Prompted by the recent attacks in Paris, the U.S. and French Air Forces stepped up their airstrikes against oil targets in Eastern Syria, destroying a number of oil trucks on Monday. Despite these renewed military efforts, the flow of oil from ISIS-controlled territories has historically proven difficult to halt – will the recent airstrikes make a difference this time around?
In this article, based on research conducted at Stanford University’s Department of International Policy Studies during Q1 2015, we review some of the details behind the ISIS oil smuggling phenomenon, focusing on Turkey.
The oilfields captured by Islamic State in Syria and Iraq are estimated to yield a daily revenue of between $1 and $5 million, depending upon the price fetched (much of this oil is sold as gasoline or diesel product). ISIS is reliant on oil revenues as one of its principal sources of finance, thus focusing the allied strikes upon the source of this supply chain. A good visual summary of the current situation is provided here by the Financial Times.
1. HOW IS ILLEGAL OIL SOURCED, AND HOW DOES IT REACH ITS MARKET?
Prior to the civil unrest which commenced in 2011, according to EIA figures Syria was producing just under 400,000 bopd of domestic crude, with the domestic surplus of ~100,000 bopd exported from Tartus on the Mediterranean cost. Since 2012, as the government’s authority subsided, official Syrian production has capitulated.
As ISIS have expanded their footprint from the Syrian light oil fields of Deir Az-Zawr on the Euphrates to the Tigris valley in Iraq, they have wrested control of an increasing share of the region’s oil infrastructure. At their eastern frontier lies the autonomous Kurdish region of Iraq, host to giant oilfields such as Kirkuk, to the South East lies Baghdad, and beyond lies the Basra export hub.
The majority of oil produced in ISIS-controlled regions that is not consumed locally is destined for Iran and Turkey, and nations further afield. Turkey itself has very little indigenous crude production, her domestic supplies meeting less than 10% of national demand. Most of Turkey’s domestic production originates from the Batman area of Anatolia, from where it is piped to Ceyhan on the Mediterranean coast. The oil deficit, now approaching 700 thousand bopd is supplied by two trans-national oil pipelines: the Baku–Tbilisi–Ceyhan (BTC) and Kirkuk-Ceyhan pipelines, delivering approximately 1.2 and 0.4 million b/d respectively.
Turkey has witnessed endemic oil smuggling since the early 1990’s, predominantly sourced from its neighbors Syria, Iran, Iraq and the former Soviet territories. This practice evolved as a reaction to the high taxes imposed on petroleum products since the late 90’s – an important stream of fiscal revenue for the Turkish government.
By 2005 the Turkish government acknowledged the nation’s oil smuggling problem, estimating that over a billion gallons of product were illegally entering the Turkish economy each year, reducing fiscal revenues by up to $4Bn per year, or 0.5% of GDP. The magnitude of the problem can be explained by the high price differentials of gasoline between Turkey and its neighboring states (see Table), providing an attractive market arbitrage opportunity.
The Turkish government responded by stepping up border defenses and introducing inert chemical markers at the refinery gate to “certify” their fuel’s legitimacy. A unique marker is applied to each category of oil product (gasoline, diesel, jet oil, etc) at low concentrations. The marker, which does not interfere with an engine’s combustion process, can be detected at very low concentrations using hand-held devices operated by Turkish police authorities.
If a stopped vehicle’s fuel tanks show that this marker is absent the vehicle may be impounded for further tests, and a convicted owner may face up to 3 years imprisonment. Specific guidelines govern the minimum concentration of additive required to avoid conviction, in order to prevent diluting legitimate fuel with smuggled fuel in equal parts. These fuel testing campaigns are most prevalent in the South East of Turkey, where smuggling is more commonplace. Turkish nationals living in Ankara whom we interviewed were unaware of these measurements, or even where they could purchase smuggled fuel.
Following the second Iraq war, much of the country’s infrastructure was damaged and a severe fuel shortage resulted. In order to access refined products to resume business, many entrepreneurial Iraqi’s began to fabricate small refineries using basic heating and separation equipment to process their light sweet crude into gasoline and a low-grade diesel that could be used to power generators. Initially much of the equipment to fabricate these “mini-refineries” was knowingly sourced from Turkey, since within South East Turkey similar small refineries had long been an established means to process smuggled crude imports. As the Iraqi Kurdistan government developed its own refinery capacity by 2010 they began to close down such mini-refineries, however by this time the technology had become widely understood, and can be easily replicated today in ISIS controlled areas.
Based upon our interviews with researchers and journalists, there are numerous small refineries which are typically mobile (they may even be truck mounted), implying that the ISIS oil supply chain is highly dispersed and thus hard to track down and eliminate.
The 550 mile Syrian-Turkey border mostly comprises of low relief, arable farmland, separated by oftentimes little more than battered barbed wire fencing, and patrolled by the Turkish defense forces. Oil may be smuggled into Turkey in a number of ways, from trucking jerry cans to the border and hand carrying them across, to using pack animals. In some locations short, narrow bore pipelines have been buried across the border strip, perhaps only a few hundred feet in length, allowing Syrians to pump gasoline or diesel at one end, and have their Turkish counterparts drain the fuel out into waiting barrels at the other.
The Turkish border-control Gendarmerie have been successful in intercepting some smuggling activity and locating pipelines, but as at Q1 2015 (when our research was being conducted) they had by no means completely conquered the problem.
Financial accounting and auditing methods are a useful way to track illegal trades, so to evade scrutiny smugglers may transact using a number of “currencies”, from cash to gold to bartered goods. Some buyers within Turkey use legitimate businesses to launder their downstream revenue, for example via carpet or jewelry stores, or travel agents. Given the low population density in the border regions, much of the smuggled fuel proceeds onwards and is dispersed in Central Turkey.
2. WHAT SOLUTIONS CAN BE DEPLOYED TO TRACK CRUDE AND PREVENT SMUGGLING?
According to the level of interest in this article, we may publish a follow-up piece describing a possible set of solutions to prevent oil smuggling, be it from ISIS, or other geographical regions where corruption is a problem.
Among these ideas is a novel nanotechnology solution to tag hydrocarbon (ie crude or refined fuels) which is already used by farmers in the olive oil industry to protect and certify their high value product against forgery. Such a method may offer a solution for differentiating between legitimate and illicit crudes arriving on U.S. shores in future, as well as bringing a little more transparency to global oil trades and the finance that underpins them.
We were inspired to write this piece by the journalism of Paul Salopek, who tracked down the crude contents which supplied his local gas station and visited their global sources of production.
“Yet with a little research, and proprietary data supplied by the Marathon Petroleum Co., the Chicago Tribune could trace with unparalleled clarity virtually every bucketful of trucker Howard Dunbar’s shipment back to its distant origins. On the hydrocarbon menu that September night, in round figures:
Gulf of Mexico crudes 31%
Texas crudes 28%
Nigerian crudes 17%
Arab Light from Saudi Arabia 10%
Louisiana Sweet 8%
Illinois Basin Light 4%
Cabinda crude from Angola 3%
N’Kossa crude from the Republic of Congo 0.01% ”
*Extract from “A Tank of Gas, a World of Trouble” by Paul Salopek, 2006