The Murky Underworld of Oil Theft and Diversion
POST WRITTEN BY
Terry Hallmark, Instructional Assistant Professor, Honors College
Earlier this month I attended the Association of International Petroleum Negotiators’ 2nd annual International Petroleum Summit, held in Houston. The group is made up of attorneys, petroleum economists and others who cut long-term oil exploration and production deals with foreign governments. Of the dozen or so panels or presentations, none were more interesting than a panel on preventing fuel theft. Anyone who has spent decades in the international oil industry has heard plenty about oil theft, but I came away with a much deeper understanding of how widespread the problem has become, and what countries are trying to do about it.
I have written about oil theft in a previous blog post on Nigeria. Oil thieves there engage in a practice known as “bunkering,” where pipelines are tapped and crude oil or refined products siphoned off for use or sale on the black market. Money from illicit oil helps fund militant groups like the Movement for the Emancipation of the Niger Delta (MEND) and the Niger Delta Avengers (NDA), and it lines the pockets of garden-variety crooks and corrupt public officials.
The corruption associated with oil theft runs so deep in Nigeria that both the Nigerian Navy and the government’s own anti-insurgency Joint Task Force of the Niger Delta – along with other rogue security forces members, politicians, customs agents, tanker captains and countless other shady characters – have been accused of aiding and abetting bunkering schemes. According to one estimate, the Nigerian government spends $1.5 billion per month combatting oil theft and diversion.
This much I knew before attending the panel. What I learned – and think is worth sharing here – is three-fold: First, oil theft and diversion are far more widespread than I realized, and the causes or motives are multiple. Second, the ways oil is stolen and transported goes far beyond bunkering. Third, despite the fact that oil theft and diversion are a way of life in some countries, and have been for decades, the innovative measures and new technologies authorities are adding to their long-standing anti-theft efforts are beginning to pay off.
The panel frequently referenced a January 2017 report on oil theft and diversion by the Atlantic Council, a Washington D.C.-based organization comprising 100 or so international relations experts and policymakers. The report, Downstream Oil Theft: Global Modalities, Trends, and Remedies, written by Dr. Ian M. Ralby, covers 10 countries ranging from major oil producers (Azerbaijan, Mexico, Nigeria) to countries that produce very little oil (Morocco, Mozambique, Turkey). I draw extensively on various parts of the report here.
As one might guess, the highest level of oil theft and diversion occurs in countries that have the most oil. Both Azerbaijan and Mexico, with a few differences, look a lot like Nigeria. In Mexico, fuel theft is on the rise as criminal gangs look for ways to lessen their dependence on earnings from narcotics trafficking. In 2006, state oil company Pemex reported that the country’s pipeline system had been tapped by oil thieves 211 times; last year the hits numbered nearly 7,000. But in the case of Mexico, it’s gasoline – not crude oil – that’s stolen. Thieves take the gasoline and sell on the side of the road for half what it costs at the pump.
In Azerbaijan, the thieves are not gang members but instead, members of organized crime syndicates; crude oil is the thieves’ target, not oil products or gasoline; and it doesn’t stay in the country – it’s bunkered and secretly taken to neighboring countries via train and tanker truck, taking advantage of open borders and a multinational agreement that prohibit searches of commercial vehicles.
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If crude oil production doesn’t suck a country into the oil theft business, geographic location often does. Morocco, Thailand, Turkey, as well member countries of the European Union, all play a role in the smuggling or diversion of stolen oil, most of which is refined products. These countries shine an interesting light on the phenomenon, but Morocco and Thailand are especially instructive. For example, because of bad blood between Algeria and Morocco, the vast, desert border between the two countries has been closed for more than two decades, but sizable amounts of illicit Algerian fuel still make it into Morocco with ease. Indeed, according to some estimates, hundreds of thousands of cars in Morocco (and Tunisia) run on fuel smuggled from Algeria. Even more interesting is evidence uncovered in 2014 that stolen Nigerian crude oil was smuggled into Ghana, “laundered” or mixed with crude oil from Ghana’s Saltpond field, and then shipped as Ghanian crude to Morocco (and Italy), refined and sold on the open market.
Oil smuggling is big in Thailand, with gasoline and diesel coming in from Malaysia by land and by sea through the Gulf of Thailand. In addition, liquefied petroleum gas (LPG) comes in from Malaysia in specially converted trucks and then is smuggled into neighboring Myanmar and Cambodia.
The difference in gasoline and diesel prices in Malaysia and Thailand is the main reason for the rampant fuel smuggling. Malaysia subsidized fuel prices for many years, until 2014, while Thailand did not, so fuel prices were and still are much higher in Thailand. Everyone needs fuel, and everyone likes cheap prices at the pump – so smuggling and use of stolen fuel is extensive in Thailand. Aside from Nigeria, there is perhaps no other country with such a wide array of individuals and groups so deeply involved in oil theft, ranging from organized crime and gangs to prominent figures in business and elected public officials in both Thailand and Malaysia.
The individuals involved in the theft or diversion of oil are as smart and sophisticated as any drug trafficker or money launderer. The thieves not only have all the usual tools in their toolkit – fake shipping documents, knowledge of shipping and checkpoint schedules, inside information from oil workers, public officials on the take and the like – but plenty of other options as well. In Nigeria, for example, bunkering can be done using “hot” or “pressure” tapping (as mentioned above) while the pipeline is still in operation, or the thieves can engage in “cold bunkering,” where they blow up a pipeline and install a permanent underground tap leading to a storage facility while the line is out of operation. No one knows the difference once the pipeline is back in operation. If need be, the crude can be moved through any number of stand-alone, illegal crude oil or products pipelines. If the thieves can’t steal the oil by tapping into pipelines, they can steal it from export terminals or storage facilities.
When it comes to moving crude oil or refined products by sea, the cargo can be sold or moved once the ship reaches its destination. But it can also be sold while still at sea, especially if the cargo is refined products. Tankers filled with stolen gasoline or diesel can be turned into floating filling stations. In Malaysia and Thailand, completely fake fishing vessels are used to smuggle gasoline and diesel, which can then be sold at completely fake filling stations onshore.
Stolen and diverted oil disrupts the supply chain and can cause environmental degradation, fill the coffers of insurgents, gang members, organized crime, corrupt politicians and others with money, and costs oil companies and governments billions of dollars in lost revenues.
Bad things all, but what to do?
The steps usually proposed to mitigate oil theft and diversion are similar to those taken to stop international drug trafficking – crack down on corruption, wipe out gangs, tighten borders, deploy more manpower – and they are not likely to be any more effective. Fuel theft in Nigeria is so systemic it will not be slowed or stopped any time soon. Doing so would be tantamount to eliminating drug trafficking in Colombia. Mexico could be almost as bad in less than a decade.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.
But there are some things that might counter fuel theft and diversion in other countries.
Tankers and inventories can be tracked better. Eliminating fuel price discrepancies between neighboring countries like Thailand and Malaysia would be helpful, as would blacklisting the filling stations that sell illicit gasoline and diesel. The most promising means of combating fuel theft and diversion, however, is fuel “marking.” Fuel marking has been around in one form or another for some time, but in recent years, covert molecular fuel markers have been developed that are virtually impossible for thieves to detect. Such markers allow stolen or diverted fuel to be identified and recovered, and perhaps more importantly, used as admissible scientific evidence to prosecute fuel thieves and smugglers in courts of law. One of the most successful programs to date is Ghana’s Petroleum Product Marking Scheme (PPMS), instituted by the country’s National Petroleum Authority in 2013. The program allows inspectors to determine if the gasoline or diesel sold at filling is legal and offenders are subject to being fined or jailed.
Terry Hallmark is an Instructional Assistant Professor in the Honors College. He teaches the Human Situation sequence, along with courses in ancient, medieval and early modern political philosophy, American political thought, American foreign policy and energy studies. His current research is focused on the political rhetoric and writings of Will Rogers. Prior to his appointment in the Honors College, Dr. Hallmark worked in the international oil and gas industry, where he had a 30-year career as a political risk analyst. He has been an advisor to international oil exploration and service companies, financial institutions and governmental agencies, including the World Bank, U.S. Department of Defense and members of the intelligence community. He is the Honors College coordinator for the minor in Energy and Sustainability Studies.
UH Energy is the University of Houston’s hub for energy education, research and technology incubation, working to shape the energy future and forge new business approaches in the energy industry.
Original article: https://www.forbes.com/sites/uhenergy/2017/05/26/the-murky-underworld-of-oil-theft-and-diversion/#75dabe16886e