Gas oil smuggling community rakes in $1 billion for Iran and its proxies

By Maha El Dahan and Yousef Saba

DUBAI (Reuters) – A refined gas oil smuggling community that some consultants imagine generates a minimum of $1 billion a yr for Iran and its proxies has flourished in Iraq since Prime Minister Mohammed Shia al-Sudani took workplace in 2022, 5 sources with data of the matter instructed Reuters.

The operation exploits a authorities coverage below which Iraq allocates gas oil to asphalt crops at closely subsidised costs and entails a community of corporations, teams and people in Iraq, Iran and Gulf states, in keeping with the 5 individuals and three Western intelligence reviews, two from August this yr and one which was undated.

Underneath the scheme, wherever from 500,000 to 750,000 metric tons of heavy gas oil (HFO), together with excessive sulphur gas oil (HSFO) – equal to three.4 million to five million barrels of oil – is diverted from the crops every month and exported, principally to Asia, two of the sources stated.

The extent of the gas oil smuggling since Sudani got here to energy and the involvement of a number of entities inside Iraq within the illicit commerce haven’t beforehand been reported.

Iranian and Iraqi officers didn’t reply to detailed requests for remark in regards to the findings within the Reuters story.

Iran views its neighbour and ally Iraq as an financial lung and wields appreciable navy, political and financial affect there by the highly effective Shi’ite militias and political events it backs. It additionally sources onerous forex from Iraq by exports and avoids U.S. sanctions by way of its banking system, Iraqi and U.S. officers say.

Whereas Baghdad has been delicately balancing its position as an ally of each Washington and Tehran for years, with President-elect Donald Trump anticipated to take a tough line on Iran’s makes an attempt to skirt U.S. sanctions, its actions in neighbouring Iraq are anticipated to return below growing scrutiny.

Of the 2 principal routes the gas oil takes out of Iraq, one entails mixing it with related product from Iran and passing it off as purely Iraqi, serving to Tehran evade powerful U.S. sanctions on vitality exports, stated the 5 sources, who declined to be named because of the sensitivity of the matter.

The opposite entails exporting the gas oil that was initially meant for the subsidy programme utilizing cast documentation to masks its origins.

Iran advantages straight from the primary route. Iranian gas oil usually sells at a reduction resulting from sanctions however it may promote it for a better value whether it is handed off as Iraqi. The second route, in the meantime, advantages the Iranian-backed militias in Iraq that management the smuggling scheme.

Three sources estimated how a lot each routes have been bringing in primarily based on assumptions in regards to the volumes traded and relative costs. Their estimates ranged from $1 billion a yr to over $3 billion.

The illicit commerce probably places Iraqi establishments and officers liable to U.S. sanctions for serving to Iran and a few Iraqi officers are involved a Trump administration might goal them, the three sources stated.

Nevertheless, Iraqi leaders rely closely on the help of influential Iranian-backed Shi’ite teams to remain in energy, making it tough for them to crack down on illicit actions, such because the gas oil smuggling, the sources stated.

Sudani’s workplace didn’t reply to requests for remark in regards to the commerce, the danger of sanctions or authorities makes an attempt to curb the enterprise.

ON WASHINGTON’S RADAR

The profitable smuggling and its hyperlinks to Iran and people below U.S. sanctions are already on Washington’s radar. The topic got here up in discussions between U.S. officers and Sudani when the Iraqi prime minister visited america in September, one of many sources stated.

Requested by Reuters whether or not smuggling had been raised, a State Division official stated: “Whereas we don’t touch upon particular discussions, we will affirm the Division has emphasised with our Iraqi counterparts the harms of illicit commerce and our help for bringing oil transparently to market.”

The U.S. Treasury didn’t reply to questions in regards to the gas oil commerce or whether or not Iraqi entities and officers have been liable to sanctions.

U.S. sanctions on Iran are mainly in response to its nuclear programme and its help for teams throughout the Center East that the U.S. sees as terrorist organisations, together with Hamas in Gaza, Hezbollah in Lebanon and the Houthis in Yemen.

Whereas Washington has put strain on Iraqi officers to clamp down on actions benefiting Iran, Tehran’s affect runs deep.

Central to the smuggling operation is Iraqi Shi’ite group Asaib Ahl al-Haq (AAH), a paramilitary pressure and political occasion that was an early backer of Sudani and a key member of the bloc that nominated him to be prime minister, in keeping with the 5 individuals with data of the matter and the three reviews.

The findings within the reviews seen by Reuters are primarily based on a broad vary of sources in Iraq and its authorities departments who weren’t recognized.

Sudani’s workplace and AAH and its chief Qais al-Khazali didn’t reply to questions posed by Reuters.

Backed by Iran’s Islamic Revolutionary Guard Corps (IRGC), AAH was folded into Iraq’s safety equipment in 2018 and now additionally has 16 members of parliament.

Khazali was sanctioned by Washington in 2019 for AAH’s alleged position in severe human rights abuses, associated to the killing of protesters in Iraq that yr and different violence, together with a 2007 assault that killed 5 U.S. troopers.

Khazali mocked the sanctions, saying in a video posted on X two days later that he was personally harm it had taken Washington so lengthy to sanction him.

HOW IT WORKS

Whereas gas oil smuggling existed earlier than Sudani got here to energy in October 2022, it has grown in complexity and turn out to be extra formalised since he took workplace, the 5 sources stated.

Iraqi gas oil exports are on observe to hit an all-time excessive above 18 million tons this yr, in keeping with trade sources and ship-tracking information, greater than double exports in 2021.

To create surplus gas oil for export, a number of the asphalt crops concerned within the community overstate their wants when requesting official gas oil allocations. Others exist in title solely, which means their total allocations may be diverted for export, in keeping with the 5 sources and intelligence reviews.

Central to the scheme is the State Firm for Mining Business, which operates asphalt crops as a three way partnership with personal corporations, the sources stated. It was initially established to spice up native industries, resembling flancoat manufacturing, an asphalt waterproofing materials utilized in development.

The state agency was singled out in one of many Western intelligence reviews as coming below tight AAH management throughout Sudani’s tenure and getting used for the export of huge portions of HSFO. Al-Thager Asphalt Industries Manufacturing unit, one of many state mining firm’s ventures in keeping with its web site, is utilized by AAH as a web site for storing gas oil, the intelligence report stated.

A number of the crops allegedly concerned are managed by AAH or Kataib Hezbollah, one other Iraqi militia backed by Iran’s Revolutionary Guards and designated as a terrorist organisation by Washington, the intelligence report stated.

The State Firm for Mining, Al-Thager and Kataib Hezbollah didn’t reply to detailed requests for remark.

In a earlier try and clamp down on the commerce, Sudani’s predecessor Mustafa al-Kadhimi ordered a evaluation of the particular working capability of asphalt crops, reduce their allocations and raised the worth of subsidised gas to $220 per ton from $70, in keeping with two of the sources and the intelligence reviews.

Reuters could not decide what prompted the crackdown.

In January 2023, a number of months after Sudani took over, the worth was lowered to $100-$150 a ton, far under the market value for exports, estimated at wherever between $300 and $500. The decrease the worth of the sponsored gas, the upper the revenue margin when exporting it on the worldwide market.

Sudani’s authorities additionally expanded licensing for asphalt crops to incorporate 37 new initiatives, a near-doubling of the trade virtually in a single day, one of many sources stated. All the sources stated a number of the initiatives have been fictitious, suggesting they have been simply ploys to get gas oil allocations for export.

The allocation of gas oil is set by Sudani’s workplace by its Nationwide Operations Command (PM-NOC).

The Oil Merchandise and Distribution Firm (OPDC) is then tasked with processing gas motion requests, which embody automobile numbers, cargo volumes and specs, and figuring out info for every driver and truck.

The gas oil actions are reviewed by the PM-NOC and authorized with memos that allow vehicles go by varied checkpoints manned by Iraq’s oil police, three sources stated.

PM-NOC, OPDC and Iraq’s state oil advertising and marketing firm SOMO, the physique chargeable for exporting Iraqi gas oil, didn’t reply to requests for remark.

BLENDED WITH IRANIAN FUEL

As soon as diverted from the crops, the gas oil takes one of many two routes, each involving cast documentation, the 5 sources stated.

A number of the Iraqi gas is exported straight by Iraq’s southern ports with falsified paperwork itemizing it as different merchandise, resembling vacuum residue or flancoat, each byproducts of refining that may be shipped legitimately.

The state mining firm, which owns a community of heavy gas oil mixing services throughout Iraq, is authorised to move gas oil between them and export flancoat, one of many intelligence reviews stated.

The second route entails mixing the illicit gas oil with related Iranian gas and passing it off as purely Iraqi, once more with falsified paperwork, to assist Tehran skirt powerful sanctions Western nations have imposed on its vitality exports.

The southern Iraqi metropolis of Basra has emerged as the guts of the mixing operations, with Khor Al Zubair and Umm Qasr ports key export factors for the illicit gas, the 5 sources stated.

Reuters was unable to find out whether or not the authorities within the ports have been conscious of the smuggling operation.

The mixing is finished by Iraqi engineers, usually throughout ship-to-ship transfers, and the gas oil is then shipped to shoppers primarily in Asia, two of the intelligence reviews stated.

The operation is made simpler by the similarity between Iraqi and Iranian gas oil grades and it’s tough to find out scientifically that mixing has occurred after the actual fact, one of many individuals stated.

Iraq’s port authorities didn’t reply to requests for remark.

In July, Sudani’s authorities ramped up the worth of subsidised gas oil to $369 per ton, advisable chopping asphalt plant allocations to about 60% of their capability and in addition ordered a evaluation of their precise capability.

Reuters was unable to find out why the federal government launched the evaluation, or the end result. Three of the sources stated the transfer was an try by the federal government to distance itself from the smuggling operation.

Sudani’s representatives didn’t reply to requests for remark.

Subsidised costs have been inching again down since August and at the moment are $228 to $268 a ton.