Originally published on Energy Post.
By Karel Beckman and Nehad Ismail
The theft of refined oil products, such as petrol and diesel, poses significant threats to the global economy and to the stability of states and regions in which it is prevalent, according to a first-ever in-depth study of global downstream oil theft, conducted by Ian M. Ralby for the Atlantic Council. The report shows that refined oil theft is becoming ever more sophisticated and increasingly involves those who are supposed to guard against it. “The line between licit and illicit actors is blurring.”
The theft of crude oil has been the subject of many studies, but up until now, stealing of refined oil products such as petrol or diesel has not been extensively studied. The reason is that it is more difficult to collect reliable information on downstream illicit activities, writes Ralby, who is the founder and CEO of I.R. Consilium, a company specialising in security issues.
Ralby’s report, Downstream Oil Theft, which was published by the Atlantic Council and released on 12 January in Abu Dhabi at the Atlantic Council’s Global Energy Forum, shows that this is a serious omission. While crude oil theft has actually become less lucrative in recent years, thanks to the relatively oil price, refined oil theft is running rampant in many parts of the world. It is not only costing governments and taxpayers billions in lost revenues, it is also spreading corruption in the highest circles.
Refined oil theft in Mexico is low risk, low effort, high reward—an attractive proposition for any criminal network looking to diversify or supplement its finances
The report contains ten case studies that show the enormous dimensions of the problem. In Mexico, for example, “refined products can be stolen with relative ease and sold at a discount from market prices with little fear of punishment”, notes the report. “In other words, refined oil theft in Mexico is low risk, low effort, high reward—an attractive proposition for any criminal network looking to diversify or supplement its finances. Sale of illicit products is common on the street and even from criminal networks to fuel stations. Given the profitability and ease of the domestic marketplace, most of the criminal activity stays localized within Mexico, but some stolen products are also sold in other jurisdictions.”
The report notes that “The principal means of oil theft in Mexico—both crude and refined—has been the tapping of Pemex pipelines, frequently referred to as ‘milking’. While Pemex has reported the number of taps over time, such reporting fails to paint an adequate picture of the scale of illicit activity. At peak prices, sophisticated criminals with tapping skills were able to drain $90,000 worth of refined gasoline in less than seven minutes, making fuel tapping even more lucrative than the narcotics trade. In the first five months of 2016, Puebla State alone recorded 395 pipeline taps, the most of any state in Mexico, with Guanajuato coming in next with 290 and then Tamaulipas with 155.11 According to local media, pipeline tapping is ‘a multibillion peso business, practiced by professionals and amateurs alike, wherever Pemex pipelines run’.”
Ralby writes that “while some taps are conducted in rudimentary fashion, many involve highly skilled operations requiring extensive technical knowledge about pipeline layouts and depressurization. Such skills are normally acquired during prior or even ongoing employment at Pemex.”
Under the presidency of Goodluck Jonathan from 2010 to 2015 corruption reached unprecedented levels. The government itself awards security contracts to criminal gangs
Another country that is in the top rankings for downstream oil theft is Nigeria, a country that is heavily dependent on oil revenues (over the past four decades, 90% of the country’s total export earnings and 70% of government revenues have come from oil) and notoriously corrupt. Anywhere between $3 and $8 billion a year is stolen there (crude and refined oil combined) annually. As a result, the country loses almost 20% of its production to illicit activities.
The report says under the presidency of Goodluck Jonathan from 2010 to 2015 corruption reached unprecedented levels. The government itself awards security contracts to criminal gangs. The awarding of suspect oil contracts to shady and dodgy enterprises legitimises the illegal theft of oil and related refined products. Corruption and collusion among law enforcement agencies and the military are established facts. 80% of the fuel in Benin is illegally smuggled from Nigeria. Large scale bunkering and tapping wellheads and pipelines are common. Protection rackets by criminal gangs and thefts at export terminals are a way of life. 30% of refined products are stolen.
Uganda, a recent entrant into the oil game, is another bad example of complicity between criminals and government officials. A transparency International report ranked Uganda as one of the most corrupt states in Africa. The so-called “OPEC boys”, gangs of criminals engaged in cross-border smuggling, eventually became reliable suppliers of oil products in Uganda with the blessing of the authorities. This example shows that, as the report notes, “the criminals who perpetrate illicit downstream hydrocarbons activity range from sophisticated and sinister international networks to well-meaning humanitarian service providers on limited budgets in poor and desperate communities. Refined oil theft is not, therefore, a crime that necessarily involves a desire to do harm; rather it frequently starts and ends with a desire for a discount. This diversity of criminal motives, however, complicates the approach to ending the problem, as communities may wish to preserve the illicit market.”
The state-owned oil sector in Mozambique is also rife with corruption. Over 54% of all cargo movements in Maputo involve bribes to the highest levels of government. Fraudulent procurement contracts cost the government $4.9 billion between 2002 and 2014 a recent study found.
Much of the fuel smuggled into Ireland comes from Poland
In Turkey, high fuel prices and long borders have created opportunities for smuggling. The most controversial example was the smuggling of diesel from ISIS held territories in Iraq and Syria to Turkey. A US Treasury official said in 2015 that ISIS makes $40 million a month from doing business with the Assad regime.
In Azerbaijan private criminal activity is much less. Here the state rigorous controls the production of oil and gas most of which is extracted from the Caspian Sea. Ample evidence exists of illegal bunkering, smuggling and downstream oil thefts, and fraud, linked to the regime.
The EU is not as corrupt as developing countries, but price disparities between states do encourage corrupt and illegal practices. Ireland is an example, as the report notes: “Price differences between the Republic of Ireland and both Northern Ireland and Great Britain have created prime conditions for criminal gangs to engage in smuggling. In addition, discrepancies between Eastern European prices and British and Irish prices have inspired maritime smuggling routes.
Cocktailing and other forms of adulteration … have been long-standing cross-border issues in Ireland and Northern Ireland, but recent efforts at mitigating this modality have led Irish and British actors to engage in more traditional smuggling…. Much of the fuel smuggled into Ireland comes from Poland. This is made profitable by the significant price gap between the countries; in March of 2016, the estimated price of a liter of diesel in Poland was €0.91, while in the Republic of Ireland it was €1.10.”
The report notes that refined oil theft is, indeed, a universal problem. Meanwhile, worrying trends have emerged in this lucrative business.
First of all, notes Ralby, “traditionally, criminals have operated in a contrary relationship to non-criminal elements”, but “the binary dynamic is shifting. In other words, the line between licit and illicit actors is blurring. … Increasingly, criminals no longer find themselves in opposition to people trying to stop them; rather they are the people who are charged with the responsibility of stopping illegal conduct. Similarly, criminals, who traditionally are a threat to the safety, security, and stability of society, are actually finding themselves in the role of providing essential public services.”
Thus, for example, “one of the institutions most extensively implicated in Nigeria’s large-scale illicit hydrocarbons market is its Navy.” In Ghana, “the police, who should be cracking down on the illicit hydrocarbons market, are themselves facilitating it and both conceptually and physically protecting it. Indeed, their involvement as law enforcement officials transporting cargo essentially serves to launder and legitimize the stolen fuel.”
Thailand provides another example: “The 2014 coup provided temporary intervention into the criminality of the Thai Police and demonstrated that even the royal family was involved [in the illicit hydrocarbons trade].”
The police, who should be cracking down on the illicit hydrocarbons market, are themselves facilitating it
A second trend is what Ralby describes as “the increasing use of laws, regulations, and policies as tools for engaging in illicit activity. Criminals are generally quite adept at finding and exploiting gaps or loopholes in the legal, regulatory, and policy structures pertaining to lucrative industries like the oil and gas sector. They are also increasingly using law, regulation, and policy as means to refine and escalate their illicit activity and maximize their criminal profits.”
For example, gangs use fuel marking laws to suit their own purposes. Abusing subsidies is another method. Or, as in Nigeria, giving out official government contracts to smugglers and thieves: “A prime example is a “safe sex transaction,” whereby senior officials make use of their intimate familiarity with the workings of the government, its laws and policies, and its institutions to screen movements of money and contractual opportunities into the hands of players who will conduct illicit operations benefiting the officials.”
The third trend is that criminals increasingly make use of physical “countermeasures” to counter measures that are being taken against them. Thus, for example, “The European Union has, for more than a decade, used various dyes to mark fuel. In particular, several red dyes are used to mark agricultural diesel, which is taxed at a much lower rate than other fuels. A sizeable criminal element works to counter this mitigation tactic and remove the dye. This process of “laundering” the fuel in order to remove the red coloring of the low-cost agricultural diesel makes it possible to then sell it as high-cost, undyed, or “white,” fuel. Criminal groups working along the border between Northern Ireland and the Republic of Ireland have been particularly adept in this chemical process, and are known to have engaged in large-scale laundering operations for years.”
Naturally, the report offers recommendations to tackle the huge fraud connected with refined oil products: international cooperation, community engagement, reducing price gaps, and so on. But perhaps the only thing that will help in the end is an end to the Oil Age and a shift to renewables. But that is not part of the report’s recommendations.
Reprinted with permission.
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