awarded by the former U.S.-controlled administration without competitive bidding.

In a report to the Security Council (search) circulated Tuesday, the board raised several "areas of concern" about the Development Fund for Iraq and the country's oil production and sales which it said could be used to divert money from the reconstruction fund.

The International Advisory and Monitoring Board (search) was authorized by the Security Council in May 2003 to ensure the "transparent" operation of the fund, which was set up at the Central Bank in Baghdad to receive Iraq's oil revenue and frozen assets from the ousted regime led by Saddam Hussein for use in rebuilding the country.

The fund was controlled by the United States and Britain, Iraq's occupying powers, until the June 28 transfer of sovereignty to the new interim government. A council resolution in early June transferred control of the fund to the interim government and continued the board's mandate until after elections to be held by Dec. 31, 2005.

The board is specifically charged with ensuring that the Development Fund is used "in a transparent manner" for Iraq's reconstruction "and that export sales of petroleum, petroleum products and natural gas from Iraq are made consistent with prevailing international market best practices."

The report to the Security Council said the accounting firm KPMG was selected by the former U.S.-led Coalition Provisional Authority to conduct an external audit of Iraq's oil and gas sales, the accounts where the revenue is held, the Development Fund, and its disbursements.

The board said it expects audits from the fund's inception to June 30 to be submitted by the end of September and it said they will be made public.

As a result of briefings by the coalition, the report said the board identified "a number of issues of concern."

First, "the board noted that there was a lack of adequate control over the extraction of crude oil, as evidenced by the absence of metering or measurement of extracted oil quantities," the report said.

The absence "precludes a reconciliation of all crude oil extracted with its eventual utilization, and allows oil proceeds to be diverted," it said.

While the board noted that this practice may have preceded the coalition's arrival in Iraq, it said "this was a critical weakness that needed to be remedied so as to ensure that oil export sales have been deposited in the Development Fund for Iraq."

The board called for "the expeditious installation of the metering equipment" and said it was informed by the coalition that steps were being taken to address the issue, "first by adopting measures to curtail reported smuggling activities and by the allocation of resources to implement a metering system."

The board's report also noted that initially a shared of residual oil from the refining process was bartered for light oil products and other commodities such as electricity.

The coalition informed the board that it intended to gradually eliminate these barter transactions, but the board recommended that this be done "expeditiously" because revenue from such sales was not being deposited in the Development Fund "and because of the scope for fraudulent or non-transparent transactions," the report said.

At its last meeting in June, the board said it was informed that only one bartering contract remained.

The board said it was also told that the coalition had awarded contracts funded by the Development Fund without using competitive bidding procedures.

The board asked for any audits relating to these contracts but has not been able to obtain access to them, the report said.