Meters Cost Iraq Billions In Stolen Oil

This story was written by Robert Riggs, chief investigative reporter for CBS station KTVT in Dallas.

Millions of dollars' worth of oil is stolen daily in Iraq because of the absence of oil meters, a basic tool for preventing corruption, according to estimates by classified CIA and State Department reports, the Iraq Study Group Report, a former consultant to a U.S. oil company and a former State Department adviser to Iraq's Oil Ministry.

A six-month investigation by KTVT found the annual thefts run into the billions of dollars and help fuel insurgents, sectarian militias and corrupt officials — as well as deprive the Iraqis of much-needed money to run their struggling government.

"I would say probably between 200,000 and 500,000 barrels a day is probably unaccounted for in Iraq," says Mikel Morris, who worked for the State Department's Iraq Reconstruction Management Organization (IRMO) in Baghdad. Depending on fluctuations in the price of oil, the thefts could be worth $20 million to $30 million per day.

A Houston-area petroleum engineer, Morris says Iraq's oil industry is wide-open to corruption because there are no working meters anywhere in the system to keep count of how many millions of barrels of oil Iraq produces or exports. "It's like a supermarket without a cashier. There is no metering. And there's no metering at the well heads either. There's no metering at any of the major pipeline junctions," he says.

KTVT obtained photographs taken last spring during an Iraqi inspection that picture rusted, broken meters on the al Basrah Oil Terminal, known as the ABOT.

The bulk of Iraq's crude oil exports, which provided 94 percent of Iraq's $28 billion budget last year, are pumped into tankers at the terminal. The ABOT's oil meters have been inoperable since the U.S. invasion nearly four years ago, according to the U.S. Army Corps of Engineers, a former senior oil consultant for IRMO, statements by Iraqi officials and reports by a United Nations monitoring group.

Morris and other sources familiar with operations at the ABOT suspect that the inoperable meters allow corrupt officials to overload tankers with oil that is then sold on the black market. Intelligence reports warn that the profits from smuggled oil and petroleum products help fuel the insurgency in Iraq, though estimates of the losses vary widely.

A recent report to the Congressional leadership by the Government Accountability Office (GAO) also attributed the losses of Iraqi petroleum products to insurgents and underscored the absence of working meters. "According to State Department officials and reports, about 10 percent to 30 percent of refined fuels is diverted to the black market or is smuggled out of Iraq and sold for a profit. According to U.S. Embassy documents, the insurgency has been partly funded by corrupt activities within Iraq and from skimming profits from black marketers. In addition, Iraq lacks fully functioning meters to measure oil production and exports."

In an interview with KTVT, Samir Sumaidaie, Iraq's ambassador to the United States, conceded that there has been a massive theft of oil. "I heard about this metering problem and I think it's scandalous that we have not been able to do that," he said. When asked where the half-million barrels of oil estimated to be stolen daily is going, Sumaidaie confirmed it was reaching insurgents and corrupt government officials. "We are facing a coalition, if you like, of extremists, terrorists, organized crime, and corruption. We are aware that there is corruption going on. And we are committed to fight that. But we also are not naive enough to believe that overnight that we can simply eliminate it. It will take time."

The ABOT is under the control of Iraq's state-owned South Oil Company, which is now dominated by Shiites in southern Iraq, and the sales are managed by the State Oil Marketing Organization (SOMO). Morris says SOMO has refused to divulge its export contracts, records of sales — or even the names of buyers — in order for him to estimate how much oil is being stolen. "There's a certain secrecy behind that, so that if you don't know what's being moved in country, then you don't know what's being lost, and you don't know what's being sold," he says. "Also, you don't know what political motivations are behind what political party wants to control the oil sales. So they can take their share of the crude sales for their own political contributions or aspirations. So there's always that push to control SOMO and keep the oil sales secret."

Parsons Iraq Joint Venture, a U.S. contractor based in Houston, is scheduled to complete installation of new meters on the ABOT by May. The Special Inspector General for Iraq Reconstruction (SIGIR) reported to Congress in its Jan. 30 report that work at the ABOT, "has suffered chronic schedule slippages." Morris says powerful people inside Iraq's Oil Ministry repeatedly blocked installation of meters and fought against other measures that would help stop pervasive corruption. "There were those people inside the ministry that didn't want the sales to be known. They were the ones who probably had the most authority, (the) most power inside the ministry."

Morris says the honest Iraqi professionals in the Oil Ministry who pushed for metering and transparency put their lives at risk. "Anytime you gave the impression that you were working with the U.S. and trying to clean up the corruption problems and the word got out, there were going to be people there to make sure you didn't. One of your family members was going to disappear, or you would disappear."

Morris also became a target. He says Oil Ministry insiders tipped off insurgents about his visits to oil facilities as well as to the ministry's headquarters in Baghdad. In 2005, his Army convoys suffered deadly attacks by a suicide bomber and another by a roadside bomb. "You feel betrayed because someone inside the ministry has already helped get you attacked and tried to kill you. Our young soldiers there would ask me at the end of the mission, 'What did you get done today? Were the meetings good? Are you getting something accomplished?' I feel bad about the deaths we had from the U.S. Army soldiers that died protecting us. It still hurts me."

Iraq holds the world's second-largest proven oil reserves — approximately 100 billion barrels, with the potential of as high as 200 billion barrels. Control of that wealth is now up for grabs and is the major driving force behind the violence in Iraq, according to Amy Myers Jaffe, an energy adviser to the Iraq Study Group, which was co-chaired by former Secretary of State James Baker and former Congressman Lee Hamilton. "You really have to think about the oil as just being dollars buried under the ground or buried in a pipeline or coming out of a refinery," she says. "It's like printed money. Imagine if in the middle of the night that you could just grab some metal tool and poke it into a pipeline where there is no security, drain out oil, put it into a truck, drive it somewhere, and become a millionaire in one day. So the incentive to steal or smuggle this oil and have it be a regular business is huge in a society where there are not good controls or security."

Jaffe, who is now the Director of Energy Studies for the Baker Institute at Rice University in Houston, says political and sectarian leaders now run Iraq's oil industry without oversight because the hurriedly passed constitution did not clearly define how to fairly divide up the country's mineral resources.

As a result, corruption has become embedded in Iraq's political system to a worse extent than during Saddam Hussein's regime, according to Jaffe. "Without oil meters and control systems, there is built up a whole black market. There are different groups that can control that flow," she says. "They can pay off politicians. They can pay off government officials and government inspectors. There are people inside the system now who are making personal, individual money, or their insurgency group or their political party is making money from corruption, from smuggling, from black market activities. So they are against instituting the kinds of procedures it would take to close all this down."

The Iraq Study Group Report warned that corruption is debilitating in Iraq's oil sector and recommended putting oil meters at both ends of the supply line. It's a recommendation that has been stalled for the past three years. "Those people who are courageous and stand up and say, 'I am going to order these meters and I am going to oversee that they will be put in place' get up in the morning and their cousin is found on the street dead and assassinated or their life is threatened," Jaffe says. They were afraid to attend technical training in the United States or testify before the Iraq Study Group, "because you have this sort of layer of evil element of people who are willing to just shoot people to prevent these systems from going into place. It's very hard to implement."

Prior to the U.S. invasion, an elaborate system of corruption for stealing oil already existed in Iraq to funnel money directly to Saddam through corruption of the U.N Oil for Food program. Last May, the House Government Reform Subcommittee on National Security heard testimony that the lack of functioning oil meters at the ABOT, which had been known as the Mina al-Bakr port, enabled the Iraqi government to smuggle oil by inspectors and to top off tankers with undocumented oil. A year after the U.S. invasion, the GAO estimated that from 1997 to 2002, the former Iraqi regime had misused the Food for Oil program to attain $10.1 billion in illegal revenues through kickbacks from oil sales and smuggling oil out of Iraq .

Jaffe says a cottage industry exists for redocumenting stolen oil cargo with phony bills of loading so that it can be sold into the market through corrupt brokers. "Many of the oil trading entities that helped Saddam in the days of oil for food could be seen loading oil in Iraq after the war. So there's no question that an enterprising individual, if there were not good control systems, which of course there were not after the war, could get those same players that were fooling the U.N. to set up similar systems to fool whoever is now in the Iraqi government to continue this corruption."

Morris suspects the Iraqis are now running a new kickback scheme by paying from $6 to $9 a barrel discounts to compensate buyers for the risk of bringing tankers into the troubled waters around the ABOT. Morris recommended that Iraq could lease its own tankers and turn profits in the millions of dollars by not having to pay the discounts. But his suggestion met stiff opposition. "I thought the discounts could possibly be a kickback. But there's no proof of that. I couldn't get access to any of the contracts. It could have been a kickback, but there was no way to verify it."

The United States is now spending more than $10 million to replace the inoperable meters on the al Basrah Oil Terminal. It's the last stage of a $57.8 million overhaul of the terminal.

Overall, the United States is pumping $38 billion into infrastructure projects across Iraq. That includes spending $1.7 billion on 182 reconstruction projects to help improve Iraq's oil production infrastructure, refinery and export capacity. Yet Iraq's reported oil production remains below prewar levels.

Despite the Iraq Study Group's recommendation to install meters throughout Iraq's oil infrastructure, there are no plans to put meters anywhere else, according to the U.S. Army Corps of Engineers.

Jaffe says U.S. troops should have cordoned off secure "green zones" around the giant oil fields in southern Iraq, where it would have been easier and less expensive to produce oil and account for the revenue. "We had this very haphazard plan where pipeline projects were picked inside the Sunni Triangle. Why would you build an oil pipeline which is long and easy to blow up in a place where you have major parts of the insurgency?"

For example, Morris says pipelines for Iraq's refinery in Baiji, which is located north of Tikrit outside the apex of the Sunni Triangle, would be regularly blown up and parts of the refinery sabotaged in concert with insurgents to create fuel shortages in Baghdad. The regular disruptions at the refinery, operated by the state-owned North Refining Company, were designed to drive up the price of fuel on the black market. "They constantly work with insurgents to keep the fuel lines blown up and work with insurgents to keep fuel shortages in Baghdad. They also threaten the lives and families of refinery workers and fuel tank drivers. This refinery was corrupt during the Saddam days and needs to be seized by the Coalition Forces."

Morris recalls receiving an urgent plea for security assistance from a director general in Iraq's Oil Ministry in December of 2005. The Iraqi official warned that tanker truck drivers leaving the refinery were being threatened by insurgents. Morris says State Department officials declined to provide guards and accused him of overreacting. A few days later, the ambushes of tanker trucks started and remain unabated. Morris says it became clear that intelligence about tanker truck schedules was being fed to insurgents from the Oil Ministry.

In mid-January 2007, Iraqi Deputy Prime Minister Barham Saleh told a budget session of Parliament that the country was losing $1.5 billion to fuel smuggling from the Baiji refinery every year. "Most of this money goes to the terrorists, who target us and target our security," he said.

Last March, Morris received what he believed to be was a forged U.S. Army document from an Iraqi director general that accused specific officials in the Oil Ministry of corruption. The document alleged that Iraqi officials were creating fake invoices for construction work and the sale of petroleum products to the U.S. Army. Morris suspected that the allegations were true and recommended that the Iraqis seize the records so that the U.S. State Department could open an investigation. The next day, Morris says a fire mysteriously broke out in the Oil Ministry's financial documents office and destroyed all of the financial documents in question.

Morris says that the U.S. was overwhelmed by corruption in Iraq's state-owned oil industry. "I got the impression that it was such a problem like the insurgency that no one knew the extent of it. No one really had a plan to come up with procedures or processes that deal with the problem."

By Robert Riggs