Key allies in the US and UK led war on Islamic State (IS) are covertly financing the terrorist movement according to senior political sources in the region. US and British oil companies are heavily invested in the murky geopolitical triangle sustaining IS’ black market oil sales.

The Kurdish Regional Government (KRG) in Iraq and Turkish military intelligence have supported secret IS oil smuggling operations and supplied arms to the terror group, according to Kurdish, Iraqi and Turkish officials.

One British oil company in particular, Genel Energy, is contracted by the KRG to supply oil for a major Kurdish firm accused of facilitating IS oil sales to Turkey. The Kurdish firm has close ties to the Iraqi Kurdish government.

Genel operates in the KRG with the backing of the British government, and is also linked to a British parliamentary group with longstanding connections to both the British and KRG oil industries.

The relationship between British and Kurdish energy companies, and senior British politicians, raises questions about conflicts of interest – especially in the context of a "war on terror" that is supposed to be targeting, not financing, the Islamic State.

Kurds, Turks and blind eyes

One of IS’ most significant sources of revenue is oil smuggling. The Islamic State controls approximately 60% of Syria’s oil, and seven major oil-producing assets in Iraq.

Using a carefully cultivated network of intermediaries and "middlemen" in the Kurdish region of Iraq, as well as in Turkey, IS has been able to produce a phenomenal 45,000 barrels of oil a day, raking in as much as $3 million a day in cash by selling the oil at well below market prices.

But the sheer scale and impunity of this oil smuggling network has caused local politicians to ask whether certain officials in the KRG and Turkey are turning a blind eye to these operations.

Iraqi, Kurdish and Turkish officials have accused both the KRG and Turkish governments of deliberately allowing some of these smuggling operations to take place.

Tensions between the KRG and Iraq’s central government in Baghdad are escalating over who controls production and revenues from oil fields within the Kurdish region. Kurdish officials see the oil within the Kurdish-controlled territory of Iraq as a means to seek greater autonomy, if not potentially total independence, from Baghdad – whereas the Iraqi government seeks to ensure it retains sovereign control over all sales from its own oil fields, which include those in the KRG.

Those tensions reached a crescendo when the KRG began unilaterally selling oil by exporting it to Turkey, bypassing Baghdad.

Complicity

KRG and Turkish authorities vehemently deny any role in intentionally facilitating IS oil sales. Both governments have taken measures to crackdown on smuggling operations, and US and UK authorities work closely with the KRG to identify IS smuggling routes.

Despite KRG arrests of Kurdish "middlemen" involved in the IS black market oil sales, evidence continues to emerge that these measures are largely piecemeal, and have failed to address corruption at the highest levels.

According to a senior source in the Iraqi government’s ruling Islamic Dawa Party, US and Iraqi authorities have developed “significant intelligence confirming that elements of the KRG have tacitly condoned IS oil sales on the black market”.

The source, which has direct access to top Iraqi government officials, said that the KRG had originally seen the IS invasion of Iraq as an opportunity to consolidate Kurdish control over disputed territory, especially the oil-rich region of Kirkuk. The Kurds had not, however, anticipated how powerful IS’ presence in the region would become.

In the early period of the invasion last year, he said, “elements of the KRG and Peshmerga militia directly facilitated secret IS oil smuggling through the Kurdish province. This was known to the Americans, which shared intelligence on the matter with the Iraqi government in Baghdad”.

The issue inflamed tensions between Baghdad and the KRG, contributing to efforts by Hussein al-Shahrestani, then Iraq’s deputy prime minister for energy affairs, to crackdown on independent Kurdish oil exports.

His successor, new oil minister Adel Abdul-Mehdi, was brought in through a reshuffle in September last year that was engineered under US diplomatic pressure. Unlike Shahrestani, the source said, Abdul-Mehdi has a much more conciliatory approach to the Kurdish oil question, one which also happens to suit the interests of US and British investors in the KRG: “This has meant that Baghdad has also been much more lax on evidence of IS oil smuggling through the KRG.”

The source confirmed that under mounting US pressure, “KRG authorities have taken serious steps to curb the illegal smuggling on behalf of IS. But the smuggling still continues, although at a more restrained level, with the support of elements of KRG’s ruling parties, who profit from the black market oil sales.”

Turkish authorities also play a crucial role in the IS oil smuggling operations according to the Iraqi source, routinely turning a blind eye to the IS-run black market. “The Turks have an acrimonious relationship with the Americans,” he claimed, but admitted that US intelligence is familiar with Turkey’s role. “US intelligence is monitoring many of these smuggling operations in minute detail. Some of this intelligence has been passed on to us. The Americans know what is going on. But Erdogan and Obama don’t have a great relationship. Erdogan basically does what he likes, and the US has to lump it.”

The allegations have been confirmed by Turkish government officials and parliamentarians. In particular, a source with extensive connections to the Turkish political establishment including the office of the Prime Minister, said that Turkey’s support for Islamist rebels opposed to Bashir al-Assad’s reign in Syria was pivotal in IS’ meteoric rise to power.

Turkey, a longstanding NATO member, is part of the US-led coalition fighting IS, and has been integral to the region’s "moderate" rebel training schemes supervised by Western military intelligence agencies.

“Turkey is playing a double-game with its Syria strategy,” said the source. “The scale of IS smuggling operations across the Turkish-Syrian border is huge, and much of it is facilitated with the blessings of Erdogan and Davutoglu, who see the Islamists as the means to expand the Turkish foothold in the region.”

Recep Tayyip Erdogon is the President of Turkey, and Ahmet Davutoglu is the country’s Prime Minister. Asked how this fits with recent Turkish operations to shut-down IS smuggling operations and target IS strongholds across the border, the source described the actions as too little, too late.

“These actions fit with Erdogan’s strategy of expansion,” he said. “We are not trying to shut down the infrastructure of IS, we are attacking it selectively.”

Cover-up

These allegations are corroborated by several little-known revelations in the public record.

In July 2014, Iraqi officials revealed that when IS had begun selling oil extracted from the northern province of Salahuddin, “the Kurdish peshmerga forces stopped the sale of oil at first, but later allowed tankers to transfer and sell oil”.

Similarly, observers inside and outside Turkey claimed that the Turkish government was turning a blind eye to the smuggling of IS oil across the Syrian-Turkish border in its commitment to bringing down the Assad regime.

Prosecutor and witness testimony in Turkish courts revealed that in late 2013 and 2014, Turkish military intelligence had supplied arms to areas in Syria under Islamist rebel control, contributing directly to the rise of IS.

Turkish opposition MP Ali Ediboglu last year said that some $800 million worth of IS oil had been smuggled into Turkey. Over a thousand Turkish nationals were helping foreign fighters join IS in Syria and Iraq through Turkish territory. Both, he alleged, occurred with the approval of Turkish military intelligence.

Turkey’s dubious role in the IS oil smuggling route – which encompasses the KRG and ends up at the Turkish port of Ceyhan – was recently investigated by two British academics at the University of Greenwich.

The paper by George Kiourktsoglou, Lecturer in Maritime Security and former Royal Dutch Shell strategist, and Dr Alec Coutroubis, Acting Head at the Faculty of Engineering and Science, attempted to identify suspicious patterns in the illicit oil trade.

Their extraordinary study, published by Maritime Security Review in March, examined the smuggling route through Sanliura, Urfa, Hakkari, Siirt, Batman, Osmaniya, Gaziantep, Sirnak, Adana, Kahramarmaras, Adiyaman and Mardin. “The string of trading hubs ends up in Adana [in southeast Turkey], home to the major tanker shipping port of Ceyhan.”

By comparing spikes in tanker charter rates from Ceyhan with a timeline of IS activities, the University of Greenwich analysis identified significant correlations between the two. Whenever the Islamic State fights “in the vicinity of an area hosting oil assets, the… exports from Ceyhan promptly spike. This may be attributed to an extra boost given to crude oil smuggling with the aim of immediately generating additional funds”.

While the evidence is still “inconclusive” at this stage, the authors wrote that “there are strong hints to an illicit supply chain that ships ISIS crude from Ceyhan” to global markets. Since the launch of the IS oil venture in summer 2014, “tanker charter rates from Ceyhan re-coupled up to a degree with the ones from the rest of the Middle East”. Primary research including interviews with informed sources indicated that this was most likely “the result of boosted demand for ultra-cheap smuggled crude, available for loading” from the Turkish port.

Kiourktsoglu and Coutroubis have previously given evidence before the parliamentary foreign affairs select committee regarding maritime security off the Somalian coast.

Their study also highlights ongoing US military failures. Although they commend how US, Turkish and Gulf air raids have “curtailed” the Islamic State’s “oil cashflows” by destroying some manufacturing facilities, this has not gone far enough. They report that “extraction wells in the area of bombardments have yet to be targeted by the US or the air-assets of its allies, a fact that can be readily attributed to the at times ‘toxic’ politics in the Middle East”.

Despite large convoys of trucks transporting IS oil through government-controlled areas in Syria, Iraq and Turkey, “allied US air-raids do not target the truck lorries out of fear of provoking a backlash from locals.” As a result, “the transport operations are being run efficiently, taking place most of times in broad daylight”.

These problems are also prevalent in the Kurdish region of Iraq, through which significant quantities of IS oil are being smuggled.

In October last year, a KRG Interior Ministry document leaked to the Kurdish media outlet, Rudaw, showed that a former opposition MP, Burhan Rashid, had accused KRG institutions of facilitating the flow of funds and arms to IS militants in Iraq.

“A Kurdish political party in Erbil has supplied the IS militants with weapons and ammunition in exchange for oil,” Rashid is recorded as saying. The document revealed that the KRG chief public prosecutor had secretly prepared a lawsuit against Rashid for making the allegations.

The lawsuit, which apparently went nowhere, was an obvious effort to silence criticism. By January, however, an investigative committee led by the KRG interior minister and natural resources minister had largely corroborated Rashid’s allegations.

Kurdish parliamentary sources familiar with the final report of the committee, which remains secret, told Rudaw the report had confirmed that “a number of officials from the ruling Kurdistan Democratic Party (KDP), the Patriotic Union of Kurdistan (PUK) and the Peshmerga have been involved in the illegal trade”.

Half a year later, the identities of officials investigated remain undisclosed, and no one has been charged, tried or sentenced. The KRG’s UK office did not respond to a request for comment.

The Nokan Group

Instead, a couple of months after the committee had reached its conclusions, evidence emerged that the Nokan Group, a major Kurdish company with close ties to the KRG, had directly facilitated IS oil sales.

In a letter to the Nokan Group, Mark D. Wallace – a former US ambassador to the United Nations under President George W. Bush and CEO of the New York-based Counter Extremism Project – noted credible “reports that some Kurdish entities are in fact facilitating ISIS-related oil trade. Specifically, certain Kurdish companies are reportedly contracted to transport refined fuel from the ISIS-controlled Baiji refinery, north of Tikrit, Iraq, for delivery throughout the Kurdish region by Sulaymaniyah province authorities in Iraqi Kurdistan, in the north-eastern region of Iraq”.

Trucks owned or operated by Meer Soma, a “subsidiary” of the Nokan Group, “are being used to transport refined petroleum products from ISIS-controlled

refineries to Kurdish entities in or near Kirkuk,” wrote Ambassador Wallace in the letter dated 20 March, 2015.

Wallace noted that according to the Kurdish press, Meer Soma is among several Nokan-controlled dummy companies operating on behalf of the group, to avoid public association with the parent firm.

According to a 2012 country report by the Paris-based business intelligence agency MarcoPolis, the Nokan Group is among the largest companies in the province, and “has interests” in Meer Soma.

In 2014, the same year photographs of Meer Soma trucks transporting IS oil to Kurdish refineries were published online, the Nokan subsidiary’s website was deleted.

Ambassador Wallace’s letter generated little more than silence – no response from the Nokan Group was received by Wallace, and the Nokan Group could not be reached for further comment on his allegations.

Copies of Wallace’s letter were sent to relevant Congressional committees, as well as John E. Smith, Acting Director of the US Treasury Department's Office of Foreign Assets Control. The US Treasury did not respond to queries about what was done to investigate the allegations.

Even a spokesperson for the Counter Extremism Project, on behalf of which the letter was sent, declined to comment when asked to clarify the follow-up from US authorities.

Corruption, Nokan and the KRG

The Nokan Group is a conglomerate of companies owned and controlled by the Iraqi Kurdish political party, the Patriotic Union of Kurdistan (PUK), one of the KRG’s ruling parties alongside the majority KDP.

The Kurdistan Tribune reports that Nokan is run from the general management office of the PUK in Sulaymani district. The newspaper estimates that, accounting for its 23 subsidiary companies, the Nokan Group’s net worth approaches roughly 4-5 billion US dollars, many multiples larger than its declared value.

The Tribune points out that the PUK business model is representative of private enterprise across the KRG – rife with corruption and nepotism, largely for the enrichment of political elites and their allies. “The economic model in Kurdistan monopolises the market for the benefit of a few and poisons the environment for Small Medium Enterprises (SMEs),” observes the paper.

A lengthy report in The Nation found that the KRG’s patronage system was alienating and disenfranchising much of the population: “Many of the most profitable companies, such as those controlling construction projects, are owned by a Barzani or Talabani,” the heads of the two KRG ruling parties.

“But beyond the gleaming new suburbs, five-star hotels and flashy cars lies an ancient city in which critics say corruption remains a problem and the lines dividing government and business are unhealthily blurred,” noted the Financial Times.

Until last year, the PUK’s leader Jalal Talabani was President of Iraq. His son, Qubad Talabani, is Deputy Prime Minister in the KRG. Previously, the latter served as the KRG’s representative in the United States. In both capacities Qubad has played a key role in developing commercial relationships with the West, especially concerning oil.

Jalal Talabani’s other son, Pavel, oversees the KRG’s anti-terror squad in Sulaymani, which is run by PUK member Lahur Sheikh Jangi.

The elder Talabani’s sister-in-law, Shanaz Ibrahim Ahmed, is the PUK representative to the UK responsible for media relations, as well as for the finances of the Nokan Group.

Qubad Talabani, incumbent KRG deputy PM, is slated to speak at the Kurdistan-Iraq Oil & Gas Conference to be held in London this November. The conference is sponsored by a number of energy corporations including Exxon Mobil, Chevron, DNO, Gulf Keystone Petroleum, and the Qaiwan Group.

The Qaiwan Group, among the London conference’s platinum sponsors, is contracted to the KRG’s Ministry of Energy to design, construct and operate planned expansions to the Bazian oil refinery under a Power Purchase Agreement (PPA).

The current phase three expansion, due for completion by 2018, aims to lift the refinery’s capacity from 34,000 to 80,000 barrels per day.

The Bazian refinery is, however, owned and controlled by WZA Petroleum – another subsidiary of the PUK’s Nokan Group, dominated by the Talabani family.

WZA Petroleum’s president is Parwen Babakir, in which capacity she is the principal owner of the Bazian refinery. Babakir is also the Chairman of the Nokan Group, and is in charge of the PUK’s oil and gas portfolio. She was previously appointed Minister of Industry in the Sulaymani district by Talabani from 2003 to 2007. She did not respond to questions concerning the Nokan Group’s alleged facilitation of IS oil sales.

While KRG government officials and their relatives are directly profiting from lucrative oil and gas contracts brokered by the KRG, the same officials – who are responsible for anti-terrorism in the Sulaymani province – oversee the Nokan Group, which is implicated in facilitating IS oil smuggling.

The British connection

A British energy company with strong backing from the UK political establishment operates the oil field supplying the Nokan-owned Bazian refinery.

The refinery, owned by the Nokan Group whose trucks were seen transporting IS oil through the Kurdish province earlier this year, is supplied from the KRG’s Taq Taq field. The oil field produces a total of around 100,000 barrels per day, most of which is shipped to local refineries. British-Turkish firm Genel Energy has a 45 percent stake in the Taq Taq field.

Genel Energy was formed from a $2.1 billion merger in 2011 between a UK firm, Vallares Plc, and a Turkish company, Genel Enerji. The firm is run by Tony Hayward, a former CEO of British Petroleum (BP).

Asked about Genel’s position on working with institutions allegedly involved in financing IS terrorism, Andrew Benbow, spokesperson for the Anglo-Turkish company, stated: “These are all questions to be asked to the KRG rather than ourselves.”

According to the final report of the House of Commons Select Committee on Foreign Affairs’ inquiry into the British government’s policy toward the KRG, published in January 2015, Genel is the only major British investor in the province.

The report noted that the Kurdistan region holds an estimated 45 billion barrels of oil – in the same league as Libya and Nigeria – and a further 110 trillion cubic feet of gas, placing it around tenth or twelfth in the world for reserves. The KRG aims to export as much as 2 million barrels per day by 2020, a prospect of huge interest to Western companies including, according to the report, “Exxon, Chevron, Repsol, Total, the local giant KAR, and the British-Turkish company, Genel Energy.”

Just a month earlier, David Cameron’s then Energy Minister Matthew Hancock told the 4th Kurdistan-Iraq Oil & Gas Conference in Erbil, that Iraq “has a critical role to play in meeting the world’s future demand for oil”. Remarking that US oil production is “forecasted to peak in 2020,” he said that therefore “the world is expected to become ever more dependent on Iraqi supply”.

Iraqi oil production will treble to over 8 million barrels a day by 2040, he added: “Reserves in Kurdistan play a significant role in this increase. The region is not only thought to be one of the largest untapped areas of oil in the world, but also has significant gas potential.”

Genel Energy is positioned to profit massively from increased Kurdish output. Genel’s president, Mehmet Sepil, told the 2014 conference that his firm planned to play the lead role in exploiting 11 trillion cubic feet of gas in the Kurdish province.

A year earlier, the All-Party Parliamentary Group (APPG) on the Kurdistan Region of Iraq had released a report from its fact-finding mission to the province, recommending that the Foreign Affairs Select Committee undertake this inquiry.

As part of that fact-finding mission, British Conservative MP Nadhim Zahawi, who is co-chair of the APPG on Kurdistan, visited the Taq Taq oil field being run by Genel Energy in November 2013.

Zahawi held shares in Genel Energy, according to the House of Commons Register of Interests, which shows that he declared his relationship to Genel in June 2013. He sold his shares in Genel on 30 April, 2014.

Later in 2013, Zahawi was appointed by David Cameron to the Prime Minister’s Policy Board, with special responsibility for business and the economy, a post he still holds.

By June 2014, Zahawi was appointed as a member of the Foreign Affairs Select Committee, and played a key role in its inquiry into government policy.

“These are obviously very serious allegations which I was not previously aware of and that were not submitted to the Select Committee’s inquiry,” said Zahawi regarding the allegations against the Nokan Group and the KRG. He explained that the committee would investigate the funding of IS in a further inquiry.

Zahawi also denied knowledge of the KRG’s internal investigation into support for IS terrorism, as well as the allegations against the Nokan Group and Genel’s relationship to Nokan. “As an ex-retail shareholder,” he explained, “I have no more knowledge of the details of their operation than any other retail share holder or member of the public. I would suggest that you submit your evidence and questions to Genel directly.”

The APPG on Kurdistan is intimately connected to both the PUK-KDP run government and Western oil interests in the province. Gary Kent, who is Director of Labour Friends of Iraq, is paid directly by Gulf Keystone Petroleum – which is heavily invested in KRG oil assets – to provide secretariat services for the APPG.

The KRG and its UK arm also provide “administrative services” for the APPG, including “dinners for parliamentarians,” and annual reception, and funding group delegations to the province.

Describing the APPG on Kurdistan’s findings in January 2014, APPG Vice Chair Robert Halfon – who is now a Minister (without portfolio) in David Cameron’s new cabinet and Deputy Chairman of the Tory Party – told the House of Commons:

“Across the Kurdistan region, business is flourishing... and people are keen on British and foreign investment. Privatisation continues apace and huge property complexes are being built. There are significant oil and gas reserves… the KRG can become an important ally in guaranteeing the UK’s future energy security.”

In January 2015, as the UK parliamentary Foreign Affairs Select Committee released its inquiry report, Zahawi was back in the KRG as part of an official UK trade delegation led by Mayor of London Boris Johnson, recently appointed to the Prime Minister’s political cabinet.

Like many of the other interests involved, the Foreign and Commonwealth Office (FCO) simply failed to respond when questioned about the British government’s relationship with regional authorities and firms implicated in the facilitation of IS black market oil sales.

The eagerness of American and British oil companies to exploit Iraqi Kurdish resources, however, raises urgent questions as to whether US-UK government support for the KRG-Turkish oil nexus is undermining the war on IS.

Neither the British nor American governments appear to be willing to answer these questions.