Fuel Oil Smuggling Network in Iraq: A Billion-Dollar Operation

By Maha El Dahan and Yousef Saba

DUBAI (Reuters) – A sophisticated fuel oil smuggling network, believed by experts to generate at least $1 billion annually for Iran and its proxies, has thrived in Iraq since Prime Minister Mohammed Shia al-Sudani took office in 2022, according to five knowledgeable sources.

The operation stems from a government policy that allocates heavily subsidized fuel oil to asphalt plants and involves a network of companies, groups, and individuals in Iraq, Iran, and Gulf states, per three Western intelligence reports.

Scale of the Smuggling

The scheme exports between 500,000 to 750,000 metric tons of heavy fuel oil (HFO) each month, primarily to Asia, equivalent to 3.4 million to 5 million barrels of oil. This significant illicit trade and its deep involvement within Iraq's various entities are new revelations.

Iranian and Iraqi officials have not commented on these findings. Iran exercises substantial influence in Iraq through Shi'ite militias and political parties that it supports, procuring hard currency and circumventing U.S. sanctions.

Smuggling Routes

Two main routes are employed for the fuel oil:
1. Blending with Iranian fuel and passing it off as Iraqi to evade sanctions.
2. Using forged documentation to export subsidized fuel oil masked as other products to obscure its origins. Estimates of revenue from these routes range from $1 billion to over $3 billion annually.

Many Iraqi officials express concern about potential U.S. sanctions, but reliance on Iranian-backed groups complicates efforts to curb smuggling.

U.S. Attention

The U.S. has taken note of this lucrative smuggling operation, discussing it during Prime Minister Sudani's visit to the U.S. in September. Although the State Department did not confirm specific discussions, it acknowledged ongoing dialogue about the harms of illicit trade.

Role of Powerful Militias

The Iraqi Shi'ite group Asaib Ahl al-Haq (AAH) plays a central role in the smuggling operations. Backed by Iran, AAH controls significant assets and has members in Iraq’s parliament. Fellow Shi'ite group Kataib Hezbollah also contributes to the illicit business, aligning with U.S. terrorism designations.

The Operations Increase

While fuel oil smuggling existed before Sudani took office, it has become more organized under his administration. Iraqi fuel oil exports are projected to surpass 18 million tons this year, more than doubling 2021 numbers. Some asphalt plants allegedly exaggerate their needs for official allocations, while others operate purely as fronts for smuggling.

The State Company for Mining Industry is central to this network, reportedly under tight AAH control where fuel oil is diverted for export. Even after heightened scrutiny and attempts to regulate the allocations, conditions continue to support rampant smuggling.

Export Procedures

Once diverted, the fuel undergoes export through two main routes with falsified documents. Some is shipped directly, while other shipments involve blending with Iranian fuels to disguise origin. Smuggling is streamlined by the similarity of fuel oil types and the challenges in scientific verification post-blending.

Conclusion

Sudani's administration recently raised subsidized fuel prices while cutting allocations. However, many measures seem intended to distance the government from the smuggling issue, with continuing price adjustments reflecting ongoing market conditions. As this operation persists under the prevailing political dynamics, underlying challenges remain significant for Iraq's governance and international relations.