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Islamic State has eyes on oil production

IS may have established a rudimentary oil and gas system, but it needs to find fresh production if it is to support itself

Most Middle Eastern militias view oil and gas assets either as sabotage targets or as bargaining chips to extract concessions from their opponents. Not so the self-styled Islamic State. From the outset, IS has set its self apart from the terrorist herd, viewing hydrocarbons as a critical resource in building their fledgling caliphate.

Crude oil revenue streams are being used to consolidate its expanded territorial empire that stretches from the northern Syrian town of Raqqa to Ramadi, in touching distance of the Iraqi capital. 

Having muscled rival Islamist militias out of the oil-rich eastern Syrian oil patch in 2013, it swiftly assigned fields to clans that had sworn allegiance to IS.

It also set prices and target volumes for the barrels to be sold to IS-approved traders.

The jihadists overhauled the previous ramshackle operation under which competing tribes pumped crude from oilfields and processed it at so-called teapot refineries on-site. IS commandeered the existing pipeline system to ship crude, as well as sending it by tanker to refineries in the north or over the border in Iraq and Turkey.

By mid-2014, in IS’ purple patch as the Middle East’s newest oil producer, the caliphate was estimated to be pumping 50,000 b/d. At its peak, IS was said to be generating up to $3m/d from largely light, low-sulphur crude grades that were easy to refine.

Syrian oil production, 2011

Oil output

Such output levels won’t spook the likes of Saudi Arabia. But for a burgeoning mini-state, this revenue resource has proved invaluable in shoring up its defences and enabling the provision of public services.

Success, however, has brought its downside. As IS’ territorial reach expands, the jihadists are encountering fresh challenges in their capacity to exploit oil and gas assets.

The heady oil bonanza days of mid-2014 are over. “The oil trade in Syria has been severely disrupted by coalition bombing raids, while oil prices have lost half their value in the past year,” says David Butter, Chatham House associate fellow and author of a new report on Syria’s economy, Picking up the Pieces.

Coalition airstrikes have mainly targeted IS refining and storage facilities in an attempt to disrupt its commercial prowess. Some 200 refining installations have been destroyed, forcing IS to use smaller and more basic refineries that are easier to patch up.

Below ground issues have also hit IS production efforts. “The fields they are operating need maintenance, and Syria has a lot of small fields that were already in steep decline in 2011,” says Butter.

The largest oilfield run by IS in Syria is the Omar field, part of the Al Furat area once operated by Shell. Before Syria was convulsed in conflict in March 2011, the field was pumping an average 30,000 barrels a day (b/d). Technical challenges have capped flows at 10,000 b/d.

US-led air strikes have not stalled IS creeping advance on Assad regime areas. With its oil revenue base in decline, the jihadists have been forced to secure new income generating assets. This has triggered a shift towards central areas around Homs province that are mainly gas producing. In mid-June, IS forces were reported to have blown up a gas pipeline in central Homs province that was being used to supply Damascus and Homs.

Overall gas production in Syria was estimated to have been 5bn cubic metres (cm)/y in 2014, compared to a pre-conflict peak of 8.7bn cm/y. All of this is consumed in domestic electricity generation.

Having ousted pro-regime militias and army forces from the desert town of Palmyra in late May 2015, IS also bagged the area’s two gas fields, Arak and Hail. This is a significant booty as it could deprive Assad of nearly half its gas and power resources, amplifying its bargaining power over the Damascus regime. IS already controls one processing plant: the former Conoco plant south of Dayr az Zawr.

“The capture of Palmyra serves several goals, putting IS in a position to pressure new regime-held areas, but at the same time giving them important economic leverage,” says Yezid Sayigh, a Beirut-based fellow at the Carnegie Endowment Middle East.

The implicit strategy is to deny key vial resources to the regime. To that end, IS blew up a gas pipeline near regime-held Furqlus on 31 May. The Furqlus site encompasses the regime-held Ebla treatment plant formerly operated by Canada’s Suncor, as well as an adjacent Russian-owned treatment and distribution facility, and a large tie-in station connecting to power stations and export terminals to the west. All these are now under threat.

Cut-off

IS could try to choke the regime by denying it access to the gas. As Butter points out, the militants are also choking the anti-regime rebels in Aleppo through stopping diesel supplies.

But even here, IS doesn’t have all the cards. It is unable to sell the gas and replenish its coffers. “Of the newly acquired assets, the only way they can get much income would be through deals with the regime – such as allowing safe passage for gas in return for fees or benefits in kind,” says Butter.

This is in contrast to the situation in Iraq, where IS militants have played a year-long cat and mouse game with Iraqi security forces over the 300,000 b/d Baiji refinery north of Baghdad.

IS’ failure to fully capture and secure Baiji and use it to refine crude from fields under its control such as Ajeel, Qayara, and Himrin has prevented it establishing a Syria-style oil economy on Iraqi turf. “They can’t operate Baiji refinery in any way that the government can, and their attempts to sell oil back to the Iraqi government appear far-fetched,” says Sayigh. If Shia militias succeed in their attacks, then Baiji will be lost.

In the ebb and flow of conflict, IS’ grip on its hydrocarbons assets back in Syria is also far from watertight. On June 24, Syrian state television reported that Syrian army and allied militia had secured the Jazal oil field, near Palmyra, which had been the focus of recent heavy fighting. That may be a temporary boost to Assad’s morale. His chances of bolstering his fraying regime still depend on maintaining electricity and water supplies. While the regime can still bank on the import of 125,000 b/d of crude into the Banias refinery on the Mediterranean, facilitated by an Iranian credit line, it will still have to cut deals with rebel groups – of IS and more moderate persuasions – if his demise is to be averted. 

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