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http://www.businessweek.com/articles/2014-09-04/oil-smuggling-vital-to-islamic-states-expansion

Global Economics

Islamic State: Oil Magnates of Terror


Islamic State: Oil Magnates of Terror

Photo Illustration by 731; Photos: AP Photo (2), Corbis (1), Getty Images (2), Reuters (3)

Since it swept across northern Iraq in early June, capturing towns, refineries, and oil wells along the way, the terrorist group calling itself Islamic State may be making more money than any other terrorist group, according to U.S. intelligence officials and antiterrorism finance experts. While al-Qaeda, Hezbollah, and Hamas depend on the kindness of wealthy sympathizers and state sponsors, Islamic State finances itself almost entirely through revenue from extortion, taxes, and especially illicit oil sales. “Islamic State is probably the wealthiest terrorist group we’ve ever known,” says Matthew Levitt, a former U.S. Department of the Treasury official who directs the counterterrorism and intelligence program at the Washington Institute for Near East Policy.

The Taliban has made money smuggling opium out of Afghanistan, and the Revolutionary Armed Forces of Colombia (FARC) supports itself in part by selling cocaine and kidnapping for ransom. But those efforts pale in comparison to the money Islamic State is estimated to be bringing in through an oil-smuggling network stretching across a large swath of the Middle East. A United Nations report calculated that the Taliban raised about $400 million in 2011—more than $1 million a day. U.S. officials and terrorism experts believe that by late June, Islamic State was raising as much as $2 million a day in petroleum revenue—though that amount is declining as it loses control of some oil fields and authorities crack down on cross-border smuggling.

Once known as Islamic State in Iraq and the Levant (ISIL), the organization shortened its name to Islamic State at the end of June when it declared it was the caliphate, to which it claims all Muslims must pay homage. Over the past year, the group has gained control of oil fields in Iraq and Syria, giving it access to thousands of barrels a day that it sells on the black market.

Most of the group’s oil flows through local middlemen and is paid for almost entirely in cash, making the transactions extremely difficult to track. That insulates Islamic State from traditional methods used to dry up terrorist funds, such as international banking sanctions and anti-money-laundering laws. Al-Qaeda’s founder, Osama bin Laden, the scion of a wealthy and well-connected Saudi-Yemeni family, enjoyed the assistance of a network of foreign patrons—with overseas bank accounts. Authorities were thus able to squeeze al-Qaeda’s donors. Islamic State’s predominantly local revenue stream poses a unique challenge to governments seeking to halt the militants’ advance. Islamic State is “not as integrated with the international financial system,” Levitt says, “and therefore not as vulnerable.”

Islamic State’s revenue pays for its growing operations and territorial expansion. Before the June 10 capture of Mosul, Iraq’s second-largest city, terrorism experts put the organization’s total number of fighters at about 10,000. Thanks to a sophisticated social media recruitment campaign in the Middle East and the West, Islamic State may have doubled its manpower. Hisham al-Hashimi, an Iraqi expert on Sunni insurgencies, estimates there are 30,000 fighters or more, all of whom have to be fed, housed, and armed.

By early August the group controlled sections of Syria and Iraq that together are about the size of Wyoming. At that point, the territory included 7 oil fields and a refinery in northern Iraq, and 6 of the 10 oil fields in eastern Syria. According to Luay al-Khatteeb, a visiting fellow at the Brookings Institution’s Doha Center in Qatar, its facilities in Iraq alone would under normal conditions produce about 80,000 barrels of oil a day—more than half the capacity of the Sultanate of Brunei. But for most of the summer, Islamic State has been able to produce only a little more than half the total capacity of the Iraqi territory it controls, al-Khatteeb says.

The middlemen who smuggle and broker oil for the group demand a significant discount because of the risks involved in their illicit trade. And so Islamic State earns $25 to $60 a barrel, says al-Khatteeb, while market prices have hovered around $100 this summer. The revenue is still enough to “keep the war machine running,” he says. “The rest of the cash is going to recruiting.”

Islamic State refines some of the petroleum for its own use, mostly into gasoline and diesel for its fleet of armored vehicles and tanks, says Richard Mallinson, a geopolitical analyst with Energy Aspects, a consulting firm in London. Some of it is also used to power the plants that provide electricity for the cities the group controls. The rest of the oil, he says, is smuggled out in trucks and sold on the black market. “I don’t think any meaningful quantities are getting into export pipelines or seaborne markets,” Mallinson says. “This is going to local buyers and refineries in the region.” According to a senior U.S. official, who spoke on condition of anonymity because of the sensitivity of the issue, the oil Islamic State sells goes through the autonomous Iraqi region of Kurdistan and then into Iran and Turkey; Iran has recently clamped down on the illicit oil crossing its border. The smugglers tend to be locals: Iraqis, Turks, Syrians, or Kurds.

Petroleum may be Islamic State’s best resource—but it also provides its enemies with a big bull’s-eye. With no obvious sanctions options for the West and allied governments, the key to stopping Islamic State has become shutting down its fuel-smuggling network and taking back the oil fields. On Aug. 28, Kurdish and Iraqi forces recaptured two fields in northern Iraq—Ain Zala and Batma. According to Hisham al-Brefkani, head of the energy committee of the Nineveh provincial council, Islamic State militants set fire to oil storage tanks as they tried to halt the advance.

The loss of those fields deprives Islamic State of about 15,000 to 20,000 barrels per day, says Robin Mills of Dubai-based Manaar Energy Consulting & Project Management. That lowers the oil it can actually produce in Iraq to a “maximum of 30,000 barrels per day,” he says. Most Islamic State “production is now coming from the Ajeel and Hamrin fields,” Mills says, referring to oil fields near Saddam Hussein’s hometown of Tikrit.

Islamic State is trying to take control of the Baiji refinery in northern Iraq, which processes about a third of the country’s oil. It’s been shut down since an attack by Islamic State militants in June and remains the scene of heavy fighting between the militants and forces loyal to the Iraqi central government.

The jihadis also raise money by taxing the residents of cities such as Mosul and controlling granaries and other critical resources. Criminal activity from bank and jewelry store robberies, extortion, smuggling, and kidnapping for ransom provide additional income. The group may have raised $10 million or more in recent years from ransom payments alone, according to another U.S. official who asked for anonymity to discuss sensitive information.

“These types of smuggling, extortion, and terror taxes that give IS its funds have been going on well before June 2014,” says Denise Natali, a senior fellow at the National Defense University in Washington. “More like a decade, really,” she says, referring to the activities of Islamic State’s precursor, al-Qaeda in Iraq. The anarchy, she says, is “rooted in the corruption-weakened Iraqi state.”

While the U.S. military launches airstrikes in Iraq against Islamic State militants and their weaponry—much of it American hardware abandoned by Iraqi government forces—the Treasury Department and other agencies are seeking fresh ways to deplete Islamic State’s coffers. Authorities would like to get at the bulk of the group’s cash reserves. “It’s not totally clear where they’re storing all this money, but there may be ways to actually go after it,” says Brian Fishman, former director of research at the Combating Terrorism Center at the U.S. Military Academy at West Point. Whether or not it’s in a bank account, “you’ve got to put it somewhere.”

The bottom line: This summer, Islamic State was making as much as $2 million a day, mostly by selling oil to smugglers.

With Piotr Zalewski
Lakshmanan is a reporter for Bloomberg News in Washington.
DiPaola is a reporter for Bloomberg News in Dubai.

 
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