A Crude Awakening: The Global Black Market for Oil
The value of the crude oil production alone is worth a staggering each year. Add downstream fuels and other services to that, and oil is a money-making machine.
Both companies and governments take advantage of this resource wealth. More of the work in the oil patch than any other industry. At the same, entire government regimes are kept intact thanks to oil revenues. The only problem when an industry becomes this lucrative? Eventually, everybody wants a piece of the pie – and they’ll do anything to get their share.
While pipeline theft in places like Nigeria and Mexico are the most famous images associated with the theft of hydrocarbons, the problem is actually far more broad and systematic in nature. Fuel theft impacts operations at the upstream, midstream, and downstream levels, and it is so entrenched that even politicians, military personnel, and police are complicit in illegal activities. Sometimes, involvement can be traced all the way up to top government officials. E&Y estimates this to be a issue, but it’s also likely that numbers around fuel theft are understated due to deep-rooted corruption and government involvement.
Billions of dollars per year of government and corporate revenues are lost due to the following activities: installing illicit taps, thieves can divert oil or other refined products from pipelines. Mexican drug gangs, for example, can earn from illegal pipeline tapping. Oil acquired by thieves is pumped to small barges, which are then sent to sea to deliver the product to tankers. In Nigeria, for example, the Niger Delta’s infamous labyrinth of creeks is the perfect place for bunkering to go undetected. This involves the transfer of illegal fuel to a more reputable ship, which can be passed off as legitimate imports. For example, refined crude from Libya gets transferred from ship-to-ship in the middle of the Mediterranean, to be illegally imported into the EU.
This involves using the threat of violence to command a truck or ship and steal its cargo. Even though Hollywood has made Somalia famous for its pirates, it is the Gulf of Guinea near Nigeria that ships need to be worried about. In the last few years, there have been hundreds of attacks. In some countries – as long as the right person gets a cut of profits, authorities will turn a blind eye to hydrocarbon theft. In fact, E&Y says an astonishing 57.1% of all fraud in the oil an gas sector relates to corruption schemes.
Smuggling oil products into another jurisdiction can help to enable a profitable and less traceable sale. ISIS is famous for this – they can’t sell oil to international markets directly, so they to Turkey, where it sells it at a discount.
Adulteration is a sneaky process in which unwanted additives are put in oil or refined products, but sold at full price. In Tanzania, for example, adding cheap kerosene and lubricants to gasoline or diesel is an easy way to increase profit margins, while remaining undetected. The impact of fuel theft on people and the economy is significant and wide-ranging: Companies in oil and gas can lose billions of dollars from fuel theft. Case in point: Mexico’s national oil company (Pemex) is estimated to lose as a result of illegal pipeline tapping by gangs.
Governments receive royalties from oil production, as well as tax money from finished products like gasoline. In Ireland, the government claims it loses €150 to €250 million in revenues per year from fuel adulteration. Meanwhile, one World Bank official pegged the Nigerian government’s total losses from oil revenues stolen (or misspent) at since 1960.
ISIS and other terrorist groups have used hydrocarbon theft and sales as a means to sustain operations. At one point, ISIS was making from selling oil. The Zetas cartel in Mexico of the fuel theft market, raking in millions each year.
Not only does fuel theft cost corporations and governments severely, but there is also an environmental impact to be considered. Fuel spills, blown pipelines, and engine damage (from adulterated fuel) are all huge issues. Unfortunately, all of the above losses eventually translate into higher prices for end-customers. There are two methods that authorities have been using to slow down and eventually eliminate fuel theft.
are used to color petroleum products a specific tint, so as to allow for easy identification and prevent fraud. However, some dyes can be replicated by criminals – such as those in Ireland who “launder” the fuel, which are used in tiny concentrations of just a few parts per million, are invisible and can also be used to identify fuels.
In Tanzania, the initiation of a fuel marking program using molecular markers led to significant increases of imported petrol and diesel for the local market, and a decrease of kerosene. At the retail level, product meeting quality standards increased from 19% in 2007 to 91% in 2013. Ultimately, this resulted in an increase of tax revenue of $300 million between 2010 and 2014.
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Jeff Desjardins is a founder and editor of Visual Capitalist, a media website that creates and curates visual content on investing and business.
Visual Capitalist creates and curates enriched visual content focused on emerging trends in business and investing.