Oil theft won’t bankroll ISIS for long

By Thomas Multari
Nov. 28, 2014

Kurdish Peshmerga during the battle for Kirkuk — a critical oil city in northern Iraq — in August 2014. (Boris Niehaus/Wikipedia Creative Commons)

Kurdish Peshmerga during the battle for Kirkuk — a critical oil city in northern Iraq — in August 2014. (Boris Niehaus/Wikipedia Creative Commons)

A major obstacle to any rebellion is financing. From the Confederacy of the United States to the Contras of Nicaragua, this well-established truth has inspired creative means of circumvention by opposition groups – namely, illicit enterprises. The international drug trade — a consequence of struggles from Colombia to Afghanistan — illustrates the concept best, but “conflict minerals” and kidnapping for ransom have also emerged as regular features of the global landscape of asymmetrical warfare.

The Islamic State is learning lessons from past insurrection groups. Mainstream media has exaggerated ISIS’s proceeds from wealthy individuals from Gulf States as well as from their hostage-taking operations – grandfathering in the narrative established by fundamentalist groups in Afghanistan. However, a Buzzfeed article published earlier this month examines a different and far more lucrative source of wealth for ISIS: the production of oil. Mike Giglio argues that the production of oil is actually bankrolling the extremists. The U.S. Department of State undersecretary for terrorism and financial intelligence, David Cohen, speculates that the aspiring caliphate earns as much as $1 million per day from crude oil, the majority of which is located in eastern Syria (though some refineries and wells have been seized from their footholds in Iraq, as well).

Oil theft is not a commonly used financing tactic by terrorist groups, but oil-rich countries prove rare examples. Venezuela, Nigeria and even Mexico have all struggled to safeguard their crude from resourceful criminals. The Mexican national oil company, Pemex, reported that hydrocarbon siphoning by drug cartels doubled from 2012 to 2013, for a total of 5.6 million barrels.

If stolen oil is a common occurrence in well-endowed countries, then ISIS would not appear to be engaging in any groundbreaking or newsworthy activity. However, what makes ISIS’s oil theft distinct from the criminal enterprises has to do with the group’s position in the supply chain. Unlike mid-stream and downstream interceptions, ISIS has found itself in control of upstream production. They are pumping barrels from Syrian and Iraqi wells, giving Abu Bakr al-Baghdadi — the self-proclaimed caliph — more of a government-like appearance. This puts him on par with the leaders of other oil-producing rentier states – more Aramco than al-Qaeda. Cue the hand wringing about the world’s “richest extremist organization,” followed closely by nightmare scenarios of cash-laden jihadists waging indefinite war thanks to a limitless spigot of black gold.

Al-Baghdadi likely wishes this were the case, but the reality is not as promising for ISIS as some have speculated. While ISIS can sell a barrel of crude for $45 (about a 50 percent discount from international benchmarks), the challenge will lie in being able to continuously provide it. This more traditional illicit oil strategy outsources the difficult geology and engineering of constructing and maintaining wells to legitimate businesses or governments who are experts in the complex science of hydrocarbon production. Unlike ExxonMobil or Russia’s Rosneft, ISIS is unlikely to implement the advanced degree programs and research institutes required to provide the experts necessary to maintain oil production for an extended period of time.

There is a reason that the Sinaloa cartel and Nigerian smugglers have not attempted to become entrepreneurial oil producers. They instead rely on stealing oil once it has been produced because upstream exploration and production is among the most capital-intensive, specialized and complicated industries in the entire world (for a sampling, see this IBM Business Consulting Service primer on some of the challenges facing the industry). Any petroleum geologists or industrial engineers that have taken up the black flag of ISIS are few and far between, and even then they lack the equipment, infrastructure and resources to perform capably. Without those requisite components, ISIS’s upstream ventures are unsustainable.

Analysis of Hugo Chávez’s tenure managing the Venezuelan national oil company, Petróleos de Venezuela, S.A., will illuminate the difficulty of maintaining upstream production. Following the strike of PdVSA’s technocrats in 2002, Chávez purged the ranks and replaced skilled workers with Bolivarian loyalists. Furthermore, Chávez redirected proceeds from PdVSA’s production to social programs and political largesse (treating Venezuela’s oil like an infinite gusher of cash). Though morally motivated, in stark contrast to the thugs of ISIS, the lessons remain applicable. A revolution brings control of oil wealth and production to a group with no experience in managing these assets. Production in Venezuela declined from over 3 million barrels daily when Chávez took office to barely 2 million barrels per day now. Considering ISIS’s starting point of 30,000 barrels per day as well as their even further limited intellectual and professional resources, a more pronounced and more devastating decline in their output can be expected.

While ISIS may be engaging in a more lucrative racket than their criminal brethren, the underground riches they have been able to exploit will require substantial re-investment and expert maintenance or they will disappear — as Chávez experienced with PdVSA. The fact that the U.S. military is actively targeting ISIS’s energy facilities, and that they already lack the technical capacity to refine their product into enough fuel for themselves, ensures that the terrorist group’s days of swimming in oil money are fleeting.

Screen Shot 2014-11-28 at 1.45.50 PMThomas Multari is a Newport Beach, California based writer focused on the intersection of the energy industry and international relations. He graduated from Trinity College in Hartford Conn. with a degree in Political Science in 2012. Since then, he has been many things – social worker, line cook, surfer, explorer of the Guatemalan highlands – but has always kept one eye focused on the world of oil prices and petro-politics.

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