Tuesday, August 17, 2010

A History Of Oil Smuggling In Iraq

Iraq is an oil dependent country. The industry has been plagued by problems for decades due to wars and international sanctions. One long-lasting issue is oil theft. That began on a large-scale in the 1990s when the government used smuggling to break the United Nations sanctions. The individuals and groups involved in these activities only expanded after the U.S. invasion, as there was a general breakdown in order. Today oil theft remains a major problem for Iraq’s most important resource.

In the 1990s Saddam Hussein organized criminal gangs to smuggle oil to break United Nations’ sanctions. Traditional trade routes throughout the Persian Gulf and Middle East were adapted for these operations. Trucks sent to Turkey, Jordan, Syria, Kuwait and Saudi Arabia, and boats going through the Persian Gulf were all used to ship crude to bring in illicit revenue for the Baathist government. Sheikh Abu Risha, who would later form the Anbar Awakening in 2006, and his tribe, ran an oil smuggling ring to Jordan during this period.

After the U.S. invasion in 2003 these activities not only continued, but also expanded. First the collapse of the state, economy, and general anarchy after the fall of Saddam created powerful incentives in Iraqi society to turn towards crime to make a living. Corruption also spread throughout the country. As a result, criminals, government officials, tribes, militias, insurgents, former Baathists, and new players all became involved in the theft of oil and refined petroleum products.

One factor that facilitated smuggling was the state monopoly over oil. In 1972 the government nationalized the petroleum business. In 1987 Saddam re-organized the industry. Before it was all under the control of the Oil Ministry. Afterward the North Oil Company, South Oil Company, State Company for Oil Projects, and the State Oil Marketing Company were all created for different regions and sectors of the petroleum business. Each has wide ranging autonomy, and there is little coordination between the different parts. The Inspector General for the Oil Ministry for example, issued a report saying that there was a lack of management, control, and oversight. Political parties also have influence over parts of the system. All of these opened up opportunities for theft, sabotage, infiltration, and corruption. 

Iraqi tanker trucks waiting to be filled. The shipment of oil and refined products is only loosely supervised which opens up opportunities for fraud and smuggling

Stealing oil today takes many different forms. One is mixing stolen oil in with legitimate oil. A regular crude shipment is topped off with extra petroleum that gets a separate payment. Another involves filling boats or trucks with stolen oil that is then delivered to tankers in the Persian Gulf. A sting operation in 2006 by the Ministry of Oil found 166 craft lined up in rivers in Basra waiting to sail off to meet larger boats in the Gulf. A third is filling up tanker trucks and driving the illegal oil to neighboring countries like Iran, Syria or Turkey.

Tapping into pipelines is another common form of theft. A hole is made in a line, and then crude is siphoned off into trucks or ships. In late 2007 there were an estimated 25 holes in the northern pipeline to Turkey. Some of the security forces meant to protect these lines also colluded in these activities or were the culprits themselves. In 2004 the Defense Ministry hired the Jabouri tribe to defend the Turkish pipeline in Salahaddin and Tamim provinces. The tribe was actually involved in smuggling since the Saddam period, and expanded their activities under their new official cover. A 2009 investigation by the Oil Ministry’s inspector general found that Army units were stealing oil from the same line. Most of this crude remained within Iraq where gangs have mobile refining stations, while some was sold to fuel factories and power stations. 
Baiji refinery in Salahaddin was infamous for theft and being infiltrated by insurgents

Stealing refined petroleum products has also become a big business after the U.S. invasion. The demand for fuel, diesel, etc. increased after 2003 because of more cars and power generators. The supply however is limited because Iraq’s refineries lack capacity. The government also subsidizes gas and fuel, keeping prices artificially low. Gangs, militias, and insurgents would buy or steal gas in Iraq, and sell it in neighboring countries where prices were much higher. Other times, the stolen fuel was sold to Iraqis on the black market. The Baiji refinery in Salahaddin was infamous for being controlled by insurgents. Allegedly, they stole around one to two-thirds of its production. A huge illegal market developed around the plant involving security forces demanding payoffs for trucks to leave and enter the refinery and go through surrounding checkpoints, corrupt oil officials and political parties set up gas stations in the area so that they could get fuel from the government, which was then sold on the black market.

Checking the fuel level in a tanker truck to see if it matches the records

Iraq also has to buy refined products from Iran, Turkey, and Kuwait because it can’t meet domestic demand. That process is also corrupted. A delivery would be registered when none existed so that the payment could be collected. Truck drivers would sell products in other countries before even getting to Iraq. Tankers would deliver partial shipments of fuel and keep the rest so they could sell it. Drivers would steal fuel, and then fill up the rest of the truck with cheap local fuels. Some trucks were fitted with two tanks, one at the top that would hold a small amount of fuel, while the second larger tank would hold water. The Oil Ministry’s inspector general reported that from September 2004 to February 2005 1,551 trucks carrying 56 million liters of oil products imported at a coast of $28 million never arrived. Trucking companies were fined $4 million as a result, but it was believed that they made $24 million in the process, so they continued on with their illegal activities.

As the examples show, all of these operations involve corrupt officials, trucking and tanker companies, political parties, and the Iraqi security forces. A truck driver involved in smuggling said that political parties made sure that their followers were operating the pumps when they wanted to steal oil and fill up his truck. Oil Ministry officials would also give fake documents to cover up the theft. In Basra, the Fadhila Party and Sadrists provided protection for the Ashur clan after the U.S. invasion in exchange for 30% of their profits from stealing oil. The clan was said to make $5 million a month from their activities. The Fadhila Party also had its own criminal operations. In January 2005 it won control of the governorship in Basra, and later received the Oil Ministry under Prime Minister Ibrahim al-Jaafari. It also ran the Oil Facilities Protection Force, the Tactical Support Unit in the Basra police, and the Abu al-Khassib port in that province. As a result, the Basra governor’s brother Ismail Waili became one of the largest oil smugglers in Iraq, protected by the local security force and the Fadhila Party. Prime Minister Nouri al-Maliki’s 2008 Knights Charge offensive in Basra broke up most of Fadhila’s operation, but illegal activities continued.

Criminals, shipping companies, and political parties also colluded with Iran. For instance, gangs and tankers in southern Iraq that couldn’t get official papers to cover their smuggling would pay bribes to the Iranian Revolutionary Guards’ Navy to allow them to fly an Iranian flag, or sail under their protection in Iranian waters. The Kurds have been sending oil and refined products to Iran since the 1990s, and continue to this day. 

Petroleum is Iraq’s biggest and most important business. It provides almost all of the government’s revenue, and that in turn is used to pay for services, jobs, and the country’s development. Iraq earns several billion dollars a month from the industry, but at least a billion is stolen as well. Refined petroleum products, which are in short supply, are also taken. This all started as an extension of the state when Saddam tried to use smugglers to break U.N. sanctions. After the U.S. invasion, it became a free for all when all constraints were eliminated as the nation descended into chaos. Even with improved security, gangs and political parties involved in crime still operate with impunity. The country is in such dire need that it can’t afford to have so much money go missing. So many actors are involved in the illegal operations however, that it’s unlikely to end any time soon.

SOURCES

Dagher, Sam, “Basra strike against Shiite militias also about oil,” Christian Science Monitor, 4/9/08
- “Smugglers in Iraq Blunt Sanctions Against Tehran,” New York Times, 7/8/10

Eisenstadt, Lieutenant Colonel Michael, “Iraq Tribal engagement Lessons Learned,” Military Review, September-October 2007

Kamal, Fatima, “Iraq army personnel involved in oil smuggling,” Azzaman, 1/13/10

Katulis, Brian, Juul, Peter, and Moss, Ian, “Awakening to New Dangers in Iraq,” Center for American Progress, February 2008

Oppel, Richard, “Iraq’s Insurgency Runs on Stolen Oil Profits,” New York Times, 3/16/08

Salaheddin, Sinan, “Iraq oil refinery expands by 10K barrels,” Associated Press, 3/15/08

Williams, Phil, “Criminals, Militias, And Insurgents: Organized Crime In Iraq,” Strategic Studies Institute, June 2009

7 comments:

Don Cox said...

How bad this is for the economy depends on whether the proceeds are spent within Iraq, or disappear into Swiss bank accounts or Bond Street shops. If the money from smuggling is spent in Iraq, then sooner or later it must benefit the Iraqi people.

Even money spent on imported goods such as cars or electrical goods does some good, as there is employment in the importing operation and for repairs and maintenance.

Joel Wing said...

I would assume that a lot of this money stays in Iraq. Then again, a lot could end up in bank accounts in Jordan for all I know. At the same time, it shows that the economy is dysfunctional if so many are involved in crime instead of legitimate business. Plus it's robbing the government of a lot of money. That could be a good or bad thing depending on how you look at Baghdad.

Maury said...

The crime and corruption in many third world countries boggles the mind. I was just reading an article about the myriad ways Nigerian police shake down the law abiding public. They will arrest, torture, and even kill innocent people for paltry sums of money. In one case, a whopping 13 cents. Nigeria should enjoy relative prosperity, given the oil revenue it enjoys. Instead, most of the population is mired in poverty. That's not gonna change until the culture changes. Ditto for Iraq.

Joel Wing said...

Maury

I've often made the comparison between Iraq and Nigeria as well. You have the oil, poverty, corruption, tribalism, violence, political instability, etc.

Don Cox said...

"You have the oil, poverty, corruption, tribalism, violence, political instability, etc."

Apart from the oil, this is just like the England we read about in the history books at school, especially the "Wars of the Roses" period. Watching developing countries gives a better perspective on "history" - what we were taught was in fact the history of one small developing country.

Maury said...

Joel, I'm wondering if our Kurdish friends will comply with UN sanctions against Iran. Gasoline imports to Iran reportedly fell 50% from May to July. The regime might actually feel some heat if lines start forming at gas stations. Is there any way to find out if those tanker trucks are still lining up on the border?

http://online.wsj.com/article/SB20001424052748704017904575408872075399544.html

Joel Wing said...

Maury,

I don't think Iraq in general is going to comply with U.N. sanctions and in turn, I don't believe the U.S. will do anything about it either.

The Kurds are still shipping crude and refined oil products to Iran. A French paper just went to the border this week and there were still trucks lined up as usual waiting to go into Iran. Baghdad just gave an initial okay to a plan to build a natural gas pipeline from Iran, through Iraq, to Syria. An Iranian company just started a big construction project building houses in Iraq, etc. The business and trade transactions (around $7 bil/year) between the two hasn't changed at all since the passage of sanctions.

Since the U.S. wants to support Iraq Washington won't do anything about these activities. It's just like under Saddam and the U.N. sanctions. Turkey and Jordan were breaking sanctions with Iraq and the U.S. knew about it but did nothing because they were allies. In fact, both the 1st Bush and Clinton administrations got congressional waivers for Jordan and Turkey from laws banning U.S. aid to countries that were breaking sanctions.