A sophisticated fuel oil smuggling network that some experts believe generates at least $1 billion annually for Iran and its agents has flourished in Iraq since Prime Minister Muhammad Shia al-Sudani took office in 2022, five informed sources told Reuters.
The operation exploits a government policy under which Iraq allocates fuel oil to asphalt plants at heavily subsidized prices. The operation includes a network of companies, groups and individuals in Iraq, Iran and the Gulf states, according to five people and three Western intelligence reports, two from August of this year and one undated.
Under this scheme, 500,000 to 750,000 metric tons of heavy fuel oil (HFO), including high sulfur fuel oil (HSFO) – equivalent to 3.4 million to 5 million barrels of oil – are diverted from plants every month and exported, mostly to Asia, two sources said.
The extent of fuel oil smuggling has not been previously reported since Sudanese came to power and the involvement of multiple entities inside Iraq in the illicit trade.
Iranian and Iraqi officials did not respond to detailed requests for comment on the findings of the Reuters story.
Iran considers its neighbor and ally Iraq an economic lung and enjoys great military, political and economic influence there through the powerful Shiite factions and political parties that it supports. Iraqi and American officials say that Iraq also obtains hard currency from Iraq through exports and avoids US sanctions through its banking system.
While Baghdad has been carefully balancing its role as an ally of both Washington and Tehran for years, with President-elect Donald Trump expected to take a hard line on Iran’s attempts to circumvent US sanctions, its activities in neighboring Iraq are expected to come under increasing pressure. Auditing.
The five sources, who requested anonymity, said that of the two main routes through which fuel oil exits Iraq, one involves mixing it with a similar product from Iran and passing it off as purely Iraqi, which helps Tehran evade strict US sanctions on exports. Energy. Due to the sensitivity of the topic.
The other involved exporting fuel oil originally intended for the subsidy program using forged documents to hide its origins.
Iran benefits directly from the first method. Iranian fuel oil is usually sold at a discount due to sanctions, but it can sell it at a higher price if it is presented as Iraqi oil. Meanwhile, the second route benefits the Iranian-backed militias in Iraq that control the smuggling scheme.
Three sources estimated the returns for both routes based on assumptions about trading volumes and relative prices. Their estimates ranged from $1 billion annually to more than $3 billion.
The three sources said the illicit trade likely exposes Iraqi institutions and officials to the risk of US sanctions for aiding Iran, and some Iraqi officials are concerned that the Trump administration may target them.
The sources said Iraqi leaders rely heavily on the support of influential Iran-backed Shiite groups to remain in power, making it difficult for them to crack down on illegal activities, such as fuel oil smuggling.
Al-Sudani’s office did not respond to requests for comment regarding the trade, the risk of sanctions, or the government’s attempts to restrict this trade.
Its lucrative smuggling operations and ties to Iran and individuals subject to US sanctions are already on Washington’s radar. One of the sources said that the issue was raised during discussions that took place between American officials and Al-Sudani when the Iraqi Prime Minister visited the United States last September.
In response to a question from Reuters whether the issue of smuggling had been raised, a State Department official said: Although we do not comment on specific discussions, we can confirm that the ministry emphasized with our Iraqi counterparts the harms of illicit trade and our support for bringing oil transparently to the market. “.
The US Treasury Department did not respond to questions about the fuel oil trade or whether Iraqi entities and officials were at risk of sanctions.
US sanctions on Iran are mainly in response to its nuclear program and its support for groups across the Middle East that the United States considers terrorist organizations, including Hamas in Gaza, Hezbollah in Lebanon, and the Houthis in Yemen.
While Washington has put pressure on Iraqi officials to suppress activities that benefit Iran, Tehran’s influence runs deep.
The Iraqi Shiite group Asaib Ahl al-Haq plays a pivotal role in the smuggling operation, and it is a paramilitary force and political party that was one of the first to support Al-Sudani and a key member of the bloc that nominated him for the position of prime minister, according to the British newspaper “Daily Mail”. The five who have knowledge of the matter and the three reports.
The findings of the reports seen by Reuters are based on a wide range of sources in Iraq and its government departments that have not been identified.
Al-Sudani’s office, Asaib Ahl al-Haq and its leader Qais Khazali did not respond to Reuters’ questions.
With the support of Iran’s Islamic Revolutionary Guard Corps, Asaib Ahl al-Haq was integrated into Iraq’s security services in 2018 and now also has 16 members in parliament.
Washington imposed sanctions on Khazali in 2019 for his alleged role in serious human rights violations, related to the killing of protesters in Iraq that year and other acts of violence, including the 2007 attack that killed five American soldiers.
Khazali mocked the sanctions, saying in a video posted on X two days later that he was personally hurt because Washington took so long to impose sanctions on him.
The five sources said that although fuel oil smuggling existed before Sudanese came to power in October 2022, it has become more complex and more formal since he took office.
Iraqi fuel oil exports are on track to reach an all-time high of above 18 million tons this year, according to industry sources and ship tracking data, more than doubling exports in 2021.
To produce surplus fuel oil for export, some asphalt plants participating in the network overestimate their needs when they request official fuel oil allocations. Others exist in name only, meaning their entire allocations could be diverted for export, according to the five sources and intelligence reports.
The sources said that the General Company for Mining Industry, which runs asphalt factories as a joint venture with private companies, is one of the most important plans. It was originally established to promote local industries, such as the production of flancote, a waterproofing asphalt material used in construction.
The state-owned company was mentioned in a Western intelligence report as being under tight control by Asaib Ahl al-Haq during Al-Sudani’s tenure and used to export large quantities of HSFO. The intelligence report stated that the Al-Thaghr Asphalt Industries Factory, a project of the government mining company according to its website, is being used by Asaib Ahl al-Haq as a fuel oil storage site.
The intelligence report said that some of the alleged factories in question are under the control of Asaib Ahl al-Haq or Kataib Hezbollah, another Iraqi militia supported by the Iranian Revolutionary Guard and designated by Washington as a terrorist organization.
The General Company for Mining, Al-Tharar, and Kataib Hezbollah did not respond to detailed requests for comment.
In a previous attempt to stifle trade, Sudanese predecessor Mustafa Al-Kadhimi ordered a review of the actual operating capacity of asphalt plants, reduced their allocations, and raised the price of subsidized fuel to $220 per ton from $70, according to two officials. Sources and intelligence reports.
Reuters was unable to determine the reason for the campaign.
In January 2023, a few months after Al-Sudani took charge, the price was reduced to $100 to $150 per ton, well below the market price for exports, which is estimated at between $300 and $500. The lower the price of subsidized fuel, the greater the profit margin when exporting it to the global market.
One of the sources said that the Sudanese government also expanded asphalt factory licenses to include 37 new projects, which is equivalent to almost doubling the industry overnight. All sources said that some of the projects are fictitious, suggesting that they are merely ploys to obtain fuel oil allocations for export.
The allocation of fuel oil is determined by the Sudanese Office through the National Operations Command (PM-NOC).
The Oil Products and Distribution Company (OPDC) is then tasked with processing fuel movement requests, which include vehicle numbers, cargo size and specifications, and identifying information for each driver and truck.
Three sources said fuel oil movements are reviewed by the prime minister and the National Oil Corporation and are approved with memos that allow trucks to pass through various checkpoints run by the Iraqi Oil Police.
PM-NOC, OPDC and the Iraqi State Oil Marketing Company SOMO, the body responsible for exporting Iraqi fuel oil, did not respond to requests for comment.
Once diverted from factories, fuel oil takes one of two routes, both of which involve forged documents, the five sources said.
Some Iraqi fuel is exported directly through southern Iraqi ports with false documents listing it among other products, such as vacuum residue or film, both of which are byproducts of refining that can be shipped legitimately.
One intelligence report said that the state mining company, which owns a network of heavy fuel oil blending facilities across Iraq, is authorized to transport fuel oil between them and export flannel.
The second path involves mixing illicit fuel oil with similar Iranian fuel and passing it off as pure Iraqi, again with forged documents, to help Tehran avoid strict sanctions imposed by Western countries on its energy exports.
The five sources said that the city of Basra in southern Iraq has emerged as the heart of blending operations, as the ports of Khor Al-Zubair and Umm Qasr are considered two main export points for illicit fuel.
Reuters was unable to determine whether authorities at the ports were aware of the smuggling operation.
Two intelligence reports said the mixing process is done by Iraqi engineers, usually during ship-to-ship transfers, and the fuel oil is then shipped to customers mainly in Asia.
One person said that the process became easier due to the similarity between the grades of Iraqi and Iranian fuel oil, and it is difficult to scientifically determine that mixing occurred after the fact.
Iraqi port authorities did not respond to requests for comment.
In July, the Sudanese government raised the price of subsidized fuel oil to $369 per ton, recommended reducing allocations to asphalt plants to about 60% of their capacity, and also ordered a review of their actual capacity.
Reuters was unable to determine why the government conducted the review or the outcome. Three of the sources said that this step was an attempt by the government to distance itself from the smuggling operation.
Sudanese representatives did not respond to requests for comment.
Subsidized prices have declined slightly since last August, now reaching between $228 and $268 per ton.