Attacks on Iraq Oil Industry Aid Vast Smuggling Scheme [NYT]
By JAMES GLANZ and ROBERT F. WORTH
June 4, 2006
BAGHDAD, Iraq, June 3 — The sabotage attacks that have crippled Iraq's oil pipelines and refineries for the past three years are now being used to aid a vast smuggling network that is costing the Iraqi government billions of dollars a year, senior Iraqi and American officials here say.
Ali Al Alak, the inspector general for the Iraqi ministry of oil, said saboteurs are attacking the pipelines to force the government to import and distribute as much fuel as possible using thousands of tanker trucks. In turn, terror groups and criminal gangs — distinguishing among them has become increasingly problematical — have transformed the trucking trade into a potent tool for smuggling.
In many cases documented by Mr. Alak and other Iraqi officials, truckers — often collaborating with the gangs — pay bribes or use forged papers to cross Iraqi borders at will, tamper with their fuel meters to inflate the value of their load or simply turn their loads over to smuggling gangs.
As a result, as much as 30 percent of imported gasoline is ending up in the hands of smugglers, who promptly resell the gasoline abroad, according to American and Iraqi officials. The shortfall is part of what forces Iraqi families to spend more on fuel from the black market, where it is far more expensive than from legal outlets.
The poisonous blend of smuggling and sabotage is yet another blow to the economy of a country whose vast oil reserves were expected before the 2003 invasion to pay for its reconstruction.
The smuggling network is so pervasive and entrenched, the officials say, that fuel importers brazenly arrive at depots with half-empty tankers and arrange to have their deliveries certified as complete. It is also lucrative for the smallest of businesses. Bakers, brickmakers and even fishing boat operators find it more profitable to sell their fuel, which Iraqis receive at subsidized prices, to illicit traders rather than operate their businesses.
It is unclear where in these operations the simple urge to make a buck ends and schemes to finance insurgent activities or disrupt the workings of the Iraqi government begins.
Borders are corrupt and porous, roads are unsafe, officials at State-run oil companies are accused of being in league with insurgents and Iraq's oil wealth is carried out of the country in ships and tanker trucks as American and British overseers look the other way, according to Iraqi and American officials.
The smugglers interrupt domestic tanker deliveries as well as those bringing in fuel from abroad.
Ibrahim Bahr al-Uloum, the former oil minister, said it was obvious that crude oil pipelines connecting the northern wells with refineries and power plants further south, in the Baghdad area, had been repeatedly struck in order to force trucks to move the crude. Then oil employees trying to fix the pipelines had sometimes been kidnapped and killed. Both the trucking companies and groups in the protection rackets were probably complicit in some way, he said.
"This is a business for the people who are working in the trucks," Mr. Uloum said. "So any attempt to fix the pipeline will stop such activities."
Mr. Alak and other officials said the pipeline hits are remarkable for their sophistication.
"It's amazing what they are doing," Mr. Alak said of the gangs behind the attacks. At times, he said, the pipeline strikes are so precisely timed that they allow just enough crude oil to flow from Iraq's northern oil fields to feed the huge Bayji refinery, the nation's largest, about 100 miles north of Baghdad.
Once Bayji receives enough oil for its production, crude oil would normally be diverted to pipelines that run to export terminals in Turkey. Smugglers can make money from the gasoline that is carried in trucks, but little or nothing from crude oil exported through the pipelines. So they often strike at that point and halt the flow of crude, said Mr. Alak, who sent agents into the field and delivered a major report on smuggling to the ministry in April.
"You need hundreds of trucks to bring those quantities," Mr. Alak said.
A Scheme's Anatomy
Attacks can sometimes shut down refineries completely by starving them of crude oil or targeting them directly, forcing the country to ship more fuel across its notoriously corrupt international borders. The economics of cross-border smuggling easily reveal why the practice is unlikely to stop as long as Iraq's price subsidies are in place, Mr. Alak found.
The subsidies, set up under Saddam Hussein, create a vast differential between fuel prices in Iraq and across the border in Turkey and Syria, and a natural point of exploitation for smugglers.
Subsidized diesel, for instance, was sold by the government for less than three cents a gallon for most of 2005, meaning that an 9,000-gallon tanker truck carried fuel officially worth around $250. But the same fuel was worth perhaps a dollar a gallon on the black market. So with typical rates of $500 for protection money or police bribes and $800 to pay the truck driver, a smuggler could make at least $7,450 by bringing in fuel from Jordan, Syria or Turkey, according to Mr. Alak's report to the Oil Ministry.
So after filling their trucks in the neighboring countries at subsidized prices, the drivers sell their load at a higher rate on the black market. The beauty of the system from the smuggler's standpoint is that if arriving at an Iraqi fuel depot with an empty truck cannot be smoothed over with a bribe, the tanker can be filled again at the government pumps in Iraq at the cheap subsidized price.
After fulfilling the contract by delivering that load, Mr. Alak said, the truck driver can make an extra profit on the way back by filling up with cheap gasoline before leaving Iraq. He then crosses the border into one of the neighboring countries and unloads for the lucrative market price there. Even if the driver illicitly sells only half of his load, the profit from the double-dipping can be considerable.
According to Mr. Alak's report to the ministry, the ruse has sometimes been unmasked by checking the fuel delivered to Iraqi terminals for things like octane levels, which vary from country to country. "They would come with empty trucks and buy products inside Iraq, and deliver as imported products," he said.
At least one such operation came with a clearinghouse in Baghdad for creating forged papers, he said. It was discovered and broken up late last year.
Iraq spent $4 billion to $5 billion in 2005 to import fuel from abroad. Mr. Alak's research indicates that because of the huge price incentives, between 10 percent and 30 percent of that fuel is smuggled out of the country again.
Radhi al-Radhi, the chief of Iraq's Commission on Public Integrity, who has investigated dozens of smuggling cases, agreed with Mr. Alak's assessment, as did a Western diplomat in Baghdad, who spoke anonymously according to official procedure. Similar figures were also cited in little-noticed Congressional testimony in April by David M. Walker, comptroller general of the United States, after a visit to Iraq.
Iraqi and American officials said they could not offer a total figure for what smuggling is costing the country every year, beyond asserting that it is in the billions.
But Oil Ministry data suggest that the total was $2.5 billion to $4 billion in 2005, said Yahia Said, a research fellow at the London School of Economics and director of the Iraq Revenue Watch at the Open Society Institute.
Even at the low end, that would mean smuggling costs account for almost 10 percent of Iraq's gross domestic product, $29.3 billion in 2005.
Impact on Iraqi Families
The impact on Iraqi families is undeniable. A random survey of thousands of Iraqi households by the Central Organization for Statistics and Information Technology at the Ministry of Planning assembled statistics on how much Iraqis spend on the black market for fuel. (The organization is headed by Mehdi Al Alak, the brother of the oil ministry inspector general.)
The survey found that 40 percent of the gasoline consumed annually in Iraq was purchased on the black market, where prices recently spiked to more than $2.50 a gallon during the latest round of shortages. That is far more than the government-subsidized price of 65 cents a gallon.
The situation is even more tilted toward the black market for diesel, kerosene and liquid gas, which Iraqis use for cooking and heating. Families must satisfy most of their needs for those fuels on the black market, the survey found. The sellers make a huge profit: of about $1 billion spent on black market fuels by Iraqi households in 2005, an estimated $800 million went straight into profits for the people who run the illicit network.
Gangs have also made a lucrative business of forcing truckers to pay protection money to use public roads. The practice is so common that prices are fairly standardized, said Mussab H. al-Dujayli, who until March was general director of the State Oil Marketing Organization, known as SOMO, and remains on as a technical expert.
In the area around Bayji, which is tightly controlled by Sunni insurgents, the going protection price is roughly $500 for a large tanker truck, Mr. Dujayli said. That is just one way in which sabotage, smuggling and the trucking trade are "used to finance terrorism," he said.
The $500 protection rate for trucks in the north was confirmed by Capt. Abdullah Hassan, who lives in the northern village of Safra and works in one of the battalions that are supposed to guard the pipelines. Captain Hassan said that the undergrowth of corruption was so thick that saboteurs, smugglers and even members of the guard force work together with low-level government employees to create a stranglehold on oil proceeds.
"It is not necessary that the minister or the D.G. is involved," Captain Hassan said, using an abbreviation for director generals, as heads of state-owned companies are called here, "but line operators, accountants, suppliers and transporters work within the networks and carry out these plans."
Still, in some cases, more senior Iraqi officials have been implicated. Late last year Meshaan al-Juburi, a member of Parliament, was charged with stealing millions of dollars meant to pay for a vast pipeline protection force drawn from the tribes in Salahuddin Province. One commander hired by Mr. Juburi was arrested and charged with organizing insurgent attacks on the pipeline, although it was not clear whether Mr. Juburi knew about the attacks. A warrant was issued for Mr. Juburi's arrest, but Parliament has not revoked his immunity from prosecution as a legislator.
In some ways, the pattern of the corruption now plaguing Iraq was set by Saddam Hussein, who began encouraging oil smuggling and graft during the 1990's. Although there was corruption was less endemic in Iraq before the Persian Gulf War, the American victory and the sanctions imposed by the United Nations loosened Mr. Hussein's hold on the country.
"After the war Saddam began encouraging low-level graft to generate cash outside of the sanctions, but also as a channel of patronage," said Mr. Said of Revenue Watch. "Everyone involved got a cut and that made them happy."
Somehow the government "found a way for buyers to come through the Gulf," said Issam Chalabi, former Iraqi oil minister and an oil consultant. (He is not related to Ahmad Chalabi, the former exile who served in Iraq's interim National Assembly last year). "Mainly it was through the Iranians, who gave bills of lading saying it was Iranian product. That is how it started."
Soon a whole smuggling network developed inside and outside the country, with all of the players taking a cut of the cash. The bulk of the profits, of course, went to the government. Many of these intermediaries are still involved today in smuggling Iraqi oil , though they no longer answer to the Iraqi government, industry analysts say.
A survey of senior officials in about 20 state-owned oil companies and training institutes that was summarized in Mr. Alak's most recent annual report gives a striking view of how deeply the corruption has entrenched itself in Iraq's oil infrastructure.
Asked exactly where corrupt activities were taking place in their companies, 45 percent of those officials pointed to storage areas, 35 percent to the transport and supply network and about the same number to maintenance facilities.
More than half the officials said that bribes or out-and-out theft supported corruption in their companies, while 80 percent said that the poor security situation in Iraq helped promote the practices. Nearly every one of the officials said that corruption infected their companies at some level, suggesting that expertise of every kind is available to smugglers.
"These are professionals: they have their own equipment, they have contacts in Turkey and Jordan and Syria," said Gal Luft, co-director of the Institute for the Analysis of Global Security, which follows the Iraqi oil industry. "They are an industry like any other."
A Shadowy Network Grows
The profits of what amounts to a shadow oil industry are also infinitely greater now than in the 1990's. Then, smugglers operated out of only two southern Iraqi ports; now there are eight illegal anchorages on the Shatt al Arab, the waterway that runs between Basra and the Persian Gulf. They have names worthy of a Robert Louis Stevenson novel: Hjam Island, Al Tahaddi, Mhejran, Al Zuher.
That extensive smuggling trade apparently takes place right under the noses of British, American, Iraqi, Iranian and Kuwaiti authorities operating on ships and on the coast of those same waters. Col. Larry D. McCallister, a commander of the Army Corps of Engineers in southern Iraq, said that Iraqi construction workers were regularly attacked while trying to build a new Iraqi coast guard post along that shoreline because they happened to find themselves at a prime smuggling location.
Colonel McCallister said that once the crews recognized their predicament, they negotiated with the smugglers, who eventually agreed to move their operation a short distance up the coast.
The report on smuggling by Mr. Alak, the oil ministry inspector general, shed light on just how those southern anchorages are used to spirit petroleum products away. In one case that his investigators uncovered, most of a ragtag fleet of 1600 fishing boats plying the waters around the southern city of Basra were selling their monthly quotas of diesel to smugglers rather than fishing.
Not only that, but new boats were being manufactured at the rate of 50 to 60 a month just to obtain new quotas that could then be smuggled, the investigation found. The boats, which in late 2005 were receiving a total of some four million gallons of diesel a month almost free of charge, would load the fuel onto small ferry-sized tankers that would steam into the Gulf and fill larger tankers, Mr. Alak said.
"And then they come back," he said of the fishing boats. "Where is the fish?"
Thomas L. Delare, counselor for economic affairs at the American Embassy here, said that the only way to undercut the vast smuggling trade here would be to eliminate the Saddam Hussein-era price supports. An agreement to do just that was a central part of the deal brokered by the International Monetary Fund to forgive much of Iraq's staggering international debt last year.
But taking that step could be politically perilous for a new Iraqi government that is trying to find favor with the Iraqi populace.
There is another constituency unhappy with the prospect of that step, Mr. Delare said. In demonstrations that broke out when the plan to raise prices was announced, he said, American observers saw "some faces in the crowd who were known black marketeers."
James Glanz reported from Baghdad for this article, and Robert F. Worth from New York.
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