Black Gold Finances More than Iraq's Reconstruction

How Iraqi Oil Smuggling Greases Violence
Middle East Quarterly, Fall 2006, vol. xiii, No. 4

by Bilal A. Wahab
Fulbright fellow from Iraqi Kurdistan enrolled at American University

Oil is the lifeblood of Iraq. As Iraqis work to emerge from years of war and sanctions, oil exports are the government’s greatest source of revenue. Since 2003, the new Iraqi government has exported US$33 billion in oil. But rather than just fund reconstruction, oil has become a primary commodity on the black market and a central component of the web of corruption, terror, and criminality in Iraq. Oil smuggling has led to a convergence of crime and terrorism that increasingly destabilizes the country.

Background

Iraq is an oil-rich country with perhaps the world’s second largest reserves—estimated to be 115 billion barrels. Such assets and resources have contributed to Iraq’s wealth but have also created incentives for corruption and mismanagement.
Corruption precedes the current regime. The Baath Party initially enjoyed a reputation for integrity. But Iraq’s wars with Iran and Kuwait took their toll, as did sanctions. As Iraqi author Kanan Makiya explained, “Once the Baathist elite began to shed ideology, Iraqi officials began to use the powers of the state for personal benefit through criminal activities of one kind or another. State institutions became riddled with corruption.”
Because the Baath Party nationalized the oil industry in 1972, any corruption involving the industry became a state matter. Baath officials became the proverbial wolf guarding the henhouse. The Revolutionary Council of the Baath Party allocated five percent of oil revenues to a party slush fund for use if ousted. According to Muhammad Zini, a former consultant at the Oil Ministry, this fund grew to $17.4 billion by 1990. What private oil enterprises remained were part of Hussein’s patronage system and hardly independent. Favored regime individuals could use their position in the oil industry to enrich themselves far beyond their nominal salaries.
Corruption grew exponentially during the 1990s. Saddam’s regime siphoned off billions from the U.N. Oil-for-Food program. U.N. inspectors and the international community turned a blind eye to smuggling operations. The black market thrived, and informal business networks grew. Between 1991 and 2002, Iraq smuggled nearly 900 million barrels; between 1997 and 2003, Saddam’s regime reaped more than $8 billion in illicit oil sales. The smuggling network was huge, involving thousands of vessels, vehicles, and trucks. In one recent account, Abbud Karim Abbas, an Iraqi expert on manufacturing and modifying oil tankers, described how the Baath party would smuggle oil in ships carrying wheat.
During this period and despite enmity between their governments, oil smuggling networks grew between Iraq and both Syria and Iran, which continue to this day. Both governments benefited. The Iraqi government found a market in which it could bypass U.N. demands to spend revenue on humanitarian projects, while the Iranian and Syrian regimes found both a cheap source of fuel and kickback income. The Pentagon estimated in 2000 that of the $205 per metric ton cost for smuggled Iraqi oil in the Persian Gulf, $95 went back to the Iraqi government, $50 went to the Iranian Revolutionary Guard Corp’s navy, while the smugglers kept the remainder.
There was no shortage of market for smuggled oil. The official, government-controlled State Oil Marketing Company (SOMO) opened offices in Jordan and struck agreements with the governments of Iran, Lebanon, and the United Arab Emirates to facilitate oil sales. Buyers included organized crime networks from Somalia, Pakistan, and India, as well as brokers purchasing oil for Coalition naval vessels in the Persian Gulf enforcing the sanctions.

Oil and the Insurgency

Smuggling networks persisted into the post-Saddam period. Rather than disrupt the network, the collapse of Saddam’s government only drove it underground.
That the U.S. government did not use its post-war administration to lay an infrastructure which would facilitate accountability enabled the problem to fester. The Coalition Provisional Authority did not award oil industry contracts transparently. In addition, its failure to install metering systems on oil flow facilitated corruption. Absent such metering, the real amount of crude oil either exported or smuggled remains is subject to speculation.
The security vacuum following Iraqi liberation further bolstered opportunities not only for the existing mafia but also for new criminal gangs. Just as Saddam used oil revenue to finance violence against the Iraqi people, so too have insurgents.
Open borders facilitated smuggling, especially along the sparsely-populated Iraqi-Syrian frontier. On July 26, 2004, the new Iraqi government signed a deal to export crude oil to Syria in exchange for oil products. Over a three-week period in April 2006, Iraqi police seized 400,000 barrels of crude oil that was being smuggled into Syria. Within twenty-four hours, police at the Rabiyah border crossing confiscated 1,200 smuggling tanker trunks whose drivers carried forged documents. The scale of smuggling suggests the complicity of both Syrian and Iraqi government officials. Indeed, Dawud al-Baghistani, head of the Commission on Public Integrity in Mosul, told reporters that while the ring was connected to insurgents, the parties involved in the Rabiyah smuggling included officials from customs and the ministries of oil, interior, and finance, as well as some private companies. Smugglers offered Baghistani, who coordinated the sting operation, $1 million to release the $28 million shipment.
In another case demonstrating the confluence of officials, oil smuggling, and the insurgency, insurgents bribed government officials in order to access oil routes. Hazem al-Shaalan, who served as defense minister during the interim administration of Ayad Allawi, tasked Mish’an al-Juburi, a former parliamentarian and leader of an influential tribe in Iraq, to secure oil pipelines between Baiji and Kirkuk, an area which calls within the al-Juburi tribal territory. Subsequently, al-Juburi was indicted for theft of several million U.S. dollars. Iraqi officials also suspect that he knowingly hired insurgents to infiltrate oil pipeline protection forces and shared profits with the insurgents. It appears likely that al-Juburi, insurgents, or both bribed al-Shaalan to offer the original contract. The Iraqi government subsequently accused him of both massive corruption and provision of Saddam loyalists with intelligence and requested that Interpol arrest both al-Shalaan and al-Juburi.
The profits insurgents reap from the oil trade are significant. Some estimate that insurgents pocket 40 to 50 percent of oil smuggling-generated revenue. Government complicity in oil smuggling has continued. ‘‘Oil and fuel smuggling networks have grown into a dangerous mafia, threatening the lives of those in charge of fighting corruption,’’ the former oil minister, Ibrahim Bahr al-Ulum, told reporters. Saying that Iraq is losing at least a billion dollars each year to corruption, al-Ulum did not deny that corruption has inflicted SOMO as well. ‘‘It’s clear that corruption funds the insurgency,” a U.S. official added. In mid-2005, the Oil Ministry fired 450 employees on suspicion they were stealing fuel and selling it abroad.
Many Iraqis have come to accept corruption. According to Judge Radhi al-Radhi, the commissioner for Public Integrity in Iraq, many Iraqis justify their own complicity with the question, “How can you ask a human being to have integrity when he lives under tough circumstances?” Each day, Iraqis face high unemployment, low salaries, kidnappings, and murder. Many turn to the illicit economy to supplement income and provide for their families. In the absence of functional law enforcement, lucrative oil smuggling has replaced many small businesses. Not surprisingly, the public advertising campaign financed by both the government and some nongovernmental organizations to educate the population about the harms of oil smuggling has had only limited success.

Oil and the Militias

Corruption has also compromised Basra, Iraq’s second largest city and southern hub. Close to the Rumayla oil fields and linked by the Shatt al-Arab waterway to the Persian Gulf, it is a natural outlet for smuggling. A chief node in Saddam’s oil smuggling operations, oil smuggling in Basra has only grown more overt since his fall. One resident, Hussein as-Sabti, told a reporter that the brazenness of smugglers has “prompted the population of Basra to ask whether or not smuggling of petrol is an illegitimate act at all.” Salim Hussein, director of Basra Oil Products, said, that “influential political people and parties are running these smuggling operations.”
The rivalry among various Shi‘ite parties has compounded the problem. The Fadhila Party controls the governor’s office as well as the oil industry in Basra. When new prime minister Nuri al-Maliki decided not to give the oil ministry to the Fadhila party when he announced his new cabinet in May 2006, the party threatened to stop oil exports. Had they not received benefits from their position, such drastic action would be unnecessary. A senior Iraqi oil official said that Fadhila sought kickbacks, and blamed the unrest in Basra on the corruption and “power struggle between militias and mafias” within the ruling Shi‘ite coalition. A Shi‘ite political source told a reporter, “He who owns Basra owns the oil reserves … It has a strategic position so why would anyone give it up?”
Abdul Kareem Li’aibi, the oil ministry’s fuel distribution project manager, said that smugglers in one province had tapped a pipeline more than twenty times to siphon off oil. He blamed “organized gangs” although others say that the large smuggling operation—involving everything from tanker and pick-up trucks to small boats and large ships—could only operate with government approval. An auditing report by KMPG International suggested that a comparison of production and official sales in the final two quarters of 2004 suggested a discrepancy of nearly $70 million. An oil industry official estimated that two million liters of oil products are smuggled every day through Iraq’s poorly guarded borders. Oil ministry data suggests that some 60 million barrels of oil went missing in 2005.
Much of the oil smuggled from southern Iraq ends up in Iran. On January 16, 2006, Iranian naval vessels attacked two Iraqi coastal guard ships that had seized a steamer smuggling oil. The Iranian captain of the steamer had summoned Iranian assistance upon his contravention. The mayor of Basra, Muhammad al-Wai’ili, complained of several dozen similar incidents in which Iranian coast guardsmen protected Iranian smugglers in exchange for payment. New Iraqi oil minister Hussein al-Shahristani blamed the Iranian coast guard for allowing Iraqi smugglers to seek refuge in Iranian waters. A Basra custom officer said, “This is the main obstacle to our work,” adding that corruption within Iraqi police exacerbates the problem. Iran is not the only destination. Boat smuggling operations take Iraqi oil as far away as the United Arab Emirates.
Iraq’s economy takes a second hit when Iraq buys refined oil. Because Iraq sells the imported fuel with huge subsidies, much of the refined product is exported back to the refining countries. The Oil Ministry’s inspector general gave an example: throughout 2005, the Iraqi government has been selling diesel at the subsidized price of less than three cents a gallon, which could be sold for at least a dollar a gallon on the black market. Hence, a smuggler bringing fuel in a 9000-gallon truck from a neighboring country could make as much as $7,450 even after paying generous bribes. Because the pipelines in no way benefit the insurgents, the lines have frequently been attacked to force the government to rely on trucks—a business already controlled by smugglers. Smuggling in fuel may have cost Iraq between $2.5 billion and $4 billion in 2005 alone.

The Oil Industry in Iraqi Kurdistan

While its administration is separate, the northern Kurdish Regional Government shares many problems with Baghdad in the administration of its oil revenues. Despite continued disputes between Kurdish officials and the central government over the legality of separate deals, in June 2004, the Kurdistan Democratic Party which controlled the Erbil and Duhok governorates negotiated its own oil exploration deal with the Norwegian oil company Det Norske Oljeselskap (DNO) to drill for oil in Zakho, near the Turkish border. Under terms of the deal, the Kurdish party would receive 30 percent of the profits, while DNO would retain 70 percent. Two years later, DNO struck oil at the Tawke No. 1 field, which it estimated held a reserve of 100 million barrels which could be pumped at a rate of 5,000 barrels a day.
The Kurdish government continues to expand its oil exploration. In May 2006, the united Kurdistan Regional Government, which included both the Kurdistan Democratic Party and the Patriotic Union of Kurdistan, awarded another contract to develop the Shiwashok oil field to the Turkish company Genel Enerji and the Swiss firm Addax. Together, they plan to produce some 20,000 barrels per day by the end of 2006. The regional will have refining capacity in two years, according to a memorandum with the Lebanese Make Oil Company .
While exploitation of the fields is popular among long-deprived Kurds, nationalist thrill has blinded many locals to the complexities of becoming an oil-exporting region. Contracting mechanisms remain opaque, as do the divisions between government and political party property. There remains little guarantee that the government will use oil revenue for the good of the local population rather than to fill the coffers of the ruling parties and further tighten their grip over power, as the Baath party once did. The Kurdistan Regional Government’s recently passed investment law must allow for project oversight from the non-governmental sector. That civil war broke out between the Kurdistan Democratic Party and Patriotic Union of Kurdistan in 1994 out of a dispute over revenue sharing does not build confidence.

The Road Ahead

The exploitation and diversion of oil resources hurts Iraq’s economic, social, and political development. Oil smuggling places an enormous burden on state revenue and Iraq’s economy. Up to 30 percent of Iraq’s imported gasoline has been lost to smuggling networks, half of which is pocketed by the Iraqi insurgency. Had the Iraqi government invested this lost revenue in refineries, it might not need to import 60 percent of its refined oil needs. Not only have funds for vital projects been lost, but a portion of the missing revenue helps fund insurgency. Its terrorism, in turn, hampers foreign investment. Attacking the oil pipelines could be a criminal enterprise but, regardless, insurgents benefit by extorting protection money from oil trucks. Terrorists and criminals have established a dangerous symbiosis.
All these developments perpetuate instability and violence in Iraq. Still, there have been a few positive, albeit not very successful, steps taken to address the problems related to oil smuggling. The Coalition Provisional Authority established the Commission on Public Integrity, tasked with fighting corruption and organized crime. It has issued warrants and fired many officials in the oil ministry and elsewhere. However, instability coupled with the absence of political support has seriously jeopardized the functioning of the commission. Violence has also undercut the commission’s work. Fifteen judges who have investigated issues of corruption and criminality have been murdered.
How, then, can the Iraqi government break this cycle? First, the government needs to secure its borders. While the Coalition Provisional Authority and subsequent Iraqi governments have hired 22,000 border guards since 2003, this level is still below that needed to ensure security. Competence must also supplant sectarian, tribal, and political patronage.
While the Iraqi government, as demanded by the International Monetary Fund, has taken steps to lessen its subsidies, the continued discrepancy between the price of oil in Iraq and in neighboring countries provides the financial incentive for smuggling.
Al-Maliki’s government must also tackle the problem of bribery. Corruption permeates the Iraqi government from the top echelon of ministers to tribal chieftains and border patrol officers. Often, officials are the smugglers and are fully involved in the operation. If the new government can control bribery, then the incentive to turn a blind eye disappears at multiple points in the smuggling process.
While problems associated with subsidies and oil industry corruption may seem mundane amidst continued kidnapping and car bombs, until U.S. and Iraqi authorities manage to constrain Iraqi oil smuggling, violent crime and insurgency will continue to flourish.


http://www.meforum.org/article/1020

Notes
1. Development Fund for Iraq, International Advisory and Monitoring Board (IAMB), KPMG International, Bahrain, reports from Dec. 2003 to June 2005.
2. “Iraq Facts and Figures,” Organization of Petroleum Exporting Countries (OPEC), accessed June 21, 2006.
3. Kanan Makiya, “All Levels of the Iraqi Government Were Complicit,” Middle East Quarterly, Spring 2005, pp. 81-7.
4. Michael E. Brown, “The Nationalization of the Iraqi Petrolium Company,” International Journal of Middle East Studies, Feb. 1979, p. 107.
5. Al-Hayat (London), June 2, 2005.
6. “Country File: Iraq,” The Economist Intelligence Unit (London), July 13, 2004.
7. Claudia Rosett, “How Corrupt Is the United Nations?” Commentary, Apr. 2006.
8. The New York Times, Apr. 26, 1999; The Daily Telegraph (London), Apr. 17, 2005.
9. “Report on the Management of the Oil-for-Food Programme,” Independent Inquiry Committee into the United Nations Oil-for-Food Programme (The Volcker Commission), Sept. 7, 2005, pp. 40, 185-259.
10. Ibid., p. 31.
11. Abbud Kareem Abbas, “Sariqat an-Naft al-Iraqi,” Ath-Thaqafa al-Jadida (Bagdad), Nov. 2005, no. 316.
12. The New York Times, Apr. 26, 1999.
13. Kenneth H. Bacon, assistant secretary of defense for public affairs, “Department of Defense News Briefing,” Apr. 20, 2000.
14. Ibid.
15. Ibid.
16. “Report of the International Advisory and Monitoring Board of the Development Fund for Iraq: Covering the Period from the Establishment of the DFI on May 22, 2003 until the Dissolution of the CPA on June 28, 2004,” pp. 5-6.
17. Ibid., p. 2.
18. The Washington Post, Apr. 15, 2006.
19. United Press International, Apr. 17, 2006.
20. The Washington Post, Apr. 15, 2006.
21. The New York Times, Feb. 5, 2006.
22. Associated Press, Sept. 20, 2005; Voices of Iraq, May 28, 2006.
23. The Daily Telegraph, Feb. 7, 2006.
24. Al-Hayat (London), Nov. 30, 2005.
25. The New York Times, Feb. 5, 2006.
26. Iraqi Crisis Report, Institute for War and Peace Reporting, London, Apr. 19, 2005.
27. Radhi al-Radhi, head of the Commission on Public Integrity, Iraq, “Crime and Corruption in Iraq,” speaking at American University, Apr. 17, 2006.
28. The New York Times, June 3, 2006
29. Iraqi Crisis Report, Apr. 19, 2005.
30. Reuters, June 26, 2006.
31. The Peninsula (Doha), May 27, 2006.
32. Ibid.
33. Ibid.
34. Iraqi Crisis Report, Apr. 19, 2005.
35. Ibid.
36. “Report of Factual Findings in Connection with the Oil Proceeds Receipts Account for the Period from 29 June 2004 to 31 December 2004,” Development Fund for Iraq, IAMB, KPMG International, Bahrain, Apr. 6, 2005.
37. Iraq Business News (Baghdad), Feb. 10, 2006.
38. Platts Oilgram Price Report, May 9, 2006.
39. Asharq al-Awsat (London), Jan. 18, 2006.
40. Integrated Regional Information Networks (IRIN), United Nations, June 26, 2006.
41. Iraq Business News, Feb. 10, 2006.
42. The New York Times, June 4, 2006.
43. Ibid.
44. Energy Intelligence Group, June 15, 2006; BBC News, Dec. 1, 2005.
45. DNO petroleum company, Oslo, Norway, press release, June 29, 2004.
46. DNO, press release, June 12, 2006.
47. “KRG Prime Minister Inaugurates Oil Drilling Operation,” KRG.org, Kurdistan Regional Government, press release, May 15, 2006.
48. Energy Intelligence Group, June 15, 2006.
49. Radio Nawa, July 7, 2006
50. KRG.org, Kurdistan Regional Government, July 11, 2006.
51. The Telegraph (London), Feb. 7, 2006.
52. The Daily Telegraph, Feb. 7, 2006.
53. The New York Times, Aug. 21, 2004.
54. The Guardian (London), Aug. 16, 2003.
55. Lt. Gen. John Vines, former commander of the Multinational Corps–Iraq, Special Policy Forum, The Washington Institute for Near East Policy, Washington, D.C., Apr. 13, 2006.
56. Mussab H. al-Dujayli, former general director of the State Oil Marketing Organization (SOMO), The New York Times, June 3, 2006.
57. Louise Shelley, et al, “Methods and Motives: Exploring Links between Transnational Organized Crime and International Terrorism,” National Institute of Justice, U.S. Department of Justice, Washington, D.C., June 23, 2005.
58. Radhi, “Crime and Corruption in Iraq.”
59. The New York Times, Mar. 27, 2005.
60. International Monetary Fund, press release, Dec. 23, 2005.
61. Oil and Gas Journal, May 2, 2005.
62. “Transparency International Corruption Perceptions Index 2005,” Transparency International, London/Berlin, Oct. 18, 2005. Iraq ranked as the 19th most corrupt country out of 159.