The Threat of Organised Crime to the Oil Industry

Transcription

1 29 November 2012 The Threat of Organised Crime to the Oil Industry Liam McHugh Manager Energy Security Research Programme Key Points Lucrative opportunities and the pervasive culture of organised crime have resulted in a multi-billion dollar criminal oil enterprise. In a vicious cycle, politically weak petro-states create an environment for illicit and unrecorded oil trading. Simultaneously, criminalisation of the energy sector leads to increased fragility in the state infrastructure. In the future, criminal influence and entrepreneurialism, coupled with extent of state resilience, will feature as key determinants of the influence of criminal oil enterprises. Summary In the post-cold War period, organised crime has emerged as a far-reaching phenomenon. Driven by globalisation, criminal organisations have acted as economic and political spoilers in a variety of settings and modes of activity. They are sophisticated, adept at concealment and exhibit a degree of flexibility. Their activities pose considerable challenges for states, particularly weak states in periods of transition. Such states may act as incubators for criminal enterprises. In a society where economic opportunities are limited, the oil business can be the exception. In petroleum producing states that are economically or politically marginalised, citizens may have a weak notion of collective responsibility. Actions for the public good are likely to be rare. For some, the goal may be survival; while for others, it may be wealth, motivated be the lucrative nature of the hydro-carbon market in an environment of limited economic opportunities. Of even more

2 concern, the proceeds of crimes against the oil sector may provide the funds for other violent activity, including terrorism. In addition to funding campaigns of violence, crime in the oil sector reduces state revenue, further weakening reconstruction efforts and undermining government spending in fragile states. This produces a causal nexus, intensifying and perpetuating the criminalisation of the oil industry. The Nature of Illicit Oil Trading Analysis Illicit and unrecorded crude oil trading occurs in several different ways. Smuggling While it is an international industry, energy does not have a standardised measure. Domestic prices vary greatly and subsidies may create an artificially low price in some states; while conversely, tariffs result in high costs in others. This presents arbitrage opportunities and incentives for transnational smuggling and black market activity. Such structural discrepancies, and the lucrative opportunities they provide, have been characterised by academic criminologist, Nikos Passas, as criminogenic asymmetries 1. Equally, contextual factors may also promote smuggling in the hydrocarbon sector. Economic marginalisation, as a result of real or perceived inequalities in the distribution of oil wealth, may foster support for, and acceptance of, criminal enterprises. Similarly, criminal activity in the energy market may assuage failure by oil-producing states to provide services. Vulnerable elements of the population in oil wealthy states who do not benefit from energy revenues may regard exploiting arbitrage opportunities as a safety net. This is particularly true in states afflicted by the resource curse. Smuggling may also provide an attractive proposition, due to its low barriers to entry. The materiel required is rudimentary and minimal. At an elementary level, individuals may purchase, divert or steal gasoline and smuggle it unfettered to high-price markets. Moreover, relatively speaking, oil smuggling is a victimless crime. It therefore may be perceived as less detrimental than other criminal activities. This is especially true in states suffering from pervasive criminalisation of society, such as Mexico. The incentives and opportunities of smuggling easily create a profitable enterprise, particularly with the rise in global energy prices over the last decade. Firm estimates of the scale remain elusive, however. Statistics released by the state-owned oil company PERTAMINA in mid-october 2012, provide some degree of insight. According to PERTAMINA s CEO, Karen Agustiawan, oil smuggling had cost the company $37.01 million in lost revenue since Such figures are likely to be significantly higher in states, such as 1 Passas, N., Globalization, Criminogenic Asymmetries and Economic Crime, European Journal of Law Reform, 1999, Vol. 1 No. 4 Page 2 of 7

3 Nigeria, with sporadic enforcement and suffering from weak bilateral ties with smuggling destinations. Mingling The second form of oil theft is more complex and occurs through the mingling of official and unofficial oil. In effect, criminals extract a quantity of crude oil beyond the amount licensed for the well head. Subsequently, with the acquiescence, connivance and facilitation of corrupt officials and others along the oil supply chain, they transport the oil to its destination. The illicit component is then sold on the black market and can be highly lucrative for all those involved. Predominantly centred In Angola, Russia and Saudi Arabia, this insidious scheme - in addition to involving significant volumes of oil has the virtue, for the perpetrators, of speed and simplicity. Indicative of this, one tanker captain in Iraq suggested the profits of one trip were equal to the value of the tanker 2. Bunkering The final and best documented oil theft method is known as bunkering. In this context the term refers to the direct theft of oil from ships and pipelines. Accordingly, bunkering is messier and more complex than previously discussed processes. The risk of interdiction and the level of capability required to siphon oil from supply lines, requires a climate of instability. Accordingly, such operations are generally carried out by well-resourced organisations, such as insurgents in Iraq or Nigeria and drug cartels in Mexico. Anatomy of Energy Crime: Revenue, Trade Flow and Consequences According to a report published by Global Financial Integrity, unrecorded oil sales may amount to over 500, 000 barrels a day, or 183 million barrels per year. With a 2012 mean price of $93.75, this produces a black market for oil valued at over $17 billion annually. It is worth noting that economic pessimism has recently depressed oil prices and these statistics could be significantly higher in a more positive financial environment. Given the number of state-owned oil companies, this directly undercuts government revenues, which disproportionately impacts developing oil producing states. Nor is the cost restricted to state earnings: we cannot underestimate the effects on demand for labour, intermediate inputs, investment and externality costs from potential environmental damage. Decreased economic opportunities, coupled with weakening state authority, may perpetuate and intensify criminalisation in the oil sector, which, in turn, would propagate illicit activity. The concentration of oil activity allows for the easy identification of sources of illicit oil. Principally, among these states, those suffering from a poor rule of law are particularly vulnerable to criminal activity in the oil industry. In the recent past, Venezuela, Angola, Iraq and Iran have reported significant losses. 2 Williams, P., Criminals, Militias, and Insurgents: Organized Crime in Iraq, Strategic Studies Institute, U.S. Army War College, 2009, p.74 Page 3 of 7

4 The globalised demand for energy makes identifying destinations for illicit oil a more difficult exercise. According to Global Financial Integrity, the method used to acquire illicit oil is a significant variable in determining the product s ultimate destination. Generally, criminal activity remains a regional enterprise, concentrated on neighbouring states. In effect this limits the number of nodes along the supply chain, minimising exposure to enforcement authorities and payment to external participants, such as corrupt officials. More sophisticated criminal enterprises have, however, developed connections with refineries and spot markets, which have facilitated the growth of illicit oil supplies in the international market. There is also further evidence of deceptive techniques, such as forging and false certificates. Future Evolution of the illicit trade in Oil Entrepreneurialism Organised crime operates under an enterprise model. Accordingly, such organisations place heavy emphasis on business dimensions, constantly seeking new opportunities to maximise profits. Globalisation has allowed criminal organisations to expand to new geographic areas, exploiting disparities and weakness within economies, institutions, laws and regulation. For instance, Chinese, Russian and Italian criminal groups have expanded well beyond their home states. In relation to oil crime, geographic expansion of oil producing areas due to technological and exploratory developments may be accompanied by corresponding criminal growth. Nigerian organised crime groups currently engaged in oil bunkering activity in the Niger Delta region, may expand their operations if projections for the Gulf of Guinea s potential prove accurate. State Resilience Several authors have noted that the strength and legitimacy of the state is a key determinant in the prevalence of organised crime. Generally, institutionalisation in the rule of law and its related state and political institutions, runs parallel to the strength or weakness of government. In the 1990 s, for instance, weakness in the Afghan central government s legitimacy and effectiveness created an environment in which heroin cultivation could occur with a high-level of impunity. Fragile States Incapability by state authorities to provide protection and enforcement for the oil industry, particularly for infrastructure, may encourage the development of criminal activity. State fragility often precedes the collapse of industrial activity, and vice versa. Such political and economic upheaval also has social implications. Rising unemployment, falling wages and deterioration in socio-economic conditions, provide an ideal environment for crimes against the oil sector. With the lack of more legitimate economic prospects, oil theft becomes an attractive opportunity. Simultaneously, organised criminal activity perpetuates the fragility of public authority and institutions. Given the importance of oil revenue to these states, this Page 4 of 7

5 may add to state economic woes, undermining attempts at reconstruction and development. A number of West African states with the potential for oil production fit such a political model. The development of deep-water exploration and production technology has driven a number of oil companies to invest in the waters adjacent to Nigeria, Angola, Equatorial Guinea, the Republic of Congo and Ghana. Parallel to this, piracy, while in decline in East Africa, has risen sharply in the Gulf of Guinea. According to the International Maritime Bureau, 34 incidents were reported in the region in the first nine months of this year, up from 30 in In 2012, Togo reported more attacks than in the previous five years combined. Togo s Navy, like many in the region, is ill-equipped to tackle piracy, which could potentially lead to the proliferation of piracy gangs 3. While Togo is not forecast to be an oil producer, it and other weak regional states may act as economic and political spoilers. Exploiting state fragility, criminal enterprises may target an oil industry that is forecast to supply a significant ratio of global oil over the coming decades. Weakening of Authoritarian Petro-States Elsewhere, strong authoritarian regimes can act as an incubator for organised crime. Generally, such regimes are typified by poor political outcomes, including: one party rule, lack of oversight of the ruling elite, an absence of checks, balances in civil society, and the prevalence of patron-client relations. In turn, this promotes opportunities for graft, resulting in links between corrupt officials and criminal organisations. According to Phil Williams and Roy Godson, however, while such states encourage the development of organised crime, state authorities place limits on the power and activities of organised crime. 4. Such a state of affairs may be altered with challenges to the political structure. In the 1990s, for instance, the fall of the Soviet Union lead to the breakdown of social and political control mechanisms. While undoubtedly a positive political development, the collapse resulted in an unprecedented expansion of organised criminal activity in Russia, the newly-independent Soviet Republics and beyond. Exploiting lucrative arbitrage opportunities, the Russian mafia has, in recent years, expanded its scope to include the energy sector. Data from the Institute for Security and Development Policy suggests that 30 per cent of Latvian fuel consumption is imported Russian contraband. The institute further contends that smuggled Russian fuel is an acute issue throughout the Baltic and a growing concern in Germany and France 5. The on-going political transitions of the Middle East and North Africa have strong similarities to the Russian experience. As in the Soviet case, the revolutionary wave occurring across the Arab world has resulted in a dual transition. Politically, authoritarian regimes have been 3 Kumar Sen, A., Piracy increasing near West Africa, declining near East Africa, The Washington Times, October Williams, P. and Godson, R., Anticipating Organised and Transnational Crime, Crime, Law & Social Change, Vol. 37 No. 2, 2002, p Institute for Security and Development Policy, Russian Organized Crime: Recent Trends in the Baltic Sea Region, 2012, p. 76 Page 5 of 7

6 weakened to such an extent that some states have adopted a more participatory political system. Economically, there is evidence in some states of nascent attempts to pave the way to freer markets and away from centrally controlled economies. Reform, however, has been constrained by the absence of legal and regulatory frameworks. Most dramatically demonstrated in Libya, this vacuum has resulted in a deteriorating security and socio-economic environment. This has generated both opportunities and incentives for the development of criminal oil enterprises. Organised Crime and the Political Elite Nexus: Individual Purpose - Mutual Gain Linked to this, in an attempt to retain power and generate oil revenue, governments may develop relationships with criminal organisations. Often referred to as the political-criminal nexus, in the recent past such symbiotic relationships have arisen in various weak states. Additionally, analysts have cited this type of relationship as one of the largest obstacles to effective action against organised crime. To ensure the continuation of oil revenues in times of crisis, weak petroleum producing states may develop links with criminal organisations. In addition to income, organised criminal groups may also be deployed to ensure the political status quo is maintained and the political-criminal nexus continues. Lending credibility to such claims, reports from Syria suggest a link between the government and shabbiha paramilitary gangs. In June 2012, Reuters cited data revealing a three-fold increase in the levels of Lebanese diesel imports 6. According to industry analysts, such figures are the direct result of state-sanctioned smuggling activity. Consequently, it seems that a protracted Syrian conflict will lead to an expansion of energy crime. Similarly, an expansion of protests in the region and pressure on oil supplies may lead other states to foster similar relationships. Iran should be considered a prime candidate. Facing considerable pressure from popular protests and deteriorating economic conditions due to sanctions, Iran may seek the support of Hezbollah. Already well integrated in the domain of organised crime 7, and boasting cells in Africa, North and South America, Asia and Europe, Hezbollah could exploit its position and smuggle Iranian oil to market. Growing Criminal Influence in the Oil Industry In efforts to counter enforcement and manage risks, criminal organisations may, in the future, develop strategies to influence businesses, financial institutions and law enforcement agencies. In a direct sense, this could include efforts to infiltrate government and legal organisations. Indirectly, and perhaps more likely, criminal groups may gain influence through the creation and cultivation of networks of corruption. Supporting this forecast, according to the Economist, in 2011 over 100 staff from the Mexican state-owned oil company PEMEX were tied to oil theft. Furthermore, various 6 Al Arabiya News, Lebanon diesel import leap points to Syria smuggling, Al Arabiya News, June Rollins, J., and Wyler, L.S., Terrorism and Transnational Crime: Foreign Policy Issues for Congress, Congressional Research Service, October, 2012, p. 19. Page 6 of 7

7 reports have implicated oil facilities in the state s drug war. In 2010, the Mexican Army seized four tonnes of marijuana at a PEMEX plant. Corruption facilitates and protects organised crime. Transparency International s Corruption Perceptions Index ranks oil-producing states in the Middle East, Africa and South America as among the worst in the world. The patrimonial culture, lack of administrative frameworks, poor security outcomes and emphasis on short-term gains, make such states particularly vulnerable to oil crime. Anomic conditions, further perpetuated by corruption, may result in Angola, Ecuador, Venezuela and the Gulf of Guinea states falling victim to criminal oil enterprises. Conclusion In summary, the theft, diversion and smuggling of oil products represents a significant security issue. A vicious concatenation of circumstances and weak petro-states promotes opportunities for organised crime, which results in rising criminalisation that leads to state fragility. Currently, there are a number of early warning indicators on the role of organised crime in the oil sector. Analysing and interpreting current developments may help analysts understand the culture that facilitates the role of criminal organisations oil activity. Clearly, the influence, dynamics and motivations of criminal oil enterprises will become more significant. It is of vital importance that industry stakeholders recognise, analyse and interpret such early warning indicators. A strong understanding of the culture that facilitates organised oil crime will enhance risk management strategies. More optimistically, an appreciation of current trends may lead to the development of appropriate precautions or countermeasures to moderate serious threats to the energy sector. ***** Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International. Published by Future Directions International Pty Ltd. 80 Birdwood Parade, Dalkeith WA 6009, Australia. Tel: Fax: lmchugh@futuredirections.org.au Web: Page 7 of 7