Illegal oil exports flourish in the region

Countries clamp down as Iraqi and Saudi cases throw light on a worsening systemic problem.

Middle East oil smuggling is flourishing as governments fail to tackle big problems including unsecured borders, fuel subsidies, corruption and trade sanctions. The latest cases to surface involve the smuggling of oil products from Iraq and Saudi Arabia under two different sets of circumstances that highlight a systemic regional problem. On Sunday, the government of Iraq's semi-autonomous Kurdish region said it was clamping down on fuel smuggling across its mountainous borders with Iran and Turkey.

The government pledged to co-operate with Baghdad "to eliminate permanently all such profiteering ? along the entirety of Iraq's international borders". The statement followed an urgent request from Baghdad for talks with the Kurdistan regional government about the growing flow of oil products eastwards in defiance of new US sanctions against Iran. Oil smuggling through Kurdistan has increased in the past year, since the US began pressuring its trade partners to curb exports of refined oil products such as petrol, diesel and fuel oil to Iran in a prelude to the recent announcement of new sanctions. A number of international oil refiners that operate in the US, including India's Vitol and the European Royal Dutch Shell, complied with Washington's request, exacerbating Iranian fuel shortages.

In a separate development last weekend, Saudi officials reopened an investigation into oil smuggling from the King Fahd Industrial Port at Yanbu on the Red Sea coast. The investigating committee consisted of representatives from the Saudi ministries of the interior and petroleum and mineral resources, the customs and administrative investigation departments, the ports authority and the national oil company Saudi Aramco.

It was looking into a smuggling operation that illegally exported discounted oil to Europe for more than 11 years, the Saudi newspaper Okaz said. News reports in February this year said smugglers used barrels and pipelines to move oil from an unidentified private Saudi petrochemical company's storage reservoirs outside the port and load it on to vessels bound for France and other European countries.

The smugglers told customs officers the barrels contained used vehicle fuel, which is usually sent to foreign refineries for recycling. Later, they used hidden pipelines to circumvent oil quality tests that would have revealed the scam. The oil in the reservoirs was supposed to be used by domestic Saudi petrochemicals plants, of which there is a large cluster at Yanbu. Aramco has a two-tier price system for petrochemical feedstocks, which in Saudi Arabia are usually natural gas liquids but may sometimes be naphtha, a type of oil.

Naphtha is sold to domestic petrochemicals companies at an 11 per cent discount to its export price, the Riyadh-based Samba Financial Group says. The relatively modest domestic discount indicates a large-scale smuggling operation. Okaz reported in February that a committee of the Saudi investigation department and ministry of petroleum had implicated the owner of the company storing the oil and 10 employees of other petrochemicals companies in the plot.

In late May, the Saudi customs investigation authority found 11 of 19 companies indicted in the case guilty of smuggling subsidised oil products. The commission in charge of the investigation withdrew the companies' trade licences and imposed fines of at least US$300,000 (Dh1.1 million) in each case, the local Al Madina newspaper reported. The authorities did not disclose the identities of the convicted companies.

The latest Okaz news report did not give a reason for the case being reopened, but it is not an isolated incident. In February, Abdullah al Kharboush, a spokesman for the Saudi customs authority, said many attempts had been made to smuggle subsidised oil and oil derivatives out of the kingdom "on the grounds that it is allowed to export these materials via sea and land border posts". Persistent oil smuggling has been documented in other Gulf countries including Iraq, Iran and the UAE.

In 2008, Iran's naval forces intercepted and confiscated 10 tankers that were trying to smuggle a total of 4,600 tonnes of Iranian oil out of the Gulf. For years, organised gangs have smuggled billions of litres of fuel a year to countries such as Pakistan, Afghanistan, Iraq and Turkey, where products such as petrol, diesel and kerosene fetch substantially higher prices than in Iran. As long ago as 2005, Abdollah Ramazanzadeh, who was then the Iranian cabinet secretary, criticised parliament for maintaining heavy fuel subsidies, which he said supported a smuggling industry worth billions of dollars a year.

The Iranian parliament finally passed a resolution to remove the subsidies this year. Previously, Iranians colluded with Iraq to smuggle crude while the regime of Saddam Hussein was under international sanctions. The Iranian National Revolutionary Guard, which supports the regime in Tehran, has previously been implicated in smuggling oil products into southern Iran through UAE ports including Fujairah and Jebel Ali.