How Islamic State Uses Syria's Oil to Fuel Its Advances

In an oil field in northeastern Syria, a queue of trucks lines up daily to load crude sold cheaply by Islamic State militants who have hijacked parts of the country's energy industry in their bid to build a caliphate.

Sales at Shadada field, described by an oil trader, are just one example of how the group, which has seized land in war-torn Syria and neighbouring Iraq, is creating its own economy through a series of pragmatic trades.

It is cutting deals with local traders and buyers, even businessmen who support Syrian President Bashar al-Assad, and some of its oil has made its way back to government buyers through a series of middlemen.

"Islamic State makes not less than $2 million daily that allows them to pay salaries and maintain their operations," said a former Western oil executive who worked in a foreign oil firm operating in Syria before the crisis and who is familiar with the nascent oil market.

The United States, which has been bombing Islamic State positions in Iraq, has said it is prepared to extend the campaign into Syria, which has been racked by civil war for more than three years, and has said it will train more than 5,000 Syrian rebel fighters to counter the advancing group.

But oil sales mean Islamic State, an al Qaeda splinter group, can rely less on foreign donations and attract more recruits and supporters with its newfound wealth, something that is likely to make the group harder to stamp out in Syria.

Islamic State has taken oil fields from Western-backed Syrian rebels and the government in recent months and is believed to control hundreds of wells, depriving Assad's government of a major source of income.

Damascus says Syria's production fell to an average of 28,000 barrels per day (bpd) in 2013 from 164,000 bpd in 2012. Oil sales made up nearly a quarter of state revenues before the war. The government says it has lost $3.8 billion in stolen oil because of the conflict.

Boosted by arms seized in neighbouring Iraq, Islamic State has consolidated its grip on the eastern oil-producing area of Deir al-Zor in recent months, coming closer to the north east, where the largest oil wells are controlled by Kurdish militias.

It is estimated to have taken control of hundreds of small wells in Deir al-Zor that produced around 130,000 bpd of mostly light crude, according to a senior oil engineer now working in Damascus.

Half of Syria's estimated pre-war production of 380,000 bpd in 2011 was located in Hasaka province, which the Kurds took control of in mid-2012 as Assad's forces relocated westwards to fight Sunni Muslim rebels in Aleppo.

If Hasaka were eventually to fall to Islamic State, the group will have control of nearly all of the country's installations.

However, the group has yet to fully exploit the fields it already holds due to a lack of technical expertise. The main fields it controls - Shadad, al Omar, Tenak and Ward - were once mostly operated by international oil companies.

But Royal Dutch Shell (RYDAF) Total and Petro Canada have long since abandoned the area, making full use of the fields a formidable challenge.

"Many wells were shut down and foreign firms withdrew and the equipment was looted by rebels, who emptied warehouses," said one former oil executive with a foreign company.

Few people with technical expertise remain in Islamic State areas. In Kurdish-held territory many staff have remained, and some still get their salaries from Damascus's oil ministry.

Trading with the Enemy
A lack of expertise in extracting and refining oil means that most of Islamic State's revenues come from direct sales to local businessmen, smugglers and profiteers and oil traders.

They resell the mainly light crude to refiners across rebel held parts of Syria and have won a variety of customers by selling it at an average of $18 per barrel.

Some of the crude is sold to fuel smugglers that take it into Turkey, but the amounts are small because of tight border controls, Syrian border traders said.

Instead a local market has developed with a multi-million-dollar refinery business, run on an ad hoc basis. Local investors bring in Chinese and Turkish-made makeshift refineries via Turkey, some of which process 500-1,000 bpd.

These then sell to wholesalers and retailers in oil trading hubs across several towns in rebel-held parts of northwest and eastern Syria. Prices for the refined oil range from $50-$60 per barrel, nearly three times the price of the crude.

A litre of gasoline from this locally refined crude sells for around half a dollar, a third of the price of good quality gasoline sold in government-held areas, according to oil traders in Idlib in western Syria contacted by phone.

In a country where the conflict has produced many contradictions and strange bedfellows, traders with connections on both sides of the war have sought to make hefty profits by reselling fuel in government areas.

Crude buyers, directly or indirectly, include businessmen close to Assad's ruling circle.

They are driven mainly by wide profit margins, according to one broker who runs a network of oil lorries that transport crude oil to Latakia, a hub of pro-Assad support on the western coast.

There are tacit arrangements between Islamic State and local state officials to ensure that basic services such as electricity and water are not disrupted or destroyed.

"There is an equation that no one talks about in the Syrian war. It has not so far gone to all-out war. Parties that are fighting each other still exchange services and find bargains," said Samir Aita, a Syrian economist living abroad.

Oil traders say that since taking control of oil wells from rivals, Islamic State has continued the practice of guarding some pipelines transporting crude pumped by Kurds in their fields in northeast Syria to a government-run refinery in Homs in exchange for protection money.

"They would take fees and transit fees so the oil would go through without blowing it up," said a Kurdish oil executive working in Qamishli who requested anonymity.

Traders who buy crude from Islamic State and known middlemen acting on behalf of prominent loyalist business figures have been active buyers in recent months, according to a Damascus-based businessman familiar with the local oil market.

"This is a lucrative trade for some businessmen who are mainly war profiteers who can also find buyers any time at the right price," he said.

(By Suleiman Al-Khalidi; Editing by Sylvia Westall and Will Waterman)