Analysis: Iraq's oil smuggling -- Part 1

By BEN LANDO, UPI Energy Correspondent

WASHINGTON, Dec. 14 (UPI) -- Iraq faces increasing security problems and a growing petroleum smuggling racket that is draining chances of rebuilding after nearly four years of war.

Meanwhile Iraq's electricity and oil infrastructure -- which also depend on each other -- need at least $80 billion to fix, U.S. and Iraqi officials said last week in Washington at the New-Fields 6th Rebuilding Iraq Conference & Expo.


With nearly its entire federal budget dependent on oil revenues, the $700 million a month the Oil Ministry estimates is lost to oil and petroleum products smuggling is a major loss.

"From all reports it is significant," Lyle Hendrick, president of Investigative Research Group Inc., a business intelligence and security consultant, told United Press International at the conference.

"It's a major bleeder and not only for the economy but also the potential for success in the future," he said. "Until the Oil Ministry and oil companies get a firm handle on protection of these assets, it's going to continue to be a major problem."


An estimated 100,000 barrels of oil is smuggled from Iraq each day, according to Saad Rahim, manager of PFC Energy's Country Strategies Group.

"It's certainly an impact being felt throughout Iraq," Rahim told UPI, as gasoline shortages, long lines at filling stations and a heavy gas subsidy have fueled a crude black market.

Lacking management, auditing and metering mechanisms in Iraq's oil industry, petroleum products such as gasoline are also being taken from the country in unknown quantities.

"You don't have the personnel or capacity to track these sorts of details," Rahim said.

Iraq is producing about 2 million barrels per day, down from 2.6 million barrels before the war, despite having the third-largest reserves in the world. It exports about 1.7 million bpd.

Smugglers come in many forms, function and purpose in Iraq, all of which seem to be present in Basra, Iraq's second-largest city.

It's also home to the second-largest petroleum refinery in the country and the main port for legal and smuggled oil and oil products.

Some of the oil bounty is embezzled by industry insiders while, Rahim said, the most popular tact is redirecting or stealing trucks or tankers, be it by gangs and thugs or militia's loyal to political parties.


It's taken to ports like Basra, in Iraq's deep southeast, and sent to markets like Iran, Turkey and Syria and sold at market price (sometimes even back to Iraq).

While most of Iraq's oil reserves are in the south, controlled by the majority Shiites, regular attacks and irregular electricity have mostly brought northern production to a halt and hampered delivery of oil from the oil-rich and relatively violence-free Kurdistan region.

The south is starting to feel a change as security worsens and a fight for power escalates. Smuggling is a means for paying the bills or building a base.

"It's just politics," Juan Cole, an Iraq expert at the University of Michigan, told UPI. "The petroleum sector is a prized one for patronage."

Basra's political parties -- almost all of which are Shiite factions -- battle for control over smuggling rights and other control. They must also align themselves or take on other groups like the Marsh Arabs or gangs looking for money or power.

"The security situation continues to be a challenge," Kathye Johnson, director of reconstruction for the Gulf Region Division of the Army Corps of Engineers, told UPI at last week's conference.

During her presentation, she said Iraq's electrical system needs between $50 billion and $60 billion, not the $20 billion the World Bank estimated in 2003.


Baghdad averages six to seven hours of electricity daily, more than half its capacity, because transmission lines are "interdicted" -- government-speak for attacked. (That's on top of the gas shortage due to smuggling.)

Iraq's oil production and refining ability -- already punched by age, sanctions and war -- remains offline when it doesn't get the electricity it needs. It needs at least $20 billion in investment.

The government is sitting on a $15 billion budget surplus, partly because anti-corruption measures have scared Iraqi officials from approving reconstruction contracts, Johnson said, but also because of the security situation.

At the reconstruction conference, a frustrated American businessman asked Hamid al-Bayati, Iraq's U.N. ambassador, why Iraq isn't investing more in reconstruction.

Bayati said the government must make a judgment call on doling out reconstruction money, given the very real chance the project may be attacked, possibly opting to wait until security is more under control.

"I think we need more Iraqi forces trained and equipped," Bayati later told UPI when asked about securing the oil infrastructure, including stemming smuggling. "Sectarian problems are part of the violence of the security situation, and should be dealt with in the full situation."



(This is Part 1 of a two-part series on the link between Iraq oil smuggling and security. Part 2 takes a deeper look at Basra and will be published Friday.


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