U.S. watchdog cites KBR, U.S. and Iraq governments for poor south oil reconstruction

By BEN LANDO, UPI Energy Editor   |   Jan. 13, 2009 at 6:44 PM   |   0 comments

A new audit of a $1.2 billion contract for reconstruction in Iraq's southern oil sector split the blame for cost overruns and underperformance between the main contractor, Kellogg Brown & Root, and the U.S. and Iraqi governments.

Kellogg Brown & Root, a subsidiary of Halliburton until April 2007 and now an independent firm known as KBR, was awarded the vaguely worded contract in January 2004. Nearly completed now, the audit said the work totaled just $722.3 million, 78 percent of it from U.S. taxpayers.

The U.S. Special Inspector General for Iraq Reconstruction in a report released Tuesday acknowledged the major obstacles the contract faced -- from the mess in the sector left by Saddam Hussein's mismanagement to the post-invasion looting and ongoing security situation.

Still, it criticized the U.S. government's ability to adequately understand the problems before drawing a contract to fix them and its inability to provide oversight.

Iraq depends on oil revenue -- thus steady and increasing oil production -- to pay its bills. But wars, sanctions and misuse by Saddam Hussein hurt the oil and gas fields and infrastructure. After the invasion, poor Iraqis looted facilities left unprotected by coalition forces, adding to reconstruction costs.

The extent of damage was not clear to the U.S. government, but it went forward with reconstruction contracts. The KBR contract initially identified a broad need for work in southern Iraq, put a price tag on it, and then specified projects in subsequent task orders.

"The task orders were initially issued in February 2004 with a not-to-exceed amount, and statements of work were generally broad because exact requirements were not known when they were issued," the SIGIR report said. "In fact, detailed requirements were not known well enough to develop a definitive scope of work due to the unique nature of the work taking place to reconstruct Iraq."

The task orders ranged from providing "life-support services to government and contractor personnel," such as housing, food, laundry, to importing and delivering fuel around the country, to a variety of capital projects necessary to producing oil.

The report said KBR largely increased the value of Iraqi facilities it worked on, however; "the various tasks took longer than planned; were frequently modified, scaled back and/or terminated; and increased in cost over time."

"KBR did not adhere to cost and schedule goals and did not produce required oversight reports," the report added, pointing out KBR received only a quarter of the performance-based award fees for which it was eligible.

The SIGIR investigations unit is looking into allegations of KBR using "substandard piping material and a fraudulent material certification." KBR referred the case to the U.S. Army Criminal Investigation Division, which has not acted, the report said.

"As noted in the SIGIR report, KBR's work in Iraq improved prewar facilities," said Heather Browne, KBR director of communications. "Our efforts are greatly valued by our customer, the U.S. Army. We remain proud and honored to serve and support servicemen and -women who face dangerous and challenging missions each day.

"Major contributors to the cost of the contract, including looting, prewar maintenance and security, impacted KBR's performance. We have fully cooperated with SIGIR in providing information requested of us, and our commitment in this regard remains."

SIGIR's report, mirroring previous and ongoing audits of oil reconstruction efforts in Iraq by SIGIR, other government agencies and the media, says, "The scale and complexity of the rebuilding of the oil infrastructure was challenging to government contract oversight officials and required use of a contractor to help provide program management support."

The outside contractor received mixed reviews from government agencies, the SIGIR report said, and U.S. government "contract oversight suffered from the lack of continuity of oversight personnel." Thirteen different government contracting officers kept tabs on the account since January 2004.

The U.S. Army Corps of Engineers administered the contract. In a response to a draft SIGIR report and published in Tuesday's final version, the USACE said: "Pre-award looting, post-award security issues, and inadequate prewar maintenance of the facilities, combined with limited pre-existing knowledge of the state of those facilities, were the major factors increasing contract costs."

The task orders were modified often dozens of times, usually increasing the cost but often in line with clarifying the overall contracts scope.

Forty-six percent of the KBR contract costs -- including nearly all of the $159.6 million in Iraqi funds -- went to 16 "high-value task orders … to repair and restore oil and gas facilities" worth $332.6 million.

Most task orders were initially $5 million each, a baseline that soon soared when reality on the ground set in.

And a third of the total task orders, after paying $167.5 million -- 23.2 percent of the KBR contract's final costs -- were then terminated.

KBR was paid $40,269 from Iraqi coffers for a project to clean up pipeline spills, even though the U.S. government canceled the task order for "lack of progress" five days after it was awarded. It was then contracted to the Iraqi Oil Ministry's South Oil Co.

The largest of the eliminated orders -- one of the largest of the entire contract -- was axed "after most of the work had been completed."

The U.S. government had already spent $146.7 million -- 87.5 percent of eliminated orders, 20.3 percent of total contract costs -- on "Task Order 11," to restore natural gas liquid and liquefied petroleum gas plants and increase domestic production there.

Task Order 11 was modified 11 times between May 2004 and May 2007, when it was terminated. The report cites U.S. government agencies' change of plans for the project, which then "increased life support and security costs and ultimately caused the project to be terminated for convenience due to insufficient funds."

At the time of termination "essentially all the work had been completed," the report stated. What remained would cost only $12.5 million, according to a KBR estimate cited in the report. And still, the report added, enough was done to exceed the goal for producing products, if the plants were fired up. The facilities were complete but not all systems were "commissioned or started up before KBR demobilized."

The Iraqis were left with a newly refurbished but warehoused rotor for a turbine gas compressor, which the project needs. It hasn't been installed yet, either because of the Oil Ministry's lax reconstruction efforts, low institutional capacity, lack of know-how, or a combination of the three.

SIGIR warned of Iraq's unwillingness or inability to keep U.S.-funded projects maintained: "Unless the Government of Iraq completes what KBR started and maintains what it provided, the value of KBR's effort will be diminished and possibly lost."

The report recommends the U.S. Embassy in Baghdad ensure the government of Iraq is capable of maintaining the projects after completion.

And for future war zone reconstruction efforts, the report says, don't do this again:

"The United States undertook reconstruction projects in Iraq in an unstable security environment, beset by funding uncertainties and time constraints. These conditions made it difficult to accomplish pre-award planning, define project requirements, and oversee contractor performance," the report said. "Nevertheless, fundamental elements of contract and project management and oversight should be accomplished to the extent possible."

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(e-mail: blando@upi.com)

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