oversight

Nuclear Nonproliferation: Heavy Fuel Oil Delivered to North Korea Under the Agreed Framework

Published by the Government Accountability Office on 1999-10-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office

GAO                Testimony
                   Before the Committee on International Relations, House
                   of Representatives




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



                   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
    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 shipments—did
    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


    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.



    Page 1                                                                         GAO/T-RCED-00-20
             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.


             In implementing the Agreed Framework, KEDO will purchase and supply
Background   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



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



             Page 2                                                                             GAO/T-RCED-00-20
                       being consumed in seven of the country’s heating and electrical facilities
                       (see app. I).


                       As of July 31, 1999, 1.9 million metric tons of heavy fuel oil had been
Status of Heavy Fuel   delivered to North Korea at a cost of $222 million. The United States paid
Oil Funding and        $5.5 million for an initial shipment of 50,000 metric tons in 1995 and has
Deliveries to North    since contributed $133 million to KEDO for heavy fuel oil purchases and
                       $15 million for KEDO’s administrative expenses. Contributions to KEDO by
Korea                  the European Atomic Energy Community—an 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.


                       To provide assurance that the heavy fuel oil supplied by KEDO is being used
Controls in Place to   for heating and electricity generation as provided in the Agreed
Detect Diversion of    Framework, the organization, on the basis of agreements it reached with
Heavy Fuel Oil to      the State Department, established a heavy fuel oil monitoring system
                       beginning in mid-1995. This monitoring system consists of flow meters and
Purposes Not           data recorders installed at each of the seven sites that consume heavy fuel
Prescribed in the      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.
Agreed Framework       KEDO and its contractor—Fluor 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



                       Page 3                                                      GAO/T-RCED-00-20
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

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.



Page 4                                                                             GAO/T-RCED-00-20
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



Page 5                                                      GAO/T-RCED-00-20
                 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.


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


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




                 Page 6                                                       GAO/T-RCED-00-20
Page 7   GAO/T-RCED-00-20
Appendix I

North Korean Ports Receiving and Facilities
Consuming KEDO-Supplied Heavy Fuel Oil




                                         China                                 Sonbong
                                                                                              Russia

                                                                        Chongjin




                                         North Korea




                                Nyongbyon
                                                                             Sea
                                        Pukchang                              of
                                   Suncheon                                 Japan
         Korea                    East Pyongyang
          Bay                    Pyongyang
                        Nampo
                                                                Demarcation Line and
                         Songrim                                 Demilitarized Zone
                                                                                         Ports receiving KEDO-
                                                                                         supplied heavy fuel oil

                                                                                         Heating and/or electrical
                                                                                         plants consuming KEDO-
                                                                                         supplied heavy fuel oil

                                                   SEOUL

                                                                                          0    25        50 Kilometers
                 Yellow Sea                            South Korea                        0         25          50 Miles




                                                                                          (Figure notes on next page)




                                       Page 8                                                       GAO/T-RCED-00-20
Appendix I
North Korean Ports Receiving and Facilities
Consuming KEDO-Supplied Heavy Fuel Oil




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.




Page 9                                                                            GAO/T-RCED-00-20
Appendix II

Contributions to KEDO Available for Heavy
Fuel Oil Purchases as of July 31, 1999


                Dollars in millions

                                                                    $14.3 million
                                           •                        All others

                                                •



                                                    $50.9
                    $132.9 million                  million
                         •                           •




                                                                       $9.3 million
                                                                       Australia
                                                                      European Atomic Energy
                                                                      Community

                                                                      United States




               Notes: 1. Total contributions to KEDO available for heavy fuel oil purchases equal $207.4 million.

               2. Japan’s contribution of $19 million to KEDO—in the form of a collateral fund to be used as
               needed to pay for financing KEDO’s expenses in case of a liquidity shortfall—is 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.




               Page 10                                                                         GAO/T-RCED-00-20
Appendix III

Commodity and Freight Cost Per Metric Ton
of Heavy Fuel Oil, October 1995-August 1999




               Source: GAO’s analysis of data from KEDO.




               Page 11                                     GAO/T-RCED-00-20
Appendix IV

KEDO-Supplied Heavy Fuel Oil in Storage,
August 1995-June 1999




                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: GAO‘s analysis of data from KEDO.




                Page 12                                                                         GAO/T-RCED-00-20
Appendix V

North Korea’s Reported Biweekly
Consumption of Heavy Fuel Oil at Sonbong
Thermal Power Plant,
January 1996-June 1999




              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.




(141399)      Page 13                                                                          GAO/T-RCED-00-20
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