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Iraq: Smuggling, Mismanagement Plaguing Oil Industry

Iraq's oil industry needs investment if it will be able to reach previous levels of production (epa) November 13, 2007 (RFE/RL) -- Even as Iraq's Kurds sign production-sharing contracts with foreign firms, oil production south of the Kurdistan region appears handicapped by a lack of government control and continued smuggling.

Iraqi Oil Minister Husayn al-Shahristani said recently that production increased in October, but it remains unclear whether the current output levels can be maintained or increased. Meanwhile, Sunni leaders have begun calling on international firms to begin prospecting for oil and gas in the once-volatile Al-Anbar Governorate.

But government infighting, corruption, and smuggling continue to hold back exploration and development, and a national oil law on distributing the revenues remains held up in a parliamentary committee.

Officials Complicit In Smuggling

According to media reports in recent months, the export of oil from the south -- apparently carried out by militias connected to political parties -- is on the rise, and costing the federal government about $40 million a month.

Abd al-Basit Turki, the head of Iraq's Supreme Audit Board, said last month that at least 15,000 barrels of crude oil are smuggled everyday from Iraq's southern fields to Iran and the Persian Gulf states. In reality, the figure may be significantly higher. U.S.-based petroleum expert Jerry Kiser told the BBC in January that up to 300,000 barrels per day are smuggled from Al-Basrah to Iran through smuggling routes established by Saddam Hussein when Iraq was under sanctions in the 1990s.

Turki told Dow Jones Newswires that smugglers siphon oil from pipelines and load it onto trucks, which carry the oil to small boats in the Persian Gulf. He said, "organized gangs who are more strong and influential than the government and political officials" in Al-Basrah are responsible for the smuggling.

The Iraqi daily "Al-Zaman" reported on October 25 that government officials in Al-Basrah were even assisting the smugglers. Customs chief Khalaf Badran told the daily that the officials issue certificates to tanker drivers who smuggle the oil. "They use these permits to pass through checkpoints and security controls on their way to unload their cargo onto special boats along the shores of the Shatt Al-Arab Waterway," Badran said. He said it is impossible to know which tankers are official and which are smuggling, because the permits are official.

Political parties and militias are also controlling filling stations throughout the country, the daily reported on November 3. The groups use the revenues to finance their operations. Former Oil Minister Ibrahim Bahr al-Ulum has confirmed the practice, and says that political parties also used their clout and presence in the government to grab lucrative export deals from the State Oil Marketing Organization. Thamir al-Ghadban, a former oil minister and currently an energy adviser to Prime Minister al-Maliki, also confirmed the practice, saying that the groups in question imposed "levies on fuel products sold to the public."

Iraqi Vice President Barham Salih told "Al-Sharq al-Awsat" in October that the government has been working to eradicate widespread smuggling operations in Al-Basrah, as well as at the Bayji refinery, north of Baghdad.

Salih said the government "liberated" the Bayji refinery earlier this year after discovering terrorist groups had siphoned off $1.5 billion worth of oil and oil derivatives between 2005 and 2006. Regarding Al-Basrah, he said: "We are working to confront this situation, but we need time because the financial and administrative corruption has reached some important decision-making centers in the Iraqi political arena."

Mismanagement, Corruption Rife

Indeed, the government faces a daunting challenge when it comes to dealing with corruption. Parliamentarian Sabah al-Sa'idi, who heads the Integrity Commission at the Council of Representatives, is someone who has taken aim at the smuggling issue, but may himself have ties to illicit activities. Al-Sa'idi, who hails from the influential Shi'ite political party Al-Fadilah, last week accused Oil Minister al-Shahristani of corruption and called for his resignation.

Al-Shahristani fired back in an interview with Al-Sharqiyah television, indicating that al-Sa'idi and his brothers may be involved in the corruption. "We prevented [al-Sa'idi and his brothers] from intervening in many affairs concerning the ministry," al-Shahristani said, noting the former director-general of the State Oil Marketing Organization was collaborating with al-Sa'idi in an illicit oil-buying scheme. Al-Sa'idi "represents a group which sees that it has lost much after being denied contracts they were [once] benefiting from," the minister said.

Al-Shahristani also refuted reports by the Supreme Audit Board that Iraq is losing at least 15,000 barrels per day to smuggling. He said he has heard nothing from the board on this matter, and argued that such a loss could have come from pipeline explosions.

Meanwhile, exports via the northern pipeline are up to 300,000 barrels per day now that tribal leaders in north-central Iraq have decided to side with the government. Regarding the southern terminals, al-Shahristani said they are completely under his ministry's control, and the ministry has installed meters to track oil exports.

Former Oil Minister Thamir al-Ghadban told an audience at Stanford University last week that countrywide production currently stands at 2.5 million barrels per day, which is slightly less than preinvasion production levels. Exports currently stand at 1.7 million barrels per day. Al-Ghadban said the government's aim is 6 million barrels per day by 2015.

Before it can reach that goal, the government must contend with smuggling, as well as issues of terrorism and sabotage. Last week, some 200 tribesmen from villages surrounding the Majnun oil field in Al-Basrah stormed the field's facilities and rioted, demanding jobs for the local population. It appears that the majority of workers at the field were brought in from other areas. The tribesmen inflicted damage on several structures, including the facility's water tanks, which resulted in flooding. The attack was the third of its kind by tribesmen in recent months, the state-run "Al-Sabah" newspaper reported.

Many Hurdles Remain

Meanwhile, Iraq's center remains far behind. Once believed barren of oil, recent studies suggest western Iraq may be sitting atop a trillion cubic feet of natural gas, "The New York Times" reported in February. The amount of natural gas that could theoretically be extracted from Al-Anbar's Akkas field would be the energy equivalent of around 100,000 barrels of oil a day, one official speculated.

The recent studies have prompted leaders from Iraq's Sunni Arab-populated governorates to seek a ticket on the oil train. A delegation from the Al-Anbar Salvation Council visiting Washington earlier this month called for private U.S. investment to develop Al-Anbar's oil and natural-gas reserves. The council is a body established by tribesmen who aligned with the government to fight Al-Qaeda in Iraq.

Now that security has been established in Al-Anbar, previously Iraq's most volatile governorate following the U.S.-led invasion, leaders are keen on bringing in new business. The governorate has long been known for its cement and phosphate industries. With the possibility of significant oil and gas reserves, leaders say an economic revival is just around the corner. "It's just sitting there waiting for somebody to make use of it," Al-Anbar Governor Ma'mun Sami Rashid al-Alwani told reporters in Washington.

Corruption and mismanagement could have a significant impact on international investment in Iraq's oil industry, although with surging oil prices and high demand, investors would likely overlook reports of illicit activity so long as security, output, and delivery could be guaranteed.

For now, the lack of a national oil law remains the key obstruction to development. But if the security situation in the north-central region continues to remain stable, investment could be right behind it. In the south, the situation is more in flux, though the government announced this week that it has signed an agreement with Iran to build two pipelines. One will carry oil byproducts from Iran to Al-Basrah, while the other will transport Iraqi crude to Iranian ports. The oil will be sold at international market prices.

RFE/RL Iraq Report

RFE/RL Iraq Report

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