Global Energy Forum
Special Report Launch: Illicit Trade of Hydrocarbons
Amb. Richard Morningstar,
Founding Director and Chairman, Global Energy Center,
Nonresident Senior Fellow, Global Energy Center,
Minister Éric Besson,
former Minister of Industry, Energy and Digital Economy,
Republic of France
John C. Gannon,
Adjunct Professor, Center for Security Studies, School of Foreign Service,
Group Chief Executive Officer,
Shoreline Energy International
Location: Al Maryah Ballroom, Four Seasons, Al Maryah Island, Abu Dhabi, United Arab Emirates
Time: 9:00 a.m. Local
Date: Friday, January 13, 2017
Superior Transcriptions LLC
RICHARD MORNINGSTAR: (In progress) – trying to shine a light on this shadowy realm of the economy. And what’s maybe surprising is that there has been no comprehensive study to date with respect to oil theft and particularly with respect to refined oil theft, which is what we’re – which is what we’re talking about today. And to address this gap, our non-resident senior fellow, Dr. Ian Ralby, and his – and his team have conducted a wealth of research around the world and develops case studies of several countries.
And so today with this panel conversation, I’m pleased to announce that we are launching a comprehensive report providing insight into the modalities and trends in oil theft and specifically, again, in refined products, and then we also analyze the culprits responsible, the stakeholders that are affected and recommendations for governments and companies to try and – try and solve this situation.
I’d love to give some specific examples but I don’t want to steal the limelight from Dr. Ralby, who has a great presentation prepared for you, and then following his remarks he will join me here for a conversation alongside three highly distinguished individuals to explore this issue from a variety – a variety of angles.
So we’re grateful to have with us Minister Eric Besson down at the end, who is a former ministry – minister of industry, energy and the digital economy in France. He’s held many other positions, which you all have your biographies so I’m not going to go through biographies in great detail. But certainly very distinguished.
Dr. John Gannon, who’s an adjunct professor at Georgetown University Center for Security Studies. John, a longtime CIA analyst and the director of his – he has been the director of the National Intelligence Council. And I assume you work, John, closely with Matt Burroughs, who is involved with the – on the earlier panel.
And also Kola Karim, who is the CEO of Shoreline Energy International – a tremendous amount of experience in this area – who will give his insights. Ian Ralby, who is the primary author of the report and I think has done just a phenomenal job, is an expert on security and risk management. In addition to his fellowship here at the Atlantic Council, he’s an adjunct professor at the U.S. Department of Defense’s Africa Center for Strategic Studies and he’s the chief executive officer of his own constituency, I.R. Consilium – I.R. Consilium, Inc. He’s also done a lot of research and advisory services overall in energy security, critical national infrastructure strategy, oil and gas infrastructure and maritime law along with what we’re about to talk about today.
Again, I want to thank very much SICPA and thank Christine Macqueen and then Philippe Amon, the head of SICPA, who I’m sure is somewhere here in the – in the audience. There you are, Philippe. Thank you very much for your huge support. So let me turn it over to Ian, who will give a brief presentation outlining the report. Then we’ll go through a dialogue, we’ll have panel and, hopefully – we’re starting a little late but, hopefully, we’ll have some time for questions.
IAN RALBY: Ambassador Morningstar, excellencies, distinguished guests, ladies and gentlemen, good morning. I am extremely honored and delighted to be here with you today to share the fruits of my own labor and that of many others over the past year in exploring what has been an unrecognized issue for many, many years.
A lot of work has been done to expose issues related to crude oil theft in certain jurisdictions over the last decade or so and there have been countless reports, articles, seminars and speeches on that topic. But very, very little has been done to look at refined oil theft and the downstream illicit hydrocarbons trade.
More importantly, however, very little if any work has been done to look at that issue globally, and so I hope this report not only sheds a light on some of the national jurisdictions and regional jurisdictions that we covered but also provides a sense of this issue as a global phenomenon.
Before I get into the details, however, I want to share some thanks to a number of different entities. First of all, I’d like to thank the Atlantic Council both for having me here today at this fantastic first global energy summit but also for the opportunity to conduct this work and the support they provided throughout. I’d also like to thank the United Arab Emirates for being exceptional hosts and to add my own condolences to them for the loss of the brave souls who perished earlier this week in trying to provide assistance to the people of Afghanistan.
I’d also like to thank SICPA, which is an exceptional company that for the last 90 years has offered counter counterfeiting services and other services to the world and without their support this really would not have been possible. And last but not least, I’d like to thank my own team at I.R. Consilium, in particular, Rohini Ralby and Dr. David Soud, without whose input the content and the writing of this report would not have been possible. And furthermore, I’d like to thank my staff, which spent countless hours late into the night working on this, and also the global network of unnamed individuals who provided insight into the criminal modalities that persist, even at great danger, in some cases, to their own safety in doing so.
As you’ve heard, this is the largest study on this topic ever done. But let me hasten to add it is actually only just a starting point. I hope this will be the first of what will be many investigations into downstream oil theft and illicit hydrocarbon activity because it is an issue that needs a lot more attention.
The report itself is divided into three parts, as you’ve heard. The first part focuses on a series of case studies, and we’ll get into some of the specifics in a few moments. The second highlights the issue that we’ve heard is so important for understanding energy issues globally, which is to look at the trends. And the third presents a series of recommendations which, while conceptual at the moment, I hope will become concrete and functional in the future.
But I learned that when given limited time for making a presentation it’s often helpful to start with the conclusion. So in case I get cut off in a few moments, let me start with my finishing points and say these are the three things that I hope you will take away from this presentation.
Number one, a margin of pennies is all it takes. Number two, even small slow drips can flood a house. And number three, every context needs its own cocktail. So before you think me overly flippant in those three identified conclusions, let me say a little bit more about each of them before delving into the nature of the report.
In terms of the margin of pennies, fuel is vital to all our lives. We use it in lots of different contexts every single day. We all need it and we all use it. And as a result, I think we all look for ways to getting it at a discount. In talking about this report with friends and having them say, “What, refined oil theft? Is that even a thing? I didn’t think anybody would ever want to steal fuel!” I point out to them that most likely, and most likely for all of us, we’ve probably driven a little bit farther than it’s worth to find a fuel station that has a slightly lower price for our fuel. And if you extrapolate that into other contexts, people are willing, especially in jurisdictions where rule of law has broken down but it’s true throughout the world, to pursue a discount via illicit means. So we’re willing to break the law in order to find pennies of benefit in discounting our own fuel.
And, now, this has different applications to the poor, to the average and to the sophisticated. For the poor, it may be the impetus to support a criminal network, which, while potentially destabilizing their community overall, is nevertheless offering them access to fuel pennies below what the average going rate is.
For the average, it may be the cause for turning a blind eye to known illicit activity or suspected illicit activity that nevertheless benefits by providing a discount. And finally, for the sophisticated, it is the impetus for scaling up fuel theft to being a high-volume enterprise in order to make the pennies discount a viable criminal activity.
As for the drips flooding a house, it is very hard to see how a donkey crossing a border with a few jerrycans can impact the global economy. But when you have a lot of donkeys crossing the border every night with a lot of jerrycans, it begins to add up, and so the very small drips – the one-liter can, the 22-liter can and then the oil tanker truck and then the oil tanker on the ocean – all starts to add up to being a very big problem.
And, in fact, ladies and gentlemen, I am very pleased to tell you today that, based on the findings of this study, I think it is safe to say that refined oil theft, at a minimum, is the second largest volume and value criminal enterprise on Earth, at a minimum. More work is needed to determine exactly the contours of this value but it is at least as profitable as human trafficking, weapons trafficking or wildlife trafficking and may only be eclipsed by narcotics at large but probably eclipses the value of cocaine and certain other lower-value narcotics movements.
And finally, the cocktail point. It is often easy to apply clichés to a problem and say that, you know, well, you can’t have a one-size-fits-all approach, that there is no silver bullet and there is no single pin to pop the balloon. But this is a malady, a disease that affects the entire world but has a lot of different strains to it, and each different strain in each different jurisdiction needs its own recipe for how to actually treat and cure it. And so only by addressing this issue in a joined-up fashion with multiple lines of operation that are synchronized to produce effects that target both the direct issue itself and its second and third order consequences can we hope to have any real effect on it.
So now from the conceptual let’s go into the details, and I could spend the rest of today telling you interesting information that came out of this study. But let me go through some of the specifics from our 10 different case studies and give you a flavor for this issue.
Now, we chose these case studies to represent, geographically, a wide spectrum of the world and also functionally as many different modalities of theft as possible. Two of the case studies – Mexico and Nigeria – were very intentional and deliberate as being the two jurisdictions most often associated with oil theft. But they’ve mostly been associated with crude oil theft.
So turning the focus to the refined products, Mexico is governed by – Mexican oil theft, rather, is governed by the drug cartels. The drug cartels actually supplement their narcotics-based income with fuel theft and they do so to the tune of $1.17 billion per year in its most conservative estimate.
At the peak price of oil, a seven-minute tap of a pipeline could yield a drug cartel $90,000 in profit, making it actually more profitable than narcotics. Pemex, the national oil company, has actually had to stop moving refined products through its pipelines in order to try to deter some of this theft. But communities continue to actually support and protect drug cartels in terms of law enforcement efforts because they are benefiting so much from the slight discount they get from this illicit enterprise.
In Nigeria, the situation is different. Thirty percent of the refined hydrocarbons products that enter Nigeria leave Nigeria from smuggling operations. That is an untenable and unsustainable situation. In a country of 180 million people, the scale of that is also massive. To put it in context, neighboring Benin, it is roughly estimated by the IMF that 80 percent of the fuel in Benin as a country is actually smuggled from Nigeria.
Now, Nigeria is also famous for the uptick in piracy over the last few years, and whereas piracy off of Somalia was very much focused on kidnap for ransom, in Nigeria the impetus was oil theft, and while it had been crude, the focus over the last few years, with the decline in the price, has shifted much more towards refined products, and that continues to pose maritime security and broader security stability challenges for Nigeria and the wider region.
It has also produced new criminal organizations that are hell bent on trying to interfere with the government’s profits off of oil. The Niger Delta Avengers, which have sprung up out of some of these dynamics, have actually crippled the oil infrastructure in Nigeria to the point that they are producing 50 percent of their predicted output, dropping as low as 900,000 barrels from an estimated 2.2 million of targeted production. That is extremely crippling for a country that is facing a widespread array of challenges, and I’m sure that Kola Karim may speak to this later on.
Ghana, not too far down the road, is a – is a very different country and presents a very different set of modalities. Interestingly, Ghana presents an example of a transshipment hub. The Saltpond offshore oil infrastructure in Ghana has been used for decades to now, essentially, launder stolen crude out of Nigeria and present it into the legitimate market. A facility that produces at most 100,000 barrels a day routinely exports about 400(thousand) to 500,000 barrels. The only way that can happen is if other fuel is – other oil is entering the market.
Now, I bring this up not because I am confused about crude versus refined products, but, interestingly, a third case study that we focused on Morocco actually tied into this where the stolen crude out of Nigeria was actually laundered through Ghana and then refined some in Morocco as well as elsewhere. And so I wanted to bring that up as an example of the interconnectedness of this illicit supply chain.
But sticking with Ghana for another moment, the smuggling operations in Ghana have been so extensive that in one border town – a town of 100,000 people – more fuel is distributed than in Accra, the capital of 2.3 million. In other words, the demand for fuel to smuggle across the border is so extensive that the fuel distribution networks have actually adjusted to support that criminal enterprise.
Furthermore, it’s important to note that in Ghana the difference in price between itself and its neighbors has decreased, and the decrease actually changed the phenomenon. Whereas small-scale operations were able to make a profit off of smuggling across the border in the past, the need for – the reduction in the discrepancy in price has actually helped inspire criminal organizations to syndicate in order to provide volume-based transport of smuggled fuel. So whereas jerrycans were the mechanism before, it is now illicit tanker trucks in order to make sure that the profit margins are worthwhile.
Now, this also worries us about the possible knock-on consequences of syndicated criminal organizations using those profits to get involved in other crime. But some of the other case studies will bear that out in a moment.
Moving on to Morocco, I’ve already mentioned the illicit supply chain. But on the smuggling front, it is very interesting to note that the border between Morocco and Algeria has been closed for many years. But it is only closed to legitimate activity, because every night, as I mentioned, donkeys actually traverse the border, carrying jerrycans and, in fact, the scale of that operation is such that Algeria is losing about $2 billion a year in fuel being smuggled across its border into Morocco. Six hundred and sixty thousand vehicles in Morocco and Tunisia run all year round on smuggled fuel. So these little drips add up. They become quite a big flood.
Moving across the continent a bit to Uganda, we see an example of community-based crime. The OPEC Boys were a group of young thugs that took advantage of the price discrepancy between the DRC and Uganda, and actually provided what was ultimately seen as a community service by smuggling fuel from DRC into Uganda and offering it to a community that was under represented in terms of the distribution network.
In other words, they filled a gap in the national distribution, and this has become so endemic that even now where the price discrepancy is no longer what it was, the community is willing to pay higher prices for the fuel from the OPEC Boys just because of the ethos in supporting this community service crime.
Furthermore, Uganda presents an interesting case study of second-order consequences. Uganda has implemented a fuel marking scheme that has greatly reduced the amount of adulteration and siphoning of fuel and has helped legitimize the broader market. However, the regulatory picture has changed and the opportunities for theft have changed, and so now whereas the fuel theft may have been perpetrated by criminals at large, this is now the purview of the regulatory agency, which, when testing fuel trucks coming in to the country, are only supposed to take out 500 milliliters, yet routinely take out 22 liters. Going back to the notion of drips adding up, one border crossing having 22 liters taken from each tanker truck all year round can add up to 1.2 million liters per year – a much more significant figure when you look at the broader national economy.
Not far away, in Mozambique, we seen an example of the pre-source curse: the preemptive cringe of actually having access to wealth from the fossil fuels has led to a broad-scale jump to illegitimate activity even before it was really all that possible. But one of the best examples of where you see a blending of actors comes from a port-related situation where the private security guards charged with protecting the port actually help facilitate a major criminal operation, and in what can only be described as an example of natural selection, the only reason this operation was thwarted was that in the middle of the night this extensive operation to steal thousands of tons worth of fuel was thwarted when one of the criminals lit a candle to see better and set the whole port on fire. Very sadly, it led to the deaths of 17 individuals but it does provide an example of the interconnectedness between legitimate and illegitimate actors in pursuing this illegitimate activity.
That is further borne out in Thailand, where the royal family has actually been shaken by allegations of complicity and involvement in oil thefts and, indeed, a former police commissioner now sits in a 31-year sentence in prison for his own involvement. But in Thailand we also see another modality of theft using modified fishing vessels to smuggle fuel from neighboring Malaysia, and the maritime aspect of it is extremely important because it not only shows an example of ingenuity in how the smuggling operations occur but it also shows a nexus to other criminal activity including human trafficking and human slavery.
Moving now to the Caucasus, Azerbaijan presents a bit of a paradox because whereas a lot of these other case studies have shown extensive amounts of oil theft, Azerbaijan presents a case with very limited amounts of downstream activity, and one of the reasons for that is to see how a government that completely controls the sector may actually disincentivize fuel theft to the point of making it almost impossible to conduct.
But nearby in Turkey the situation is very different. Turkey, though with the best of intentions, has sought to stamp out this issue, nevertheless loses about $2.5 billion a year in lost revenues from fuel being smuggled into Turkey. The challenge of having conflicts – active conflicts on its borders continues to plague the state and will do so for quite a while.
And just to give a sense of some of the modalities there, false pipelines have been laid – actually, illegal pipelines have been laid across rivers leading into Turkey and helping provide a constant flow of fuel from neighboring states into the legitimate Turkish market as well as into the black market in Turkey. Additionally, fraudulent documents has helped launder fuel stolen from other places through Turkey and continues to present a major issue.
Finally, I’ll end with the EU, which, despite its development, despite its economic prowess, despite its sophistication, nevertheless loses at least 4 billion euros a year in tax revenues from smuggled fuel. It is a really extensive operation to move fuel from eastern parts of Europe into higher priced western parts and one of the most extreme examples is that for years the IRA and terrorist organizations in Ireland actually used their fuel smuggling and illicit operations to fund their broader terrorist activity.
Additionally, ongoing is an effort to clean, or launder, the fuel dye that is used to mark what is called red diesel, or farm diesel, to indicate subsidized fuel intended for farmers. That fuel is laundered and then sold onto the – to the market at a discount, providing criminal enterprise in Ireland and the UK worth at least $440 million.
So having looked at these 10 case studies, I wanted to just briefly mention the trends that we teased out of them. The first is a trend towards non-dualism. What do I mean by that? Well, traditionally there are contrary relationships between binary actors. You have police and criminals. You have security and threats. You have regulators and the regulated.
But, increasingly, the law enforcement and the outlaws end up being the same, and so we see a collapsing of this binary relationship such that those who are charged with stopping the activity are the ones who are perpetrating it in a lot of different contexts and this further, then, enfuels – and no pun intended there – the notion of community-based crime and an ethos that protects criminal activity because it is so hard to determine who is good, who is bad, and nobody really cares when they are getting a discount.
So the non-dualism is an extremely difficult phenomenon to break and often when you break it and revert to a dualistic nature, conflict arises, and the Niger Delta Avengers in Nigeria are one of the best examples of that.
The second trend is the use of law, regulation and policy as a means of conducting fuel theft. Now, it’s one thing to break the law. It’s another to actually use the law as a tool for committing crime. What do I mean? Well, there are mechanisms that have been used to take advantage of gaps and loopholes in the law that have actually perpetuated this issue. In one most – one of the most sophisticated examples what are called safe sex transactions where a – an illicit contract is entered into with the government to essentially clean the contract of the taint of illegal activity helps to obfuscate the criminal activity that it underpins.
Finally, the third trend is the countering of concrete countermeasures. Throughout the world, people have recognized that there’s an issue and some have sought to stop it via concrete countermeasures. But whether it’s actually removing trackers or trying to remove fuel dye, people have sought to counter these efforts.
So I will conclude with just a very brief mention of the recommendations we put forward and, hopefully, this will spark the discussion. There are really five categories – cooperation, reform, the establishment of regulations and standards, intervention in many different forms and countermeasures, and we can get into those in a few moments. But my final comment is that we really need to keep those pennies that are being lost in legitimate hands.
We need to work together to make sure that every little bit that we do to stop this enterprise continues to contribute towards preventing the ongoing dripping and the ultimate flooding of the global community with this illicit activity. And finally, we have to work together to employ all the tools that are at our disposal, and there are many, to develop the appropriate medicine and the medicinal cocktails that are needed to treat this disease that plagues the entire world.
So I look forward to the discussion, I thank you for your attention and I await your questions. Thank you. (Applause.)
MR. MORNINGSTAR: Thank you. Thank you very much, Ian, for this really, I think, outstanding panoramic view of the problem and I hope it whets people’s appetites to read the report. And I know you just briefly mentioned recommendations, which we’ll maybe get a little more into. There’s also the critical problem of the political will to implement the recommendations that will – that are out there.
I’m going to ask the panel several questions – or not several, some questions. I hope we’ll have some time for questions from the audience. But so I’d like – I’d like to start maybe with John Gannon. Given your experience in – you know, a lifetime of experience in the security, law enforcement and intelligence area, how serious do you categorize this issue? How do you see it as a priority – as a priority for governments? How do you relate it to other crimes including terrorism, which it’s not been – is not a major part of the report? That sort of grabs the headlines. How serious do you think that part of the situation is?
JOHN GANNON: Thank you, Richard.
First of all, I want to commend Ian and the – and the Council for producing this report. I think that the effect of this report is that in the kind of granular way we’ve looked at the problem of oil theft in 10 different countries around the world it sort of – it has elevated the profile and the recognition of the problem to a global level. I think that it’s a valuable contribution.
It also – this report also makes clear that we don’t know a lot about the networks that move from simple tapping and siphoning to the much more sophisticated maritime operations that are moving oil into export markets at very high volumes. So you go from the low-level local tapper to the – to those maritime operations, you’ve got – you’ve got much more serious issues as you move up that chain. But we have to do a lot more research and investigation to understand how that – how the oil moves and how the money moves in that supply chain.
The issue of oil itself – oil itself would not, I think, be at the top of the priorities of any – of any Western government or, certainly, any intelligence service. Where it does become an issue and a very significant issue is where the oil theft intersects with other transnational issues of very great concern such as terrorism, where the oil is being used to finance terrorist operations, narcotrafficking – the same issue as Ian referred to in Mexico – human trafficking and so forth.
I also think that there’s much greater concern as we see cyber criminals becoming more involved in oil theft and, of course, the intersection of those issues has the potential to increase the threat. But it’s at the intersection of those – of other issues that the oil theft – that the potential for oil and for – not only potential but the real fact that the oil is being used to finance serious transnational threats is a matter of, certainly, global concern, and this is something, clearly, that, I think, Western governments have to pay more attention to.
MR. MORNINGSTAR: Thank you, John. Let me – let me turn to Kola. You know, one of the things that we’ve heard a lot – heard a lot about in Ian’s description in the various countries is sort of this dichotomy – yeah, oil theft is a bad thing – it has all sorts of ramifications, as John – as John pointed out, but – and I guess in almost a perverted way one can argue that it serves a social good in that it provides – that it provides fuel at discounted prices and in that way can benefit the energy poor, which I know is – you know, which we all know is a basic priority for everybody.
How do you respond to that? How can one accomplish the same without creating this, you know, perverse – this perverse economy and how do you get around in countries like your country, Nigeria, and other countries in your region, the culture of smuggling, black market – (inaudible)? You know, how do you see that progressing and what progress in the last year, year and a half has been made in Nigeria with the new government? A lot of questions, but I think people will be interested in your responses.
KOLA KARIM: Yeah. Thank you. I think a very important area what the government – this government has done is enforcement of proper security around the energy space. A big disconnect over the years is the social contract. People in the rural areas, especially in the Niger Delta, have this firm belief that taking the fuel is part of my benefits since I’ve got nothing else.
So what you find is there’s been a huge syndicate over time – a lot of people in the rural areas getting involved in siphoning fuel out of the pipelines from the refined product side. One of the biggest drivers to this has been, first, over the years the subsidies from the Nigerian government to the local market vis-à-vis and comparing to the neighboring countries – an example, Benin.
Fuel is subsidized in Nigeria as much as 40 percent. So, if you think about it, when the gasoline is imported into Nigeria and I could take some tankers overnight into Benin, I’ve got a 40 percent uplift. That’s a huge encouragement. What this government has done is done a correction to that by making the pricing in a more commercial parity. That’s one area.
The other big problem has been the disconnect between the security apparatus within the region itself in giving a sense of balance in securing facilities from the oil companies. So if you look at not only the downstream sector, the exploration and production companies, the security apparatus and making sure the crude oil – think about it. Nigeria does not have proper refining capacity so we have got the largest importation of gasoline today in Africa into Nigeria. That’s a huge attraction to a lot of illicit businesses because of the pricing locally compared to the neighboring countries. That’s a huge markup. They’re moving to crude. Now, if you look at the last two years, the situation is getting better. As an oil producer, we were losing over 20 percent of our daily production of crude. From my injection point to the terminal, 20 to 22 percent disappears.
So what you tend to find is where is this crude going. What you see is Nigerian companies do not own ships. Someone definitely buys the crude. Someone’s refining this crude and then putting it back into the market. So there’s a major disconnect if you look at a global angle of this from the commercial point and the security point.
It’s not only looking at the West African region but look at the trading companies that are buying or trading it. How is the money moving? Because you think about oil as $60. That’s a lot of money moving. Who’s paying who? So this is a very big problem on a global angle that the focus has got to be on it in trying to fix it because the more this gets out of hand it will eventually push a very serious security position to the wall.
MR. MORNINGSTAR: Thank you.
Now, let me turn to Minister Besson and ask you what do you – what do you think can be done? What’s achievable in terms of cooperation between governments, especially at the regional level? Can governments or how can governments cooperate with private industry and at what levels of private industry? What’s the role of the major oil companies, and then going down the chain to other stakeholders? What’s – you know, how do the financial markets fit in? How do bankers fit in? Traders and other stakeholders? So how might these kinds of – how do you see these kinds of issues working through?
MINISTER ERIC BESSON: Thank you, Richard. I would like to make three remarks. If we want to crack down on oil theft, we need first to inform public opinion and the policy maker. In his excellent report, Ian wrote, I quote, “Where there is fuel it seems there is theft,” and the truth is that we are not aware of the scope of the problem. When I was minister in charge of energy, I was not aware of the extent of the issue.
To be honest, I believed it was mainly an oil-producing country issue or a problem at the periphery of Europe. I believed Europe was mostly protected by the use of a dye or marker, which was made compulsory by a European directive in order to identify fuels with different tax rates. But I learned that criminals are able to sell the so-called red diesel at the higher white price.
My second point – we need, as you mentioned, strong international cooperation. Obviously, we need, first, a commitment of every government on the domestic markets. But we should also consider cracking down on oil theft as a global priority, a real public good, because as you said – as you told us in your introducing remark, terrorism funding is at stake. Public health and environment are at stake and consumer rights are at stake because cars and trucks are hurt by mechanics’ problem of adulterated fuels.
So, in my opinion, all the international, regional, professional organization(s) should tackle the issue, whether it is the United Nation(s), OPEC or any other major organization.
My last point – international cooperation is a midterm and long-term objective. But we need to deliver right now. We need short-term results, and to achieve that goal – to get short-term results – technology can help. If we really want this, we are able to ensure the supply chain integrity from upstream to downstream.
Today, technology has come up with cutting-edge molecule markers – for instance, the Petromark marker developed by GFI. These new markers are impossible to copy or to wash out. They deliver on-the-field results, which are very reliable and even admissible in court. So the tools do exist. We need a fair evaluation of the situation and we need real determination, which means, as you said, have the stakeholders working all together.
MR. MORNINGSTAR: Thank you. Before opening it up to the audience for your questions, Ian, do you have any reactions to what the panelists have said?
MR. RALBY: Yeah. I mean, I think I could probably speak all day on this issue without even taking a break.
MR. MORNINGSTAR: It’s OK. Just speak –
MR. RALBY: But it does spark a couple of further thoughts that I, perhaps, should have mentioned, which is that every time there is a price discrepancy between borders there’s an invitation to smuggling. And so fuel subsidies in one state are, certainly, a sovereign issue. But a lot of attention needs to be paid to the criminal knock-on effects of any subsidy that is offered. So that is a, I think, a really important piece that was brought out.
I also think that the nexus between fuel theft and other criminal enterprise needs further investigation. We certainly saw it in the Mexican case study with the drug cartels, in the Thailand case study with insurgent groups and human trafficking and slavery operations. We see it in Nigeria in terms of the connection to the Niger Delta Avengers. We saw it in Ireland with the connection to the IRA and terrorist activity and we even see it now in the Mediterranean where Libyan oil tankers destined for Europe are smuggling not just oil but humans and narcotics and weapons at the same time. And so very sophisticated operations are beginning to spread.
I think it goes without saying that once you have a functional trafficking network of any one substance it is easy to move other things through it. So those connections, I think, are very important to investigate further and to really pay attention to.
And finally, on the point that Minister Besson made regarding the tools, I think it is really important to have that phased multilevel approach where we really look at what tools are at our disposal and then really pay attention to how they affect the situation and then tailor some of the other responses – the cooperation, the reform, the governance issues – to not just address the immediate response but also begin to predict how new efforts to interfere in criminal activity will affect the picture and preempt the response as best we can. So those are my general comments.
MR. MORNINGSTAR: Great. Thanks, Ian. Let’s have some questions from the audience. We have – I think we have people with microphones to pass around, and please stand up and identify yourself with your questions. Don’t be shy because I might have to call on people from certain tables if we don’t have – OK, we have some volunteers.
Q: Good morning. My name is Etna Trainor (ph).
Very comprehensive study and absolutely fascinating, some of the content here. But something really missing is the situation in this region, and I would imagine when we see – I think it’s commonly known but also I think there’s a much bigger picture in this region. And we see what’s happening in Iraq. We see what’s – we hear and we read. There’s a lot of public information out there. Is this just something perhaps for the next report? Or why haven’t you actually looked at it at this point? Thanks.
MR. RALBY: Should I –
MR. MORNINGSTAR: Yeah, go ahead.
MR. RALBY: I think that’s an excellent question and there are several answers to it. First is that we did not focus on a case study in this region partly because we did not know quite what the nature of the issues that would come out would be and we wanted to, as I said, have this as a starting point for better understanding the issue. That said, this region is mentioned quite a few times in the report in different ways. First, and I think Dr. Gannon mentioned this, cyberattacks are becoming a rising concern and a number of cyberattacks in this region have provided some insight into what we may be looking at in the future in terms of more sophisticated mechanisms of stealing oil.
Second, financing. One of the fascinating parts of the report that I really didn’t expect was how many cases studies ended up intersecting from different parts of the world. And so, you know, you’d be looking at somewhere in Africa and somewhere in Europe or Asia would turn up as relevant. And in this particular region, a number of financing connections to operations that involve the broader illicit supply chain were identified.
And finally, the elephant in the room is the ISIS issue, and while we did not tackle that directly for the obvious reason that it is extremely hard to do in any comprehensive or effective way and that really wasn’t our focus – it was – it was the broader global issue – we nevertheless did encounter, particularly in the Turkish case study, and we found some very good work that has been done.
But there’s also a huge amount of false information, further clouding the ability to understand this issue. We worked very hard to verify any open source claims that we saw and, unfortunately, on that particular issue, we were able to verify the inaccuracy of a lot of the claims that were made. And so we, I think, would need a lot more time and a lot more effort to be – to be put towards a proper investigation, and given how rapidly that context is changing it’s very difficult to nail down.
So this region is not completely absent from the report though it was not a particular focus and I do think more work on the GCC in particular would be useful because while the context does not seem right for the type of smuggling operations or low-level issues necessarily, the broader connection to a global supply chain is nevertheless already visible and more detail on that would be, I think, useful for all involved.
MR. MORNINGSTAR: I might – just to follow up on one comment – with one comment from what Ian said, we were very careful. If you look through that report, there are no, as I remember, no allegations that are made in that report that are not supported by responsible footnotes, and we were very, very careful on that. Do any of the other panelists want to comment any further and should we go on to the next question? We have another question at that same table and then we’ll come down here.
Q: Good morning. My name is Pierce Riemer. I’m the director general of the World Petroleum Council.
This looks a very interesting report. I look forward to reading it. I’ve seen similar nonpublic reports over the years produced by oil companies and a lot of the criminals that you talk about are actually the politicians or the leaders of particular states, and I wondered how you deal with people at that level because there are lots of oil and gas companies that want to take part in EITI and other schemes. They’re told if they publish what they pay, publish what you receive, that they’ll be kicked out of the country. There are other states where tankers are going in and out and the local navy is watching them go in and out. So how do you deal with this at the very top level?
MR. MORNINGSTAR: Kola?
MR. KARIM: Well, I think proper accountability is very important and there’s got to be a global conscious position itself to hold people accountable. Irrespective of what people say, governments need to be held accountable on global norms for this type of crime. And it’s becoming—it’s got to be—the way it’s working, there’s always got to be involvement of government or government apparatus, be it the navy, as you mentioned, or people in the ministry of petroleum involvement.
I’ll give an example. For a tanker to come into a country to load, someone must have certified it to come in. The navy and the port authority must have records of it. So this is not something that just vanishes into thin air. It’s a big, big criminal apparatus that’s running, and it’s got to be taken on a global level and certifies it as important.
MR. MORNINGSTAR: John?
MR. GANNON: Well, I would just add that if we look at the five recommendations with regard to cooperation and regulatory standards and so forth that could deal with these issues, the national governments and the regional government should be able to contain this problem. The problem is that the corruption is so high that you don’t get the cooperation, you’re not going to get any of these reforms without a higher order of, level of intervention.
So when I ask the question of who’s got the ability to provide information that can greatly add to our understanding of the problem so that we can do something about it, certainly Western governments could play a more active role. But the energy companies clearly have information, knowledge and the resources that can be brought to bear to greatly advance our knowledge and our understanding and our ability to deal with this issue effectively.
MR. MORNINGSTAR: Which goes back to the whole question of public-private cooperation that I think, Minister Besson, you were referring to, the need for the companies to get involved.
MIN. BESSON: Yes. To be honest, I think we need, as you mentioned, to get oil companies on board, whether it is major oil companies or local, national companies. But when we discuss with them on an informal basis, they say, or at least they think, well, it’s first government issue, and we are kind of lower enforcement issue. And they will tell you, we are able to move, we are ready to move. But we want to be asked for it by the government.
So I think the government must move first, and one of the reasons we can convince them to move is also because it’s a tax collection issue. The report makes it very clear a lot of losses of revenues. So I think we need strong international cooperation. First, we have to make governments move first.
MR. RALBY: Two very quick points on that excellent question, which really speaks to the heart of the challenge of overcoming the ongoing corruption inertia that continues to allow this to occur. First is on EITI, which is that they are right now piloting a beneficial ownership scheme where the involved parties are actually having to show where money moves. At the moment there’s a lot of capacity still within the context of a transparent initiative. I think the beneficial ownership scheme will help put some pressure on cleaning up some of those channels.
But in terms of tackling corruption, I work a lot in maritime security in Africa, and one of the most effective ways that we have found to address that issue is to bring people together. It is a lot harder to put your hand in the cookie jar when everybody is watching. The regional cooperation and international cooperation is extremely important.
But one thing that I think has been most effective in my own work is the development of whole of government processes to address issues holistically within governments because different agencies often are the ones that are particularly responsible for criminal enterprise. When you bring everyone together, it’s a lot harder to continue that in the presence of other agencies that are actually being harmed by that corrupt practice.
So encouraging more collaborative approaches to addressing energy, not just as an energy issue but as a security issue, as a development issue, as an economic issue, as an issue that benefits and potentially affects all the different agencies within a government can help tease some of those issues out. But it is a very difficult issue and I think we need to put really serious attention.
So looking at the motivations and figure out how to actually inspire people to develop the will to address this issue.
MR. MORNINGSTAR: I see three hands, and we will try and get to those questions. We have 10 minutes left and I do want to give the last couple of minutes to each of the panelists. We have already talked a lot about it, for each of you to maybe give your—what would be your top recommendation that ought to take place.
OK, Tom, and then we’ll go to, we have a few more hands. We’ll try and get them. Let’s do the three questions and then we’ll have the responses to all of them. Tom.
Q: Thanks. Tom Cunningham, deputy director, Global Energy Center.
Real quickly, when we talk about how international governments can cooperate on this issue, one thing we are looking at at the Atlantic Council is the issue of global energy governance. I think this question of how do we govern this space is fascinating because it’s somewhat about energy but it’s a lot about finance.
So any thoughts from the panel about how the international organizations as they exist, or how they need to be reconfigured to address this issue. Thank you.
MR. MORNINGSTAR: Thank you. Have a question here.
Q: Mine is more a comment. When you mention Azerbaijan, my company, Cross Caspian, I’m a board member, has played a very important role. We were the sole exclusive service provider to PCO, Exxon and BP. And I want to comment that from the first day our vision was to win the trust of the multinationals because our alternative corridor was Russia.
We really worked very hard. Yes, it is true, government of Azerbaijan does discourage, but there was a vision that we wanted to be an alternative corridor. And in fact, it was a time when Ambassador Morningstar was also in Azerbaijan and we had the support also from the embassy.
And you know, one of the key things also is that criminal operators, I think the more the international multinational companies give significance to who is my terminal operator. And quality terminal operators are very, very important because really the extent of creativity people use to steal is unbelievable.
In our case, we had ships coming in and they would have this depot somewhere, and they would go to international waters, where there is no government, and they would exchange. There would be one vessel waiting for them and accumulate from 10 vessels, and God knows where it went. So we had technologies coming in, we had Emerson – you know, the accounting.
And, you know, I want to mention again the critical problem in crude and refined products is that oil is a mystery. The quantity, volume, it depends on tank calibration, it depends on when you move from rail tank cars – rail tank cars to terminal. It’s all – as soon as the oil is in the ship, the final quantity is unknown, just like quantum physics, until at the last point.
So it’s a lot of hard work and discipline. I just wanted to say that we really did a lot on that side. Thank you very much.
MR. MORNINGSTAR: Thank you.
MR. : Good points.
MR. MORNINGSTAR: I might say that Taher Gozel is an old friend from Azerbaijan.
OK, there were a couple – we’ll just have these two more hands, two more questions, and then the panel can comment to whichever – respond to whichever points have been made you would like to, and then maybe at the same time do your one recommendation of whatever.
Q: My name is Nihad Ismail. I worked in the oil industry for many years. Now I don’t work but I write about it.
Would you believe that the USA government, the European Union, United Nations Security Council actually are part of this big smuggling and stealing operation, indirectly? There is an industry called sanction busting. Now when you impose sanctions on Russia or Iran, there is a growth industry of smuggling and illegal and illicit trade in oil and other commodities. So by imposing sanctions actually you are encouraging agencies, gangs, racketeers, all sorts of people to engage in this illegal practice.
So we need to look at this, the implications and the ramifications of imposing sanctions on countries. Russia and Iran are the prime examples of this. So really, everyone is to blame. It’s not just the poor countries like Nigeria and Benin and so on. You’re talking about big players in New York, in the United Nations actually promoting and helping indirectly and unwittingly to do that illegal trade in oil and all sorts of other commodities.
Do you have any ideas on that? Thank you.
MR. MORNINGSTAR: Thank you. And then the last. We had a hand up over on the left side. Yes? And then we will have the last comments based on these questions.
Q: My name is Jaffar al-Jaffar (ph).
I’m particularly interested in the question of smuggling by ISIS because that’s important because it’s financing terrorism. Now you said that you had a good handle of what’s not correct in these. If you know what’s correct and what’s not correct then you have a good handle on what’s correct as well. Could you tell us more?
MR. MORNINGSTAR: OK. Thank you. So I think we can go two or three minutes over, since we started late. So I would ask each of the panelists to take a minute or two to comment on whichever points you’d like to comment on and then to give us from the previous four questions and then to give your one recommendation.
Maybe we’ll start at the other end this time, Minister Besson.
MIN. BESSON: Thank you very much. I think first we need to inform. I mean, this report, we must try to have it read, and we need to release it as far, as strongly as possible. Because when people and when citizens and public officials will know the extent of the issue, I’m sure they will take action.
Then all of us must be demanding when it comes to international cooperation. We all know that to have the good recognized, or an issue recognized on an international scale it needs time. Look at the climate change issue. One decade ago it was not acknowledged but it is now. So we need to push in order to have this public good and issue recognized.
And the third thing is that we have to set up good examples. I took because I knew it the European issue, I told you that we have a dye marker which is counter-survey, and at the same time we all know that it is ineffective. Let’s move forward.
As the report mentioned, there is a new session which is open, a kind of tender which is preferred by the EU. Let us move on. Which means if we are able to show the other areas that in the Western countries, in Europe at least we have a technology which can help and which is available right now, I think we can have other areas and other governments which will take example of this issue.
MR. MORNINGSTAR: John.
MR. GANNON: Well, I would like to see us move from a situation where we recognize we need to increase our knowledge of the oil theft issue so that we understand the supply chain from the local level all the way to international markets, that we can track the money, we can track the oil much better than we can do now.
I think we have to change the perception I think in many Western governments, and to some degree within the international community, that this really is a problem for regional governments or national governments to deal with, and it isn’t worth mobilizing other resources to deal with the issue.
There is urgency to this for some of the reasons I suggested, because it isn’t just about low-level tapping. It is about oil being used to go in the larger context of international organized crime, to support movements that really are globally threatening.
I hope that the next study that we do as we try to advance this one, we really do go after not just stakeholders who can help us with the information, but really going after power centers to get more help. And I mentioned the energy companies. I think Western governments that interact with corrupt governments that are very much involved in the oil theft issue, they can also pressure those governments because they deal with it on a range of issues, not just the oil issue.
So I think the energy companies, Western governments, and then the United Nations and its agencies, which by the way do a pretty good job now. I think the international financial community does provide useful data for our understanding. But we really need to upgrade the analysis of this issue in a way that we can persuade it.
I would like to be able to bring a study to the U.S. Congress, for example, and be able to persuade people that this is an issue that merits much higher priority than it has today.
MR. MORNINGSTAR: Kola, your last comments.
MR. KARIM: I think what is critical is a global responsibility matrix that interfaces the international finance corporations, the big trading houses, the big oil companies, then the local oil companies and the government within the region where these problems occur.
What we should recognize is in medium to long term this, if not nipped in the bud, is going to become one of the global menaces that the world cannot afford because of the quantum of money involved, and it’s passing us. Without looking at it properly and seeing what this could be as a counter-effect of the world, it will be a potential global problem.
MR. MORNINGSTAR: It’s really so critical to get oil companies and traders involved in this whole issue. They have the most leverage on governments that are going to be reluctant. And so it really is critically important.
In two minutes—well, one minute because they’ve already told me we have no time. I don’t know that we’ve really answered some of the last questions but just a few quick comments.
MR. RALBY: Let me try and very quickly say a sentence for at least each of the questions and then actually finish with a response to the comment. On the issue of global governance in the finance space, I boldly made the claim that this refined oil theft industry is actually the second most valuable, at least, criminal enterprise on earth. That means there is a lot of money involved, and I think a forensic accounting of where that money comes from and where it goes is extremely important. We’ve heard some of that.
But what that also can do by looking very closely at the movement of the money, is provide us with opportunities for intervention. It can show us where mechanisms for actually interfering with the financial supply chain could provide us with opportunities to stop the actual physical theft.
On the issue of sanctions. I completely agree. And in fact, the report makes very clear that this is a global responsibility. It is not an issue of poor states. It is an issue of all states and the second and third order consequences of some of the international decisions are extremely important.
In addition to the sanctions I’ll give you another example, which is you mentioned the U.N. Subsidized fuel as an aid mechanism is also an invitation for smuggling operations. Receiving key fuel may benefit local communities but it may benefit them in ways that actually lead to a criminal enterprise of moving that fuel to neighboring states for further profit.
So I wish I could say more, but I’m going to have to jump off, but I completely agree that we need to look at that issue and very carefully choose how we approach the global market because what we do may have knock-on consequences.
On the issue of ISIS. It’s a lot easier to disprove something than to prove it. But just to go to your point. The report does have some information on what is happening. But our focus was Turkey, not ISIS itself. And so we only addressed ISIS in the report obliquely. So we do, I think, provide a pretty good understanding as best I could and my team could of what is happening in Turkey vis-à-vis ISIS. But I think more focus on that issue in particular is needed because the nexus between fuel theft and terrorism and other illicit activity needs and demands further exploration.
Finally, 30 seconds. You mentioned, sir, the creativity of criminals, and I want to end with that notion. It is important that we all be, in terms of addressing this problem, at least as cooperative and at least as creative as the criminals we face.
To that end I think we need to look for interesting opportunities to interfere in the supply chain at different points. Lawsuits in a jurisdiction far away from where theft is taking place may do more to stop that theft than putting hundreds of armed men in the particular jurisdiction where it’s occurring. Using anti-money laundering and counter-financing of terrorism mechanisms may actually do more to stop fuel theft than actually trying to physically interfere with it.
So I implore everyone to take a deeper look at this issue but also to think about it creatively in terms of how practical steps can be taken to interfere not just with the direct activity but with the broader global supply chain that sustains it. Thank you.
MR. MORNINGSTAR: OK, great, Ian. Before thanking the panel, let me remind everybody the next session will begin almost immediately here, with Fatih Birol and the special briefing on the world energy outlook, so we’re going to have to clear the stage very quickly.
This has been a wonderful panel, wonderful panelists. I think a very enlightening report and I want to thank you all and let’s thank the panelists. (Applause.)