Iraq’s black market oil fuels sectarian division

A burgeoning black market trade is siphoning Iraqi oil into the tankers of anyone who will take it, as Iraq’s self-ruling Kurds and the Al-Qaeda-inspired insurgents of the Islamic State lay the foundations for breakaway “petro-states.”

From its staging ground in rebel-held Syria, where it controls most of the country’s oil fields, the Islamic State, the Al-Qaeda breakaway group, has led a coalition of Sunni militias in an astonishing takeover of huge swaths of Iraq and a considerable portion of the country's northern oil fields. The group has begun to smuggle close to $1 million per day in Iraqi crude, prompting some to dub the insurgents’ still-fragile Islamic caliphate “the world’s smallest petro-state.”

Meanwhile, the leaders of Iraq’s autonomous Kurdish region have exploited the chaos to take control of the oil-rich city of Kirkuk and expand their extralegal exports of Kurdish oil. They have sold oil independently for years under Baghdad’s disapproving glare, but with Iraq's government in tatters, the Kurds finally seem poised to realize their long-held ambition of an independent state, bankrolled by oil wealth they don't have to share with Baghdad.

As oil fields slip from his weakening grip, Iraq's embattled Prime Minister Nouri al-Maliki is in many ways reaping what he sowed. Sunnis and Kurds say Maliki, a Shia, has monopolized Iraq’s oil revenues and engaged in cronyism, maneuvering oil wealth into the hands of fellow Shias and other political allies.

Once seen as a means of lifting the country out of years of devastating war and economic turmoil, Iraq’s oil wealth has seemed more and more to be the country’s “undoing,” said Michael Klare, author of several books on the global oil market and a professor at Hampshire College. “We in the West are really only concerned with oil production, how many millions of barrels are put onto the market,” he said. “But Iraqis care more about how the dollars from proceeds are allocated. And they’ve been handed out in a crony system.”

To be sure, the greatest threat to Baghdad's monopoly on oil revenues lies in the northern Kurdish enclave, which has sheltered itself from the worst of Iraq's sectarian violence. The Kurds have a plan to pump more than 1 million barrels per day over the next 15 years, and they've declined to share revenues with the rest of Iraq, a practice that Baghdad and its allies have declared unconstitutional. Despite the legal ambiguity of Kurdish oil exports, energy conglomerates have flocked to the Kurdish region over the past few years.

Maliki’s government has taken a three-pronged approach to block Kurdish oil from being imported into other countries: asserting diplomatic pressure, threatening legal action and leveraging oil exports from the larger southeastern port of Basra. The approach has been largely successful. On Monday a Kurdish tanker carrying more than $100 million in crude arrived in Galveston, Texas, where the Obama administration, which reluctantly backs the embattled Baghdad government, ordered the ship seized. Several tankers carrying Kurdish oil are said to be sitting in the Mediterranean Sea, awaiting news of a willing buyer.

But the Kurds have managed to leverage their oil reserves to forge an unlikely partnership with Turkey, as it struggles to quell its own Kurdish uprising. As of early January, much of Kurdistan’s oil has been pumped through a brand-new pipeline into southern Turkey.

That the Kurds have had success in selling oil and even attracting foreign investors has Baghdad nervous that Kurdistan will increasingly view itself as a viable state. If Iraq continues to destabilize and the Kurds consolidate control over their newly acquired fields, Baghdad may be unable to stop them.

Anti-Maliki sentiment is even more acute in Sunni lands, where the Shia-led government's monopolization of oil wealth has prompted rising nostalgia for ex-dictator Saddam Hussein among Iraq’s minority Sunnis, Klare noted, because at least Saddam “allocated the oil wealth a little more equitably."

It is those Sunnis who have given tacit consent to an unlikely Islamic State takeover, despite the radical brand of Islamic law the insurgents have introduced. If nothing else, the extremist group has begun to provide its subjects with social services — funded, in large part, by oil smuggling.

Though the nascent Islamic State caliphate has been ridiculed by many as economically hopeless, the group just might be the first insurgency to fund its activities by capturing oil fields and keeping them running. Insurgents in Nigeria and Libya have disrupted state oil revenues by attacking pipelines or hijacking oil tankers and trucks in transit. But none have sought to actually operate oil production facilities themselves, which the Islamic State has started to do, shipping off oil in trucks to corrupt Kurdish businessmen, according to Iraq Oil Report. It’s an approach that is very much in line with the extremist group’s emphasis on governance and continuity of daily life in its conquered territories.

“This is the first time you have a terrorist organization that’s an oil power,” said Klare. “The Islamic State is no longer a rebel organization, it actually has a functioning government financed by oil.”

The group is also said to be controlling the majority of Syria’s oil fields and producing over 150,000 barrels per day there, with monthly revenues approaching $50 million, according to a report from the International Business Times.

To be sure, the Islamic State’s oil production is fraught with risk, and it is inefficient. Analysts say the group is likely forced to sell its illegal oil at a substantial discount. An extragovernmental group like the Islamic State, with few regional allies, will also struggle to keep the fields operating, said Richard Mallinson, a geopolitical analyst with Energy Aspects in London.

“The challenge for an insurgent group is twofold. Keeping the field operating depends on having engineers, expertise and equipment, which will prove quite a challenge. Then, even if they have crude oil, treating it and moving it to the market will be extremely difficult for them,” he said.

Not to mention that international oil companies with resources and expertise won’t be willing to work with the group. “It is sustainable at some scale, but we shouldn’t treat this as if the volumes are large enough to affect the regional or world market,” Mallinson added. The greater threat, he said, is that Iraqi oil "has become a source of revenue for a dangerous militant group."