The
analysis “The Islamic State Oil Industry Is a Pipe Dream” has been initially
published by Oilpro, a professional network for the oil and gas professionals.
July 3,
2016
CALGARY, Canada — While I am writing this
analysis, we have still to metabolize the great sadness related to the two
terrorist attacks that have occurred in the last few days. The first one at the
Ataturk International Airport in Istanbul, Turkey, where more than 40 people
were killed. The second one at an upscale restaurant in the diplomatic quarter
of Dhaka, Bangladesh, where 20 people were killed. It’s indeed another very gloomy
page of the endless terrorist attacks against civilians. These horrible attacks
against innocent people are very difficult to intercept and to stop. Reality and
rationality tell us that we have to live with the possible remote (per single
person) occurrence of such events. Logic and probability would dictate to us
that we should rationally worry more the possibility of dying of several
diseases than about the possibility of being killed by a terrorist attack — but
it’s not easy to be calm and rational when terrorist events occur. For sure, introducing
a police state will not be a solution; introducing a lot of restrictions would enormously
limit our way of living. And, living under a police state would be a victory
for the terrorists of every kind.
The basis for this analysis is primarily based on
a conversation I had some months ago, precisely a few days before the attacks
in Paris, with a U.K. film director interested in the current developments in
Syria and Iraq, i.e., the emergence of the Islamic State, a.k.a. ISIS or ISIL.
The director wanted to have my opinion about the economic strength of the
Islamic State; he was very well informed about the current war developments in
Syria and Iraq. But, like many other researchers and journalists, he had a sort
of “worried excitement” in relation to the Islamic State. I told him that I was
expecting other terrorist attacks across the globe — a few days later occurred
the Parisian attacks — but that with reference to the economic power of the
Islamic State I was quite skeptical at least as for the possibility of
establishing a real and functioning state in the areas under the Islamic State’s
control. After some months, I am still deeply convinced that at the economic
level the Islamic State does not have good prospects. Let’s see why.
In Iraq, the effective territorial prominence of
the Islamic State started in early 2014, when during its western Iraq
offensive, a.k.a. as the Anbar offensive, the Islamic State was able to push Iraq’s
government forces out of key Iraqi cities. After that offensive, on June 10,
2014, the group captured Mosul, a city home to 2.5 million people and a
relevant center for crude oil production located in northern Iraq. In Syria,
during the Syrian Civil War, in 2013, the city of Al Raqqah was captured by the
Islamic State, which in 2014 made this city its headquarters in Syria. Raqqah
is the de facto capital of the territory under Islamic State’s control in Iraq
and Syria. In brief, the Islamic State currently controls a vast area straddling
between eastern Syria and western Iraq. In specific, the Islamic State controls
vast areas of the following governorates:
- in Syria: Aleppo, Al Raqqah, Deir ez-Zour, Homs, and Rif Dimashq
- in Iraq: Al Anbar, Saladin, Kirkuk and Nineveh
Theoretically, approximately 10 million people
should live in the Islamic State-controlled territory in Iraq and Syria —
exactly twice as much the population of the Kurdistan Regional Government (the
K.R.G.), which according to K.R.G. cabinet sources stands at 10.2 million
people. It’s important to understand that both in Iraq and Syria there are
large swaths of territory where, although it does not have direct control, the
Islamic State is completely free to operate. According to U.N. reports, 4.8
million Syrians have been forced to flee abroad, primarily to Turkey (2.7
million) and Lebanon (registered 1 million but the refugees are probably 1.5
million exerting a huge impact on the already not brilliant Lebanese economy).
In Iraq, still according to U.N. data, there should be more than 3 million
people who are now internally displaced.
Since its apogee in the summer of 2014, the
Islamic State has lost around 40 percent of its territory in Iraq and 10 to 20
percent of its territory in Syria. According to the latest U.S. intelligence
estimates, the present number of Islamic State recruits is put at 25,000;
indeed, there has been a consistent decline in the number of recruits over the
previous months, although in light of the contingent situation in both Iraq and
Syria, these statistics are not a 100 percent reliable. A total of 25,000
Islamic State fighters have been killed by the U.S.-led airstrikes in the
region. But, unless Western countries decide to scale up their intervention,
with all the unknown possible outcomes that may derive from a Western presence
on the ground, reconquering the lost cities in Iraq is a very lengthy process.
For instance, Ramadi, in Iraq, was reconquered by Iraq’s government forces only
after an offensive that lasted several months. In Syria, where getting some
sense of the civil war, an ongoing multi-sided armed conflict with
international interventions, is even more complicated, trying to stabilize the
country is right now almost an impossible task.
Is the
Islamic State Rich? It Depends From What It Means to Be Rich
It goes by itself that the Islamic State needs
money in order to:
- fight in Iraq and Syria
- manage the territory it controls in Iraq and Syria
- conduct terrorist attacks in other countries
The difference between the
Islamic State and some other terrorist groups is that it controls a vast territory.
And from this territory, it derives several revenue channels. It is on a grand
scale a replica of what happens in some cities across the globe (for instance, Caracas,
San Pedro Sula, San Salvador) where the police do not dare to enter some
neighborhoods because it would be outgunned — in other words in these cities as
well as in the Islamic State-controlled territory the official rule of law is
not applied. Having a precise estimate of the Islamic State’s revenues is not
easy because these local revenue channels may vary consistently from month to
month. At the time of this writing, three are the most important sources of
revenue: taxes and property confiscation (together around 50 percent), and the
sale of crude oil (43 percent). The latter was initially the most important of
the Islamic State’s revenues. Other sources of financing are the sale of
antiquities, drug smuggling, banks reserves, ransom for hostages, and donations.
When the Islamic State conquered Mosul, it found something like half billion dollars
in the Mosul branch of Iraq’s Central Bank, but of course this was a one-time
revenue source.
According to the Rand
Corporation, a U.S. policy think tank, in late 2008 and early 2009, the Islamic
State earned around $1 million per day, while in 2014 it was able to collect an
amount ranging from $1 million to $3 million per day. So, assuming that the
Islamic State is able to collect $3 million per day, this is equivalent to $90
million per month (best case scenario for the terrorist group). But, these
estimates are too optimistic. In fact, I.H.S., a consultancy, reported that as
of March 2016, the Islamic State’s revenue per month experienced a 30 percent
decrease to $56 million from a value of $80 million per month in mid-2015.
These numbers tell us one main
thing: $56 million per month, but it would be the same if the Islamic State
still collected $90 million, is a high amount of money in order to carry out
terrorist operations around the world, but it is absolutely insufficient in
order to run a territory that the Islamic State would like to transform into a
fully fledged country. Managing a territory is a much more complex and
expensive task. For instance, the K.R.G.’s population is practically half the
Islamic State’s population. And, the Kurdish government estimates that to manage
the K.R.G., an autonomous province within Iraq, it needs $850 million to $1
billion per month, which should be equivalent to the 17 percent of the federal
budget. The Iraqi Constitution assigns 17 percent of the federal budget to the
K.R.G. Today, between Erbil and Baghdad there is again a strong confrontation
as for the distribution of the revenue obtained from selling the K.R.G.’s and
Iraq proper’s oil via the Kurdish pipeline — in March 2016, Iraq’s central
government decided to stop its oil exports via the Kurdish pipeline system
(more details below) because of disagreements with the K.R.G. on oil revenues. In
both the K.R.G. and Iraq proper, under the current strained circumstances (a
war against the Islamic State, low oil prices, and 3 million of internally
displaced people), it’s quite improbable that the budget may permit Baghdad to
transfer $1 billion a month to Erbil, but at least it gives us an idea of the
financial burden required to run a country of 5.2 million people in that area
of the Middle East — although it’s true that geography of the K.R.G and that of
the Islamic State territory is quite different (mountain vs. desert plain). The
fact that, in 2015, the Islamic State approved a budget of $2 billion confirms
that its revenues are not comparable to the revenues of a standard country.
So the real question is
whether the Islamic State has abundant economic resources to at least barely
run a territory spanning between Iraq and Syria. And the answer is no. The
economic means that it has right now at its disposal are absolutely not
sufficient. Resorting to terrorism — although a constant in Iraq’s life after
the fall of Saddam Hussein — is a manifestation of a weak position versus
adversaries more powerful; adversaries who cannot be won in an open political
confrontation or in a fight according to international humanitarian law
(I.H.L.), a.k.a., jus in bello.
In addition to these
economic considerations, after the immediate fall of Saddam Hussein and during
the years of Nouri Al Maliki’s government (2006-14), the Islamic State
partially found fertile ground in Iraq thanks to the disenfranchisement of the
Iraqi Sunni population, around 35 percent of Iraq’s population — an important
caveat: some Sunni groups helped the invasion of Iraq by the Western powers,
but later they were never rewarded for their help by the new Iraqi
administration. Instead, during Saddam Hussein’s period, Sunnis were the
majority of the Ba’athist government and enjoyed a special treatment. In brief,
today the economic conditions of most Sunnis in Iraq are at the root of their
support for the Islamic State. In fact, apart from some areas in Baghdad and
the city of Mosul, most of Iraq’s Sunnis are farmers, who have been hit hard by
the poor harvests and food shortages of the last years — in Iraq, after 2003,
agricultural productivity declined by 90 percent. In other words, poverty and
political marginalization pushed many Sunnis toward the Islamic State. In the Middle
East, the identitarian affiliation has always been a very powerful political tool.
Especially when life is harsh and the future is bleak, the normal behavior is
to more tightly embrace one’s identitarian affiliation, no matter whether the
basic ideology is not supported a 100 percent. This is exactly what happened
between the disenfranchised Sunnis and the Islamic State ideology.
The
Islamic State and the Sale of Crude Oil
As mentioned above, the
Islamic State obtains half of its revenues from taxation and confiscation in
the territory it controls. It’s evident that the wider territory it controls
and the more people live in that territory, the higher are the rents for the
Islamic State. Over the last year the Islamic State has lost ground in both
Iraq and Syria, so it has now a reduced taxable base. Despite the importance of
taxation and confiscation, I would like to develop some considerations on the
relation between the Islamic State and the sale of crude oil. The reason behind
this choice is that last fall during my conversation with the film director a
lot of attention was given to the flow of revenues the Islamic State obtains
from crude oil sales — in addition to this, I am a petroleum consultant (legal
and fiscal issues), while I do not know much about selling antiquities,
smuggling drugs and so on.
A petro-state is a country
that depends on petroleum for:
- 50 percent or more of export revenues
- 25 percent or more of G.D.P.
- 25 percent or more of government revenues
Under this definition, the
Islamic State may well be defined as a petro-state. Putting aside considerations
about whether it’s good for a country to be a petro-state (also the well
managed Norway is a petro-state), the real issue is that the Islamic State is a
“very poor” petro-state. In other words, its petroleum revenue is insufficient
to administer the territory it controls. Revenues are insufficient today, when
the Islamic State approximately produces 21,000 bbl/d, and were insufficient in
2014 and 2015 when its production was higher — in August 2014, before the
beginning of the U.S. airstrikes production hovered around 70,000 bbl/d.
For the petroleum
industry, the advance of the Islamic State has created a lot of economic
damage, especially in Iraq — Syria is today a minor oil producer at the world
level. Luckily the Islamic State has completely been unable to reach two out
three of Iraq’s main oil-producing areas, i.e., southern Iraq and the K.R.G.
The third area, Kirkuk Province, sees the presence of both Kurdish forces and
Islamic State forces, but the most important oil fields, technically still under
federal jurisdiction, are under Kurdish control. As a result of the presence of
the Islamic State in central and western Iraq, the Kirkuk-Ceyhan pipeline has
in operation only the section related to the Turkish part from Fishkhabur (Iraq-Turkey
border) to the port city of Ceyhan in Turkey. The Iraqi section of the
Kirkuk-Ceyhan pipeline (from Kirkuk to Fishkhabur) has been out of service
since March 2014 as a consequence of repeated militant attacks. In fact, this
pipeline runs through Islamic State-controlled territory. So, since May
2014, the K.R.G. has been exporting its crude oil to Turkey via its new Kurdish
pipeline system, which is connected to the Turkish section of the Kirkuk-Ceyhan
pipeline. This new Kurdish pipeline system was then expanded from Khurmala to
the Avana dome in the Kirkuk area with the express goal of facilitating export
from the Makhmour, Avana and Kirkuk area fields. In fact, these fields had been
unable to export since March 2014 because the standard Kirkuk-Ceyhan pipeline
had been damaged by the Islamic State.
In the territory the
Islamic State has conquered in both Iraq and Syria, it has the control of
practically all the oil fields and the related infrastructure, but it may use
them only in a very limited way. In fact, since August 2014, the U.S.-led airstrikes
have consistently reduced oil extraction inflicting a lot of damages to the oil
industry. In specific, Operation Tidal Wave II, a U.S.-led military operation
that started at the end of October 2015, targeted oil transport, refining and
distribution facilities and infrastructure under the Islamic State control.
According to the U.S. forces, in just two months, Operation Tidal Way II destroyed
90 percent of the Islamic State’s oil production. In addition to this, the
Islamic State has also to face the difficulty of substituting aging as well as
broken infrastructure. Similarly, it is not easy to find engineers and
technicians able to operate the oil fields — the call for recruiting these
types of professionals started immediately during the advance of the
spring/summer of 2014. The way the group managed the Baiji refinery, which is
130 miles north of Baghdad, well testifies to these difficulties. The refinery
had a capacity of 170,000 bbl/d and supplied petroleum products for northern
Iraq. After the Islamic State captured the refinery in June 2014, the refinery
started to produce only a fraction of its rated capacity because of lack of
personnel and oil supply — Iraqi forces retook the refinery five months later.
As mentioned above, the
Islamic State is experiencing a reduction in its overall oil production. It’s
currently producing around 21,000 bbl/d. It’s quite evident that in order to
move this oil the Islamic State has to use exclusively trucks. But shipping oil
by truck is an expensive means, especially when oil prices are low. Tank trucks
are described by their size or volume capacity. Large trucks typically have a
capacity ranging from 20,800 liters to 43,900 liters. The present capacity of
the Islamic State could be moved with as many as 76 43,900-liter tank trucks.
Furthermore, in light of
its illegality, this oil has necessarily to sell at a discount. As a means of
comparison, last year when prices averaged $52 a barrel, the K.R.G. was able to
cash in $36 a barrel, while in February 2016, when Brent was $32 a barrel, the
K.R.G. cashed in $20 a barrel. Of course, although in Baghdad someone might
dissent on this point, for a potential buyer one thing is to buy from the
K.R.G. and one completely different thing is to buy from a terrorist
organization. In other words, the oil of the Islamic State should be consistently
sold at an important discount in comparison to Brent. Reliable data are not
available, but it has been reported that the Islamic State’s oil from Syria
sold at as little as $18 per barrel when Brent sold at $107 per barrel.
In brief, part of the Islamic
State’s oil is sold on the black market along the very much permeable borders between
the Islamic State and the neighboring countries. The Islamic State primarily
refines oil in small rudimentary mobile refineries having a capacity of 300 to
500 barrels per day. Also this refined oil is shipped to Turkey via truck,
although some of this oil has been sold to the Syrian regime — pecunia non olet. Refining has always
been a problem for the Islamic State because by October 2014, 50 percent of its
refining capacity had been destroyed by the U.S.-led airstrikes. Moreover, in
both Iraq and Syria, the Islamic State gets profits as well from selling oil to
its captive markets at a price higher than the one obtained when exporting oil
abroad. And in Iraq and Syria, people desperately need oil for their daily
activities; in many areas diesel generators are essential because otherwise
there would be no electricity.
When assessing the Islamic State, the most
important first step is to decide whether to consider it a state or a terrorist
organization. If the Islamic State is state, it is indeed a poor and
dysfunctional state. It may control a territory straddling between eastern
Syria and western Iraq, but it will always be difficult for this hybrid state
to consolidate its position. A state in order to thrive needs a functioning
economy, which is something that the Islamic State completely lacks. Instead,
its economy is a looting economy, i.e., an economy based on the indiscriminate
taking of goods by force as part of its military victories. Continuing with
looting activities (the present futile taxations based on the Islamic State-imposed
new norms are nothing more than disguised looting) after several months is a
clear sign that the Islamic State will never succeed in establishing a normal
state. Instead, if the Islamic State is a terrorist organization, it is indeed
a very rich organization in relation to its terrorist activities. Indeed, it’s
an organization that has the economic capabilities of committing atrocities in
several countries. Especially now, in light of the recent difficulties in the
Iraqi theater, it is highly probable that Islamic State terrorists will continue
to export to other countries the present Iraqi-Syrian mess. The oil business is
a very complex and complicated business, so, since the beginning of its
territorial expansion, it was out of question that the Islamic State, a
terrorist organization, could have continued developing Iraq’s and Syria’s
petroleum sector — this idea was already even more clear after the beginning of
the U.S.-led airstrikes. In other words, from an economic point of view, the
Islamic State may implement only one technique: pillaging.