The Islamic State has been called the richest terrorist organization in history. It’s commonly believed that its control of oil fields in Syria and Iraq generate several million dollars in revenue each day via smuggling, and that this is its main source of funding. Matthew Reed, Vice President of Foreign Reports, a consulting firm focused on oil and politics in the Middle East, has questioned this conventional wisdom. Here is an interview with Reed explaining his analysis of IS’s oil industry. His two-part series on ISIS oil operations is available at Energy Fuse (Part 1; Part 2). He can be followed on Twitter
1. After the Islamic State seized Mosul in June 2014 the media, analysts and governments tried to explain how the group was able to accomplish such a task. One important narrative that emerged was that IS controlled several oil fields in Syria, and seized more in Iraq after Mosul. There were early reports that it was generating anywhere from $1-$4 million a day as a result. What did you think of those early estimates about IS’s oil revenues?
Revenue estimates last year were eye-popping. $3-4 million a day was a popular guess but it was never clear what the price and volume assumptions were. Let’s test the high-end estimate with some simple math. If ISIS earned $4 million a day last summer at $40 a barrel, then it produced some 100,000 b/d. The production estimate is quite high but plausible, however, the per barrel price is questionable. Most reports then and now hold that ISIS oil usually goes for around $25 a barrel--often less. Production of 100,000 b/d at $25 per barrel would still generate $2.5 million a day.
I was skeptical of the high estimates early on but even middle of the road estimates like $2.5 million a day are alarming. The highest estimate of $4 million a day was extremely unlikely. Half that makes more sense and lately estimates have converged. The official U.S. estimate has hung around $1.5 million a day since July; the Associated Press recently cited an internal ISIS memo from April using that amount; a Financial Times’ investigation into the trade settled on the same estimate last month.
Peg those daily revenue estimates to a modest price of $25/barrel and production might be in the neighborhood of 60,000 b/d. That’s believable. If ISIS produced 100,000 b/d for a time last year that would have been a minor miracle. Before the coalition attacked the ISIS oil network, sustained production in Iraq and Syria was probably closer to 75,000 b/d, according to estimates informed by various governments, including Iraq’s.
We’re all guessing. My starting point is: what’s plausible given ISIS constraints?
2. Since Mosul the U.S. and its allies have begun air strikes on the Islamic State. What effect have those had on IS’s oil industry?
Last summer the group controlled some two dozen semi-sophisticated modular refineries inside Syria. These weren’t “mobile” as some reports claimed. They were modular, meaning the pieces were prefabricated and ultimately assembled inside Syria using heavy equipment. Crude from Iraq and Syria was delivered to these refineries. The refined product (like diesel) was then stored by ISIS for fighting purposes, sold to locals and neighboring territory, and some was smuggled across borders, especially into Turkey. (Black market demand is high there because diesel is so heavily taxed.)
Unfortunately for ISIS, those refineries are unmistakable from the air. The coalition had no problem identifying and attacking them. ISIS lost twenty refineries in September-October 2014 and a handful of others have been hit since. This was a major loss because the units yielded more fuel, wasted less oil, and processed more oil on a daily basis.
Similar refineries turned up in Syria this year although they haven’t lasted long. ISIS seems to have given up on the refining business. Instead, the group has used its border controls, cash and contacts to start importing modular refineries in order to sell them to local entrepreneurs for hundreds of thousands of dollars each. As long as you trust a buyer and can move the hardware, it’s not that difficult. You can buy Chinese models online.
It’s a good thing if ISIS is out of the refining business. There are far fewer customers for crude oil than there are commercial fuels like diesel. Crude is also much cheaper so ISIS profits have taken a hit. Because of this, it’s logical to assume ISIS has had to trade more crude for goods. Without coalition strikes ISIS would be richer today. Its oil operations would be diversified and it would earn more from smuggling.
|Satellite photo of makeshift refineries in Syria (Google Maps)|
3. Most reports assume that IS is smuggling the majority of its oil via traders to places like Turkey. You believe that IS is now focusing upon buyers in its own territory along with selling to the Assad government in Syria. Can you explain the dynamics that have led the group towards those two markets?
There is plenty of refined fuel being smuggled across the Syrian-Turkish border--not a lot of oil. This is a key difference. If ISIS has been knocked out of the refining business then it simply can’t sell much fuel across the border into Turkey; strategic imperatives also dictate that ISIS conserves fuel for the war effort. Smuggling is more difficult after the Kurds advanced along the Turkish border this year. Other, well-established smugglers present stiff competition as well. It’s worth noting that illicit oil refining capacity is limited inside Turkey. Ankara has a state-backed monopoly to protect.
Besides these limitations, ISIS has every reason to sell oil to locals who have set up makeshift refineries near oil fields in Syria, particularly around Deir az-Zor. The demand is there. Also, the middlemen who truck ISIS oil profit more if they sell it closer to the source. Otherwise they risk incurring more ISIS tolls, bribes and fuel costs.
Over the last year we’ve seen hundreds--maybe thousands--of simple kilns assembled in the Syrian countryside. These kilns, when fired up, boil the oil which separates the crude into lighter and heavier hydrocarbons. The lighter stuff turns into a vapor which is channeled, cooled, and condensed into diesel. It’s simple in theory but still extremely dangerous. Clusters of these kilns are usually operated by local families that can’t make a living otherwise, so they refine ISIS oil and sell fuel by the roadside. The kilns add up to tens of thousands of barrels of daily refining capacity. Thus, locals could easily consume most if not all ISIS oil. Raqqa and Mosul are major population centers that need fuel.
The Assad regime has also traded in oil and natural gas with Syrian Kurds and ISIS. It’s unclear how much oil ISIS delivered to Assad but middlemen linked to him have been sanctioned for dealing with the group. However, ISIS has attacked regime-held oil facilities more aggressively lately. That could disrupt deals.
Deliveries of natural gas--piped from ISIS territory to regime-held refineries out west--can probably last because ISIS needs the utilities and can’t move the gas any other way. It’s not like oil. You can’t move it in buckets or barrels.
4. Finally, if IS is concentrating on selling oil to the population under its control and the Syrian government what does that mean for America’s effort to cut the group’s funding?
This is a captive market where demand is steady and supply is resilient. It appears to be self-sustaining. So long as the U.S.-led coalition avoids hitting oil at the source, then the trade will flourish, and ISIS will profit. The coalition has carefully selected its targets in order to avoid a humanitarian and environmental disaster. The U.S. doesn’t want to turn Syria into Kuwait circa 1991, after Saddam Hussein ordered that oil fields be torched. Instead, the coalition has attacked dozens of ISIS oil depots and other equipment which enables production. It has not attacked wellheads because the fires could burn for years.
ISIS makes money by controlling territory. What the coalition needs is a partner on the ground that can uproot ISIS and drive it out of oil-rich territory. In the meantime, the only sensible option, however frustrating, is to keep the pressure on.
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