Five sources familiar with the issue said that a sophisticated fuel oil smuggling ring in Iraq has grown since 2022 when Prime Minister Mohammed Shia al-Sudani assumed office.

According to five individuals and three Western intelligence reports - two dated August of this year, and one undated - the operation is a result of a government policy in which Iraq distributes fuel oil at heavily subsided prices to asphalt plants. It involves a large network, including companies, groups, and individuals, from Iraq, Iran, and Gulf States.

According to two sources, the scheme allows for 500,000-750,000 metric tonnes of heavy fuel oil, including high-sulfur fuel oil, to be diverted each month from the plants and exported to Asia.

It was not reported before the extent of fuel oil smuggling in Iraq since Sudani took power, and the involvement of several entities in Iraq.

Officials from Iran and Iraq did not reply to requests for detailed comments about the findings of the article.

Iran sees its ally and neighbour Iraq as an economic lung. It has considerable influence in Iraq through powerful Shi'ite political parties and militias it supports. Iraqi and U.S. government officials claim that Iran also obtains hard currency through its exports, and circumvents U.S. sanction via its banking system.

Baghdad's activities in Iraq will be scrutinized more closely as President-elect Donald Trump is expected to take a tough line against Iran's efforts to circumvent U.S. sanctions.

Five sources who declined to give their names due to the sensitive nature of the issue said that one of the main ways fuel oil leaves Iraq is by blending it up with Iranian product and passing it off purely Iraqi. This helps Tehran avoid the tough U.S. energy export sanctions.

One involves the exportation of fuel oil originally intended for the subsidy program using fake documentation to hide its origins.

Iran gains directly from the first option. Due to sanctions, Iranian fuel oil is usually sold at a discounted price. However, it can be sold for a higher rate if it's passed off as Iraqi. Second, the Iranian-backed Iraqi militias that control the smuggling schemes benefit from the second route.

Based on assumptions regarding volumes and prices, three sources calculated the amount that both routes brought in. They ranged in value from $1 billion to $3 billion.

Three sources say that the illicit trade could put Iraqi institutions and officials in danger of U.S. sanction for aiding Iran, and that some Iraqi officials worry a Trump administration might target them.

Sources said that Iraqi leaders are heavily dependent on influential Shi'ite groups backed by Iran to remain in power. This makes it difficult to crackdown on illegal activities such as fuel oil smuggling.

Sudani's office has not responded to any requests for comments about the trade or the risks of sanctions, nor government attempts to curtail the business.

On Washington's Radar

Washington is already aware of the lucrative smuggling, its connections to Iran, and those who are subject to U.S. sanctions. One source said that the subject was discussed between U.S. officials, and Sudani during the September visit of Iraq's prime minister to the United States.

A State Department official was asked if smuggling was discussed. He replied: "While we cannot comment on specific conversations, we can confirm that the Department has stressed with our Iraqi colleagues the harms of illegal trade and our support to bring oil transparently onto the market."

The U.S. Treasury has not responded to any questions regarding the trade in fuel oil or if Iraqi officials and entities were subject to sanctions.

The U.S. sanctions against Iran are primarily in response to the Iranian nuclear program and its support of groups in the Middle East, which the U.S. views as terrorist organizations, such as Hamas in Gaza and Hezbollah and Houthis, in Yemen.

Tehran's influence is deep, despite the pressure Washington has placed on Iraqi officials.

According to five people who have knowledge of the issue and three reports, the Iraqi Shi'ite Asaib Ahl al-Haq group is at the heart of the smuggling operations. AAH is a paramilitary and political force that backed Sudani early on and was a member of the coalition that nominated Sudani to be the prime minister.

The reports that you have seen are based on the findings of a wide range of sources from Iraq and its government departments, who were not named.

Sudani's Office and AAH, and its leader Qais Al-Khazali didn't respond to the questions asked by.

AAH, backed by Iran's Islamic Revolutionary Guard Corps(IRGC), was incorporated into Iraq's Security apparatus in 2018. It now has 16 members.

Khazali received a sanction from Washington in 2019 because of AAH's alleged involvement in serious human rights violations, relating to the killings of protesters that occurred in Iraq in that year, and other violent acts, such as a 2007 attack in which five U.S. troops were killed.

Khazali mocked Washington's sanctions in a two-day old video that was posted on X. He said he felt personally hurt by the fact it took so long for Washington to sanction him.

How it works

Five sources claim that fuel oil smuggling was already occurring before Sudani took power in October 20, 2022. However, since his election, the smuggling has become more complex and formalised.

According to ship tracking data and industry sources, Iraqi fuel oil will exports to reach a record high of 18 million tons in 2018. This is more than twice the exports for 2021.

Some asphalt plants in the network have overstated their fuel oil needs to create surplus for export. According to five sources and intelligence reports, some asphalt plants exist only in name, which means that their allocations could be diverted entirely for export.

Sources said that the State Company for Mining Industry is at the heart of the scheme. It operates asphalt plants in joint venture with private firms. The scheme was initially designed to boost local industries such as flancoat, a waterproofing asphalt material used in construction.

One of the Western intelligence report singled out the state firm as being under AAH's tight control during Sudani’s tenure, and was used to export large quantities of HSFO. The intelligence report stated that AAH uses Al-Thager Asphalt Industries Factory as a fuel oil storage facility. According to the website of the state mining firm, this is one of its ventures.

The intelligence report stated that some of the plants involved were controlled by AAH, or Kataib Hezbollah. This is another Iraqi militia supported by Iran's Revolutionary Guards, and has been designated as a terror organisation by Washington.

State Company for Mining Al-Thager, and Kataib Hezbollah have not responded to detailed questions.

According to two sources and intelligence reports, in an earlier attempt to crack down on the industry, Sudani’s predecessor Mustafa al-Kadhimi had ordered a review the actual operating capacities of asphalt plants. He also cut their allocations, and increased the price of subventioned fuel from $70 to $220 per tonne.

Couldn't tell what caused the crackdown.

After Sudani's takeover in January 2023, the price of the fuel was reduced to between $100 and $150 per ton. This is far below the export market price, which ranges from $300 to $500. The higher the margin of profit when exporting the fuel, the lower the price is.

One source said that the Sudanian government had also increased the number of asphalt plants licensed to 37, which would have resulted in a near-doubling the industry overnight. Sources from all sources claimed that some of these projects were fake, and were likely a ploy to obtain fuel oil allocations.

Sudani's office, through its National Operations Command PM-NOC, determines the allocation of fuel oil.

Oil Products and Distribution Company is then tasked to process fuel movement requests. These include vehicle numbers, specifications and cargo volumes, as well as identifying information about each driver and truck.

Three sources confirmed that the PM-NOC reviews and approves fuel oil movement memos, which allow trucks to pass through different checkpoints guarded by Iraq's Oil Police.

The Iraqi state oil marketing company SOMO and PM-NOC did not respond when asked for comments.

Blended with Iranian fuel

Five sources claim that once the fuel oil is diverted away from the plants it takes either of two routes. Both involve forged documents.

Some Iraqi fuels are exported through the southern ports of Iraq with false documents that list them as other products such as vacuum residues or flancoats, which can both be shipped legally as byproducts from refining.

One of the intelligence reports stated that the state mining company which has a network heavy fuel oil mixing facilities in Iraq is authorized to transport fuel between them and export flancoat.

Second, the fuel oil is blended with Iranian fuels and passed off as Iraqi fuel, using falsified documentation, in order to allow Tehran to avoid sanctions imposed by Western nations on its energy exports.

Five sources claim that Basra, a city in southern Iraq, is the center of the blending operation, and the ports of Khor Al Zubair, Umm Qasr, are the main export points of illicit fuel.

It was not possible to determine if the port authorities were aware of this smuggling.

Two intelligence reports stated that the blending of fuel oil by Iraqi engineers is usually done during transfers from ship to ship. The fuel oil is then sent to customers mainly in Asia.

One person said that the operation was made easier because the grades of fuel oil in Iraq and Iran are similar. It is hard to prove scientifically after the event that the blending took place.

The port authorities of Iraq did not respond when asked for comment.

In July, the Sudanian government increased the price of fuel oil subsidised to $369 per tonne, recommended reducing asphalt plant allocations by about 60% and ordered a review on their actual capacity.

It was not possible to determine the reason for the review or its outcome. Three sources claimed that the government was trying to distance itself from smuggling.

Sudani's representatives have not responded to any requests for comment.

Since August, subsidised prices have been slipping back down to $228-$268 per ton.

(source: Reuters)