5/25/2007

KIRKUK, Iraq -- In a desolate stretch of desert near this northern city, a pool of gooey crude oil was spreading by the side of the road on a February night. A U.S. military patrol followed the oil to an exposed underground pipeline. Three square holes pierced its thick steel skin.

A hose led from the pipeline to a pump next to a pickup truck, which had a makeshift tank mounted on its bed, according to U.S. soldiers. Two men had just finished siphoning off the crude from the holes, which were cut with a power tool. The men were detained.

Operations like this used to puzzle Iraqi and American security forces. Theft of petroleum products was nothing new. But crude oil isn't usually attractive to thieves because it has little practical value until it's refined into fuel.

"For the first couple of months, it bothered us. Why are they tapping into the crude line? What are they doing with it?" recalls Lt. Col. Jack Pritchard, commander of a U.S. Army artillery battalion that arrived here in September with the mission to improve pipeline security.

After months of investigation, Col. Pritchard and his team uncovered the answer: The operations were part of a sophisticated network of savvy thieves, unruly desert tribes, bomb-planting insurgents, corrupt security forces, cross-border smugglers and operators of small domestic refineries. At those refineries, U.S. officers believe, raw oil is turned into fuel and sold on the black market, where it's used in vehicles and to power home generators. This loose confederation has all but crippled production in Iraq's northern oil fields, even as the political future of this ethnically mixed city and its underground riches hangs in the balance.

PLUGGING THE LEAK

•  The Situation: Theft of petroleum from Iraq's network of pipelines is linked to insurgents, black-market sales and unofficial refineries.
 
•  The Backdrop: Most of the oil theft is in the north of Iraq, where Kurds and Arabs are deeply divided over how to share the region's oil wealth.
 
•  The Bottom Line: Iraqi oil production remains far below prewar levels, costing the country billions of dollars in lost revenue.
 

In the second half of last year, one stretch of pipelines connecting Kirkuk with the Turkish Mediterranean port of Ceyhan -- the main outlet for Iraq's northern oil exports -- pumped oil for only 43 days. The rest of the time the pipes sat idle, leaking crude through dozens of holes drilled along their 200-mile run through the Iraqi desert. One pipeline has been broken into 39 times so far this year, according to U.S. military officials.

The holes help explain why, four years after the U.S. invasion, Iraq hasn't been able to match its prewar crude production levels of 2.5 million barrels a day. This year, Iraq is averaging 1.9 million barrels, mostly from southern oil fields that haven't suffered the unrelenting sabotage seen in the North. Kirkuk currently produces 180,000 barrels of oil a day, but under normal conditions it could produce an additional 400,000 barrels a day. At current market prices, that would bring Iraq up to $20 million of revenue a day. Projected over an entire year, this additional income would amount to about one-fifth of Iraq's current annual budget of $32 billion.

A British-controlled company discovered oil in Kirkuk in 1927, hitting a live well that gushed crude and flooded the nearby countryside. Ever since, oil has affected the fortunes of this ancient city, historically populated by ethnic Kurds, Turkomans and Arabs. Saddam Hussein's Baath party tried to drive out the Kurds and replace them with Arabs, in a decades-long campaign to cement Arab control over this strategic region and its oil.

Since 2003, the Kurds, who claim Kirkuk as their capital, have pushed aggressively to reverse the trend. Many Kurds have moved back and tried to get Arabs to leave. The city is supposed to hold a referendum this year on whether it should join with the autonomous Kurdish region to the north, which could ultimately give the Kurds control of the oil. Arabs oppose the move, fearing discrimination and the loss of a major source of national revenue.

While both Arabs and Kurds deny they are motivated by oil, an estimated 10 billion barrels of crude beneath Kirkuk make it a lucrative prize. Total Iraqi oil reserves are estimated to be 110 billion barrels.

FIGHT FOR IRAQ

¹

See continuing coverage² of developments in Iraq, including an interactive map³ of day-to-day events in Iraq and a tally of military deaths⁴.

See a copy of the draft Iraqi oil and gas law⁵

Kirkuk's 500 active wells are scattered over three major oil fields within a short drive of the city. A series of pipelines runs from here toward a big refinery in the town of Bayji, about 50 miles south. Some deposit oil at the refinery for conversion into fuel for the Iraqi market. Others turn north and carry crude to the Turkish border. The pipelines run through Sunni Arab land, and authorities believe that members of that group are behind most of the thefts.

The first priority of Col. Pritchard's artillery battalion was to secure that 50-mile leg of pipelines between Kirkuk and Bayji along the main desert road, code-named Route Cherry by the Americans. Of particular concern was a secluded area where the road curves around a salt marsh in a spot called the Cherry Hump. The underground pipelines here dip to a low elevation point, where residual crude gathers by force of gravity.

Catching Thieves

In late winter and early spring, U.S. troops scooped up thieves here by the Humvee-load, often after unmanned airborne drones observed pipeline sabotage. Some detainees told U.S. and Iraqi investigators they were using the crude to seal their rooftops or to burn in stoves to heat their homes.

Other operations are more sophisticated. Earlier this year, U.S. soldiers stumbled on a remote desert redoubt where several pumps, generators and tanks were arrayed behind a hill. Intelligence reports indicated that crude stolen from the pipeline would be brought here and collected for trucks to pick up at night, says Sgt. First Class Jonathan Dufriend, an intelligence officer at the U.S. Army artillery battalion. When U.S. forces tried to reach the abandoned site again, the trail to it was booby-trapped with roadside bombs.

The crude-transfer site fit into a broader pattern revealed by arrested thieves. Many spoke of delivering the stolen oil to middlemen on farms, where trucks would arrive after enough crude was accumulated. Often referred to as "chicken farms" by the detainees, these collection points are so well hidden that Col. Pritchard's men have had a hard time pinpointing their location.

The trucks, often smeared with black splotches from hasty loading, take crude to neighboring countries, such as Syria, and to small refineries within Iraq, U.S. and Iraqi officials say, though exactly how this is done remains a mystery. "There is always a market for crude oil all around Iraq," says Manaa Abdullah, the 63-year-old director-general of the state-owned Northern Oil Co.

The Americans recently arrested a Syrian truck driver with a suspicious load of crude, whose origin and destination he couldn't clearly explain. Other smuggler trucks impounded on the desert roads carry fraudulent paperwork, describing their load as asphalt, an oil derivative that is difficult to tell from crude. That makes it harder to identify illegal trucks at the busy cross-border checkpoints or to prosecute the drivers in the Iraqi courts.

International smuggling of crude was perfected under Mr. Hussein, who sought to bypass export quotas imposed under the United Nations' oil-for-food program by orchestrating illicit exports to Turkey, Jordan, Syria and across the Persian Gulf. U.S. officials believe that modern-day smugglers may be taking advantage of the old networks.

There are also clandestine refineries in northern Iraq with the capacity to produce very small amounts of low-grade fuel. Mr. Abdullah and his U.S. colleagues suspect these outfits -- which, though not very sophisticated, require some technical expertise to set up -- account for some demand for the crude stolen from the pipeline.

Sgt. Dufriend, the U.S. intelligence officer, compares these refineries to back-country liquor distillers during Prohibition. "If you can't get alcohol, but you know how to make it, you become popular," he says. Although the large Bayji refinery has ramped up production recently, recurrent fuel shortages are sustaining a booming black market.

Some of the pipeline tapping at the Cherry Hump unfolded with the complicity of Iraqi soldiers charged with protecting the pipeline, according to interviews with Iraqi and U.S. officers. "The insurgents do it, sometimes my soldiers do it," says Col. Sadra al-Din, commander of the third battalion of the Iraqi army's Strategic Infrastructure Brigade.

Col. al-Din smoked nervously in the Iraqi brigade headquarters, a villa formerly owned by Ali Hassan al-Majid, a Hussein acolyte known as "Chemical Ali." An ethnic Kurd from Kirkuk, Col. al-Din is viewed as an outsider by his Sunni Arab charges. Earlier this year, he survived a bomb explosion in his office, and another time he was shot in the back. Both incidents appear to be inside jobs, according to U.S. officers.

The Northern Oil Co. has found itself at the center of the ethnic tensions. Of its 12,000 employees, only a few hundred are Kurds. "Of course there's discrimination at the oil company," says Hasib Flamez, a 33-year-old Kurdish soldier who was guarding a crew repairing a punctured pipeline on a recent day. "Arabs think oil is only for them, but it's for all of Iraq." In the early 1990s, the Flamez family was told to get out of Kirkuk, and their house was taken over by Arabs, he says.

A few feet away, Farez Mohammed, a 40-year-old Sunni Arab repairman, surveyed a pool of oil bubbling out of a broken pipeline. This spill was caused by corrosion, not theft, and the workers were here to scoop out the muck and place a rubber clamp over a tiny hole. His hands blackened by crude, Mr. Mohammed says he was born in Kirkuk, as was his father. Now, it is Arabs who are pressured to leave and sell their homes. He suspects the Kurds have designs on Kirkuk's oil. "The oil doesn't belong to the Kurds, it belongs to all of Iraq," he says.

Mr. Abdullah, the Northern Oil director, has been hiring Kurds, though he admits only 500 or so have come to work. Being an oil worker here has become increasingly dangerous. Pipeline-repair crews have been hit by roadside bombs and shot at. Sunni insurgents have been dropping leaflets in Kirkuk telling all government employees, including oil-company workers, to quit or face a bloodbath.

Last summer, Adil al-Qazaz, Northern Oil's director-general at the time, went to Baghdad to visit the Oil Ministry. After his meeting, he was snatched by gunmen on the street, never to be seen again. "We were invited to go to Baghdad together, and I feel guilty about not going," says Mr. Abdullah, who was Mr. al-Qazaz's deputy at the time. He has avoided moving into his missing colleague's office. "I keep getting calls from his family: 'Have you heard anything?'"

Among the Iraqi security forces, the strategic infrastructure battalions have one of the strangest histories. In the aftermath of the U.S. invasion, Northern Oil tapped the Sunni Arab tribes to protect the pipelines running through their turf. Mr. Hussein used a similar system, mixing intimidation and rewards to secure cooperation of the tribal sheiks. After 2003, the oil company started direct payments to the sheiks, who would in turn distribute the money to the tribal guards. Essentially, the tribes were being paid to refrain from attacks on the pipeline.

Last year, the Iraqi government decided to integrate the tribal guards into the regular army. They were issued uniforms, assigned new commanders like Col. al-Din and paid directly by the ministry of defense. Robbed of the purse strings, the sheiks were marginalized. "Because of the sudden gush of money to the soldiers, tribal leaders have no influence," says Mr. Abdullah, the oil-company director. He is universally addressed as Sheik Manaa because of his own position in the Obeidi tribe dominant in the area.

Tribal Loyalty

But tribal bonds still encouraged the newly minted soldiers to help, or at least turn a blind eye to, pipeline drillers who often come from the same village or from the same family. "Tribal loyalty is stronger than national loyalty," says Col. Pritchard. Several soldiers have been arrested stealing crude. In mid-April, an American patrol caught an out-of-uniform soldier planting a roadside bomb near the Cherry Hump. Mr. Abdullah has tried to enlist local sheiks to help him stop the drilling.

Since Col. Pritchard's artillery battalion arrived, the drilling along Route Cherry has dropped off significantly. But the smugglers have moved on to a more secluded area further north, the focus of a new security push that's just getting under way. The drillers feel so comfortable there that U.S. forces have found pipeline holes with spigots and valves. Sami Othman, the tough-talking Kurdish chief of the Oil Protection Force in Kirkuk, has just hired 600 new guards that he plans to deploy there.

All of this has allowed Mr. Abdullah to start exporting again: He sent crude to Turkey three times in May, but then several new holes in the pipeline stopped oil flow again. Recently, he learned of a possible case of pipeline sabotage near Route Cherry, and passed the tip to Col. Pritchard's battalion. That night, several Humvees drove around the desert looking for smugglers, but found nothing. Still, Mr. Abdullah preferred to wait longer to make sure the pipeline was intact. "We've borne it for so long, we can bear it another day," he says.

Write to Philip Shishkin at philip.shishkin@wsj.com⁶

Pipeline Thefts Cripple -  Source

DinarBanker - The Number One Source for Buying and Selling Iraqi Dinar. We ship Iraqi Dinar all over the world and are Registered with the United States Treasury Department and Better Business Bureau. Be sure to tell your friends and colleagues that DinarBanker is the number one source for buying and selling Iraqi Dinar Worldwide.