Hundreds of tankers wait to cross into Iran in one of several lots near the Parwezkhan border crossing in Diyala province, Nov 6, 2013. (PATRICK OSGOOD/Iraq Oil Report)

Hundreds of tankers wait to cross into Iran in one of several lots near the Parwezkhan border crossing in Diyala province, Nov 6, 2013. (PATRICK OSGOOD/Iraq Oil Report)

TUZ KHURMATU - Since invading huge swaths of northern and central Iraq, the Islamic State of Iraq and al-Sham (ISIS) has been smuggling increasing amounts of crude scavenged from Iraq's stricken oil infrastructure to buyers in the Kurdistan region, earning the extremist group an estimated $1 million per day.

The first truckloads of ISIS-controlled crude arrived in Tuz Khurmatu, a mixed population town with a large Turkomen contingent that has long been at the epicenter of ethic and administrative tension, just two days after much of Salahaddin province fell to ISIS in mid-June.

Oil is being looted from pipelines, storage tanks, and oil fields in ISIS-controlled territory, according to two people directly involved in the smuggling, an official at Iraq's state-run North Oil Company (NOC) who is monitoring the trade, and other government and security officials.

In the early stages of the smuggling operation, trucks laden with crude were sold to middlemen. But as the trade has grown and Kurdish authorities have made truck movements more difficult, ISIS has been selling directly to smugglers who drive their own trucks.

The crude is smuggled into the Kurdistan region, where it is refined locally in unlicensed topping plants in Erbil and Sulaimaniya, according to a provincial government official and two oil traders in Sulaimaniya.

The Iraqi and Kurdish governments do not appear to have sanctioned the trade, but they also have been unable to prevent it.

A provincial government official and two smugglers directly involved in the trade said ISIS started out by selling fully laden tankers for around 5 million Iraqi dinars ($4,167), about $26 per barrel, to a handful of middlemen on the outskirts of Tuz Khurmatu. The smugglers then took the crude into Kurdistan at a large markup, selling it to buyers inside Kurdistan for around 12 million Iraq Dinars ($10,000), or $63 a barrel, said the NOC source, smugglers, the provincial official and Shallal Abdul Baban, the mayor of Tuz Khurmatu.

Over the last 10 days, the ISIS oil trade has grown, and the militants are now taking a larger hand in operations. They stopped using middlemen, kicked out other militant groups that had been involved, and are now filling more than 100 trucks of oil a day, selling each tanker cargo for between 8 million and 14 million dinars ($6,600 to $11,666).

"The price of the crude depends on the number of tanker drivers who demand it. If there are too many, the price will be driven up, and vice versa," said one driver, who was buying crude from ISIS on his own account.

Smuggling has long been a fixture of Iraq's oil trade. Saddam Hussein used smuggling routes to earn money during the imposition of international sanctions on Iraq after 1991, and insurgents and criminal gangs have sold stolen oil since 2003, though in recent years the U.S. and Iraqi governments had been able to curtail much of it.

Anti-government militants now control territory containing producing oil fields, refineries, and pipelines filled with both crude oil and refined fuel. ISIS, which has rebranded itself the "Islamic State" after its leader declared territory under its control to be a new Islamic Caliphate, is tapping into these established smuggling networks to generate significant revenue needed to fund its operations.

According to Malla Hassan Garmiani, a member of the Salahaddin provincial council and a Kurd from Tuz Khurmatu, the smuggling began just two days after Salahaddin province fell to ISIS-led militants and local insurgents.

Tapping and trucking Iraq's oil

The speed with which ISIS began to tap Iraq's oil infrastructure suggests they were targeting oil assets as a source of revenue. They have also shown determination to take control of oil assets capable of sustained production.

"ISIS's first oil source was seven oil wells in the Hamrin Mountains, south of Kirkuk, on the right side of the road of from Kirkuk to Tikrit," said Garmiani, referring to producing wells at the Ajeel field, and possibly to the Hamrin oil field as well.

A senior officer in the Asayesh, Kurdistan's intelligence service, verified on condition of anonymity that the main source of the smuggled oil are oil fields in the Hamrin mountains of Salahaddin province, where the Hamrin and Ajeel oil fields are located.

In the immediate wake of the Iraqi Army's retreat, said Garmiani, the militant group Ansar al-Sunna, which has been supporting the ISIS invasion in Salahaddin province, took control of the Ajeel oilfield southwest of Kirkuk. But on June 25, ISIS ran the group out of the oil field so they could run it directly. Since then, ISIS oil trucking has increased significantly.

"They are loading daily about 20,000 bpd" from Ajeel, said a senior NOC official who tracks the status of property belonging to the NOC. The field is limited by infrastructure constraints – it can produce up to 40,000 bpd but requires completion of a second production pipeline, the official said. It was producing 20,000 bpd prior to the recent violence that has stalled the northern oil sector.

"They sell around 100 tankers every day," said the Asayesh officer, adding that "militants who sell the crude tried to drive up the price of the crude to $11,000 for each tanker, but smugglers refused and they still buy it for $9,000."

The 20,000 bpd produced by Ajeel is enough to fill 125 standard sized oil tankers. If ISIS is indeed selling that many tankers every day for $9,000, then its daily revenue is $1,125,000.

Hamrin began producing 4,500 bpd in February and the first phase of a development plan to get to 60,000 bpd was underway, according to multiple senior NOC officials. It is not clear whether ISIS is also selling oil from Hamrin, or whether the group is making any attempt to raise production.

"The oil is taken to refineries along the Kirkuk-Erbil road, a section known as Qush Tappa, to the small, private refineries located there," said an oil trader in Sulaimaniya.

He has been getting calls from truckers who used to work for him who tell him they purchased crude from Ajeel at between 7 million and 8 million dinars per tanker, and are looking to sell it.

"The truckers have become businessmen," he said. "Knowing there is a market for crude, they go to the ISIS-controlled areas, fill up their trucks, then bring it back to the KRG to be refined."

The Asayesh officer also said that militants have been boring holes in oil pipelines as far south as Samarra and pumping out crude into trucks.

The drivers are "local people from Kifri, Tuz Khurmatu and Sulayman Bek, and the crude goes to Sulaimaniya," the officer said.

That version of events is corroborated by people directly involved in the smuggling.

"Daash poked holes in a pipeline and are selling the oil to buyers," said one tanker driver, using the Arabic acronym for ISIS. According to the driver, ISIS militants created a large pit for oil and then ruptured a crude pipeline between Baiji and Kirkuk. Smugglers then pumped crude from the pit into the tankers.

The driver said that he picked up the cargo from militants clearly identifying themselves as ISIS in a quiet agricultural area southwest of the oil refinery town of Baiji, in Salahaddin province. ISIS has been selling crude by the tanker from this collection point.

The driver and several security officials said that ISIS provides convoy protection to tankers and ensures they clear militant-run checkpoints along the route.

"The militants gathered us into a group of eight tanker trucks and they provided about 10 gunmen to protect us. The gunmen stayed with us until we reached Yengegeh," the driver said.

Yengegeh, a small, majority-Turkomen town three kilometers east of Tuz Khurmatu on the highway to Tikrit, is where the crude was initially re-sold to several buyers from Sunni tribes in the area.

Smuggling through Tuz

Since around June 13, 25 tanker trucks or so per day laden with crude started to cross from ISIS-controlled territory into Tuz Khurmatu, according to two Peshmerga officers in Tuz, which appears to have been the first point of entry used by oil smugglers into Kurdish-controlled territory.

One of the Peshmerga officers, who has a senior role in border operations in Tuz, said that a command came from higher up the ranks to let these tankers in and out of Tuz.

Before the ISIS surge in June, responsibility for securing Tuz Khurmatu was contested between federal Iraqi forces, a local ethnic Turkomen militia group and the Kurdistan Regional Government (KRG). After the ISIS invasion, Kurdish Peshmerga soldiers moved into and around the town. Much of the population has fled, and the Peshmerga face off with ISIS only a few kilometers away to the southwest in the Sunni Arab town of Sulayman Bek.

The crude, according to two people participating in the trade, comes up into Kurdistan through Peshmerga-operated checkpoints. Initially, the crude tankers went southeast out of Tuz town center to Sulayman Bek, a majority Sunni Arab town in ISIS control, and from there into Kurdistan.

"ISIS signed a contract with a guy called Baqi Yaseen, originally from Sulayman Bek, to sell the crude. They sold each tanker of crude for 5 million dinars, then Baqi Yaseen re-sold each tanker to smugglers for 11 million dinars," said Garmiani.

IOR confirmed this account with one of the tanker drivers and another smuggler involved in Yaseen's business. The smuggler working for Yaseen said there were five or six main buyers of ISIS crude from the area southwest of Tuz Khurmatu, and Yaseen was the main one.

Yaseen, said both smugglers, was buying crude at Yengageh and ensured it got through the Peshmerga checkpoint on the western side of Tuz Khurmatu, then back out of town to the south on the road to Sulayman Bek. The smuggler close to Yaseen claims to sell the crude on to smugglers in southern Tuz Khurmatu district, who then truck it to Sulaimaniya, for processing in unofficial refineries or for export by truck into Iran.

Yaseen was making a tidy profit for this short trip. According to the smuggler who worked with him, each tanker initially cost 5 million dinars [about $4,167] to buy from ISIS, and then Yaseen sold them on for over twice that amount. He also said that, since June 24, the Peshmerga have started to prevent tankers from passing the checkpoint west of Tuz.

"We are fighting Daash at one checkpoint and buying oil from them at the other," said a Tuz Khurmatu resident, one of many who claim to have complained to the Peshmerga in late June about the tankers rolling through the town.

Those complaints eventually paid off and the Peshmerga closed the Yengageh route into the west of Tuz. On June 27, 14 drivers of tankers carrying ISIS crude were arrested, according to one of the drivers. Some were released, on the condition that they stopped taking part in the trade. The smuggler close to Yaseen said he had also been arrested.

Hard to stop smuggling

The arrests and the ban on tankers failed to stem the flow of illicit crude from ISIS, however.

An eyewitness in Tuz Khurmatu and the two smugglers said tankers have been rerouted to avoid Tuz town center and the westernmost Peshmerga checkpoint of the town, where the drivers were arrested.

The smugglers say the tankers now skirt around Tuz to the north, through an area called Shasti Wan, and on July 1, the trade had recovered and around 50 tankers were travelling into Kurdistan, according to a Peshmerga official in Tuz Khurmatu.

"They found out a new road to smuggling the crude, instead of the Yengeneh road. They bring their tankers to the main road from Kirkuk to Baghdad, and I have not found where they come from," Garmiani said, adding that along with the change of route, ISIS cut Yaseen out of the loop, and "started to sell its crude directly to smugglers."

The senior Asayesh officer from the area was adamant that for the trade to happen, it had to be supported at some level by local Kurdish authorities.

"It is not something that should be acceptable by KRG's formal policy, but there are big partisan officials behind the business. They are too powerful to be stopped by a poor policeman at Tuz checkpoint," he said. "This is very profitable business for all sides, ISIS, drivers, smugglers and KRG officials who indirectly have been involved."

Officials in the local regional administration in Garmian deny that smuggling is happening.

"We haven't let any smuggled oil come from ISIS-controlled areas through Garmian. If we see it, of course, we will stop it and ban it," said Haval Ibrahim, the spokesman of Garmian administration. "Last year, the director of Garmian administration decided to ban any oil company that has no contracts with KRG's Ministry of Natural Resources."

Other officials acknowledge the smuggling is happening.

"No Peshmerga, no Tuz Khurmatu local government and administration, no PUK and no other political parties accept oil smuggling from ISIS's controlling areas. We are against this, but we can't stop it," said Hassan Baram, the deputy manager of the PUK's office in Tuz Khurmatu.

"The KRG tried hard to stop this business and ban it, but it seems smugglers use their money and ability to bribe people to overcome the KRG's will. And there are a lot of people who are just professional smugglers and sometimes they can pass every difficulty. Even Saddam Hussein regime could not end the smuggling," said Garmiani.

Mohammed Hussein and Christine van den Toorn reported from Tuz Khurmatu and Sulaimaniya. Iraqi staff contributing from Tuz Khurmatu is anonymous for their security. Patrick Osgood and Andy Watkins reported from Erbil. Ben Lando reported from Erbil and the United States.