Oil smuggling to Iran embarrassment for Iraq

The smuggling of tens of thousands of gallons a day of crude oil and refined fuels from northern Iraq to Iran, in violation of new U.S. sanctions, is stoking tensions between Iraq's central government and its Kurdish provincial counterparts.

The reports about the oil smuggling surfaced just over a week after the U.S. imposed new sanctions barring the export of refined fuels to Iran. They also arise at a time when Kurdish help may be needed to form the next government as politicians in Baghdad have been deadlocked since the March 7 election.

Iraqi officials quickly vowed to do something about the practice. The smuggling is an embarrassment for Baghdad and the Kurds — both U.S. allies — not only because of the sanctions but also because of Iraqis' perception that politicians are profiting on the trade while the public suffers from fuel shortages.

Iraqi Oil Minister Hussain al-Shahristani said Tuesday the cabinet had decided to summon representatives of the Kurdish regional government to discuss the smuggling issue and "to put an end to it, as it harms Iraq's national and economic interests."

"This matter is unacceptable and strange," al-Shahristani told reporters after the cabinet meeting. It is "illogical to export refined products to neighboring countries while Iraq imports refined products such as gasoline."

Days earlier, government spokesman Ali al-Dabbagh said an urgent meeting would be held with Kurdish officials.

The Kurds, however, appeared resistant. One Kurdish government official told The Associated Press he doubted any meeting would take place, noting "the government's mandate is over." He spoke on condition of anonymity because he was not authorized to discuss the issue.

Kurdish officials acknowledged that some refined fuel from their region was being exported legally, but denied that any crude was being smuggled into Iran.

Kurdish Natural Resources Minister Ashti Hawrami insisted the source of the smuggling problem was not the Kurds. According to the Kurdish news agency, Hawrami said oil from two major refineries in central Iraq is being shipped to Iran and "the Iraqi government's raising of this issue now has a political objective of covering up the unofficial sale of crude oil from southern Iraq."

In a statement this week, the Kurdish regional government blamed Baghdad's policy of selling heavily discounted fuel to private distributors for the Iraqi public, which it said creates "incentives" for the buyers to smuggle it abroad. It acknowledged some of that smuggling may go through Kurdistan and said it is "committed to working with the federal government to eliminate permanently all such profiteering of fuel oil."

An Associated Press reporter who visited the area several weeks ago saw hundreds of fuel tankers lined up at an official crossing on a narrow mountain road at Haj Omran, a Kurdish resort town on the border with Iran. One driver, Nouri Ahmed, said he was to transport his shipment down to the Iranian port of Bandar Imam, where it is unloaded and moved to a tanker in the Gulf.

"I don't know where it goes" from there, Ahmed said.

The oil smuggling is far from new. For several years after the 2003 U.S.-led invasion, it was one of the preferred ways for insurgents to fund their operations. As security improved, private individuals and political groups picked up on the lucrative practice. Analysts say that smuggling of oil has been going on in the Kurdish north since the early 1990s.

But the issue is in the limelight now after President Barack Obama this month signed the new sanctions, which punish entities involved in exporting refined fuel products to Iran. Iran is a major exporter of crude oil, but it sorely lacks refineries, making it heavily reliant on imports of gasoline and other refined fuels. The U.S. move aims to put extra pressure on Iran over its nuclear program after four rounds of U.N. financial sanctions.

"If Iran had not been placed under international sanctions, the smuggling would have continued without a single comment," Bassem al-Sheik, the editor-in-chief of Ad-Dustour newspaper wrote Monday. He said the Kurdistan government's silence on smuggling for so long was likely because the Kurdish political groups were benefiting from the proceeds.

U.S. officials in Iraq said smuggling had long been an issue, even before the new sanctions were approved. But as major oil companies grow increasingly reluctant to sell refined products to Iran, new players had been stepping up.

"We're concerned about this, and we're reviewing these developments," said Nolan Barkhouse, a U.S. embassy spokesman in Baghdad.

Oil has long been a source of tensions between the central government in Baghdad and the government in the autonomous Kurdish region in the north. The two sides have been at odds over just how much control the Kurds — who sit on more than a third of Iraq's 115 billion barrels in proven crude reserves — should have over the oil in their territory.

Several years ago, Baghdad deemed illegal the unilateral oil deals signed by the Kurds with foreign companies following Saddam Hussein's ouster.

While the Baghdad government struck a deal in June 2009 with the Kurds to allow exports to resume through the pipeline that runs from Kirkuk to Ceyhan, Turkey, the agreement was short-lived, with exports halted three months later over a dispute over payments to foreign companies operating there.

Exports through the line have yet to resume with any consistency, raising the question of what becomes of production from the Taq Taq and Tawke fields that feed it. Taq Taq is operated by China's state-owned Sinopec Group and Turkey's Genel Enerji, and Tawke by the independent Norwegian oil company DNO.

Tawke's production in May — the latest available — stood at about 4,800 barrels per day, far shy of the field's 50,000 barrel per day capacity. Of that production, 80 barrels per day go to power the company's operations at Tawke, according to company figures. The rest is split between DNO's local refinery and the small refineries in the region, said DNO spokesman Tom Bratlie.

While DNO doesn't keep track of what happens to the oil once it's sold, "all deliveries are subject to approval by the local government," Bratlie said. He said oil refined by DNO is distributed by the local government.

The smuggling seems less a matter of helping Iran than of turning a profit.

"It's physically impossible for the oil being smuggled to be more than a drop in the bucket for Iranian needs," Samuel Ciszuk, Mideast energy analyst with IHS Global Insight said.

El-Tablawy is based in Baghdad and Barzanji in Sulaimaniyah; AP writer Sinan Salaheddin contributed to this report from Baghdad and Ian MacDougall from Oslo, Norway.