Statement by Benon V. Sevan Executive Director

Office of the Iraq Programme
May 29, 2002

This is an excerpt regarding revenues and oil pricing. To read full statement

Revenue generation

During my briefing at the Council's informal consultations held on 26 February this year, I had observed the fact that despite all the billions of dollars we had been talking about, the programme implementation was facing a financial crisis of growing magnitude due to the substantial drop in revenues received from Iraqi oil exports under the programme. As at 15 February 2002, there were 699 approved applications for humanitarian supplies with a total value of $1.6 billion, waiting to be funded. The amount of just over $1.9 billion still available then in the escrow account was earmarked for oil spare parts and equipment ($1.34 billion) and for the purchase of supplies under the special allocation ($584 million) included in the distribution plan.

It is regrettable that an agreement regarding the setting of the price of Iraqi crude oil has remained elusive. Thus, the continuing practice of setting the price of Iraqi crude oil retroactively by the 661 Committee, which, combined with the continued excessive premia demanded by Iraqi crude oil contract-holders, has led to an average reduction in exports of some 500,000 barrels per day or $1.2 billion in lost revenue since the beginning of phase XI on 1 December 2001. Moreover, Iraq's month-long suspension of its oil exports, starting on 8 April this year, resulted in a further estimated revenue loss of some $1.2 billion.

With the end of the prolonged consultations on the GRL list and the adoption of resolution 1409 (2002), I do hope that the members of the 661 Committee would spare no effort to resolve the difficulties encountered with regard to the pricing of the Iraqi crude oil. In that regard, the full cooperation of the Government of Iraq is essential. Unless the question of the pricing mechanism for setting the price of Iraqi crude oil is resolved urgently, all other efforts and decisions taken to expedite the approval of humanitarian supplies for Iraq may unfortunately remain academic. Irrespective of improvements in procedures, including those recently adopted by the Council in resolution 1409 (2002), without the necessary funds available in the escrow account it will be impossible to implement the humanitarian programme effectively.

I am pleased to inform you that the Government of Iraq has responded positively to my suggestion to revise downwards the allocations to the oil sector in various phases, in order to utilize the balance of $1.1 billion for funding priority applications in other sectors, making $778 million available for such purposes. However, the same approach cannot be taken with regard to the funds ($739 million) reserved for the "special allocation" sector, which can be used only for strictly humanitarian projects to address the needs of the most vulnerable groups. Accordingly, as at 24 May, there was a total of 678 approved humanitarian applications awaiting funding, with a total value $1.75 billion.

As at 22 May, the shortfall in available funds for the purchase of humanitarian supplies was approximately $1.84 billion. The total of reserved funds for the oil and the "special allocation" sectors was about $1.07 billion, including $329 million for the oil sector.

On 10 May 2002, in a letter addressed to the Permanent Representative of Iraq, I reiterated the recommendations made previously on several occasions, that the Government of Iraq may wish to consider, inter alia, the following:

- Review with the suppliers concerned the cases of 651 applications worth $1.24 billion, which were approved over a year ago, but under which no shipments to Iraq had been delivered as at 30 April 2002, and cancel those contract applications, which were unlikely to be fulfilled.

- Review the cases of 238 applications worth $506 million, which were approved before 31 December 2001, but for which the Central Bank of Iraq had not requested the issuance of letters of credit as at 30 April 2002, and cancel those contract applications which were unlikely to be fulfilled.

We have been informed by the Government of Iraq that each of the concerned ministries would be reviewing all the approved applications submitted under their respective sectors, with a view to identifying those applications which were no longer a priority. Those applications which were not considered to be of sufficient priority to warrant funds at this stage would be cancelled after consultations with the suppliers concerned. The Government of Iraq would also be reviewing the list of approved applications for which letters of credit had been opened but against which no deliveries had been made as at 30 April 2002. Furthermore, a similar review would be undertaken by the ministries concerned with regard to applications placed on hold, taking into account the fact that some applications had been placed on hold for a long period and that the contractors concerned may not wish to continue with their contracts under the same terms as originally contracted.

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