Dark world of oil theft and fraud

Oil theft and fraud affects everybody — not just those in far-away nations — because it enables everything from terrorist attacks to human trafficking. The author outlines thieves’ techniques and what countries are doing to battle this multibillion-dollar scourge.

It starts with the donkeys. Unaccompanied once they reach a border, they carry their loads of oil from Algeria to Morocco and Tunisia and return with empty containers. They make their journey twice a day — every day — to power an estimated 660,000 cars on illegal fuel.¹

According to a report presented by the Nigeria Natural Resource Charter (NNRC), Nigeria lost about $4.4 billion in 2016 and $2.8 billion in 2017 to crude oil theft. This translates to a loss of about $8.9 million daily and a combined loss of $7.2 billion over the two-year period.²

In Mexico, fuel thieves drilled 2,274 illegal taps in the company’s pipelines during the first two months of 2018 — 38% more than during the same period in 2017 and 352% more than were discovered in the first two months of 2014.³

Ernst and Young estimates that thieves steal, adulterate or defraud about $133 billion worth of fuels from legitimate oil and gas enterprises.⁴ The Eurocontrol Technics Group noted that these numbers are likely to be understated because of corruption, government involvement and the nature of the crime, which is hard to detect.⁵

Oil theft is a widespread problem that harms countries around the world. The scale of the issue, however, remains widely unknown. When we hear about oil theft, we tend to think about Nigeria or Mexico, but it goes far beyond these countries.

Oil theft could also involve various illicit activities, including smuggling, adulteration, fueling terrorist groups and drug cartels, tax avoidance and money laundering.

Tackling these crimes is particularly difficult when stakeholders, whose intent should be to fight crime, become criminals themselves.

I.R. Consilium, a research and analysis firm in maritime security, oil and fuel crimes, international law and the blue economy, conducted the first comprehensive study of refined oil products theft in 2016, which the Atlantic Council published in 2017.⁶ The study continues with another report expected later this year. The report provides insights into modalities and trends in oil theft plus responsible parties, affected stakeholders and recommendations that could change the dynamics of the issue.

The scale of the problem

According to Dr. Ian Ralby, founder and CEO of I.R. Consilium, downstream oil criminal activity is a global phenomenon. During an interview I had with Ralby, he said oil theft happens everywhere, so singling out key countries can be misleading. However, certain states are hotbeds for fuel theft.

Mexico experiences widespread and rampant fuel theft. The profits are large and growing (even the most conservative estimates suggest criminals stole $3 billion of fuel in just the last two years), and gangs and organized-crime groups are the main perpetrators.⁷

Mexico transports large amounts of refined product throughout thousands of miles of pipelines in areas that are difficult to monitor. Pipeline tapping, or “milking” as it’s known there, is a major enterprise. In some ways it’s more profitable than trafficking drugs because oil theft involves less risk. According to Reuters data, thieves are stealing roughly one-fifth of total national gasoline consumption (about 150,000 barrels per day) from pipelines.⁸ They hijack tanker trucks or steal directly from the country’s refineries, too, with the willing or coerced collusion of petroleum company employees, though it’s much easier to steal oil via taps than tankers.

Mexico’s current government recently implemented new reforms to combat fuel theft, including using tankers instead of pipelines to move fuel and shutting down the most heavily targeted pipelines. However, these new initiatives have led to shortages at gas stations across several states.⁹ Less than four months later, the government had announced that the oil theft was down by 95%, but many suspect that this sudden change is temporary and won’t last long.¹⁰ As Ralby said, changing the mode of moving fuel will only change the method of stealing it unless entities address the underlying dynamics.

Nigeria also experiences oil theft on a large scale. This has been a problem for years, mainly because of widespread corruption and the direct involvement of security forces, terminal workers, regulatory authorities and government officials. Despite efforts to combat oil theft, the problem continues unabated at consistently high levels. The U.S. deputy ambassador for the United Nations, Michele Sison, said that Nigeria loses $1.5 billion in revenues every month because of the extensive nature of the oil-laundering game across the nation.¹¹

Nigerian crude, which is among the lightest and sweetest in the world, is physically stolen in a variety of ways. (Light and sweet oil is the most valuable oil because it’s easier and less expensive into refine to products. Light oil also has a higher percentage of light hydrocarbons, which results in less processing and refining.) The main categories are:

1. Large-scale theft in which thieves pump stolen oil — often tapped from pipelines or taken from storage facilities — into barges, boats and ships and export it, either under the guise of legitimacy or mixed with legitimate product.
2. Small-scale theft in which stolen oil is either sold back into the supply chain or refined and then sold on the streets as fuel.
3. Theft at export terminals via the manipulation of meters and the forging of bills of lading; bills of lading are legal documents issued by a carrier to a shipper that details the type, quantity and destination of the goods being carried.
4. Hijacking of tanker trucks with or without collusion of the driver.
5. Piracy and armed robbery of seagoing tankers.¹²

The U.S. government investigated and broke the story that thieves routinely mixed stolen Nigerian crude with Ghanaian crude at an offshore facility before exporting it into the supply chain as legitimate oil.¹³ According to the I.R. Consilium report, a major concern involves crooks laundering and releasing ship-to-ship transfers of stolen crude into the global market.

Also, according to the I.R. Consilium report, apart from the extensive array of upstream oil theft, Nigeria also suffers from massive downstream criminality, mostly involving thieves misdirecting and smuggling imported fuel into neighboring countries. Perpetrators smuggle about 80 percent of Benin’s fuel, for instance, from Nigeria. It’s believed that culprits pay the majority of the proceeds of this smuggling activity to members of the Nigerian political elite.

Asia, Libya and the European market

Fuel theft is also rampant in Southeast Asia. Last year, investigations revealed that thieves siphoned and smuggled thousands of tons of fuel out of a major Singapore refinery. The working routes in this region formed a triangle between Thailand, Vietnam and Singapore, and also included oil facilities in Malaysia.

Smugglers took advantage of the difficult-to-patrol sea (difficult because of the vastness of the Thailand and Vietnam coasts) and attractive black-market prices. Also, pricing differentials that arise from some countries’ fuel subsidies drive a regional dynamic. For example, Malaysia, Indonesia and Bangladesh are particularly vulnerable to losses because of their low fuel prices.¹⁴

According to the I.R. Consilium report, Libya, a destabilized state struggling to control its prime source of revenue, also suffers from fuel theft. The nation faces coordinated criminality from militias, corrupt officials and transnational criminal organizations out of Italy, Malta and other locales. Recent U.N. investigations have discovered that crooks routinely ferried huge quantities of stolen fuel from coastal facilities to waiting tankers affiliated with Malta-based companies. The criminals then offloaded the fuel at the Augusta refinery in Sicily, sold it at below-market rates, mixed it with existing stock and distributed it in Italy, France and Spain by various companies, including an Italian trading firm.

Libya illustrates one way smuggled fuel enters the European market, but there are others.¹⁵ Smugglers transport Russian fuel into the EU by a few routes, including Kaliningrad and Belarus;6 Poland, for instance, is one of the main sources of fuel for smugglers into the U.K. and Ireland.¹⁶

Other examples from around the world include Ecuador, the Philippines, Turkey, Morocco and Azerbaijan, among many others.

According to the I.R. Consilium report, the most concerning aspect of this large-scale problem is that profits from downstream fuel end up in the hands of transnational criminal organizations, terrorist groups and insurgent outfits, all of whom use those profits to finance even more nefarious activities.

How oil theft happens

Here’s a list of the most common ways criminals steal oil and refined petroleum products.¹⁷

Illegal bunkering

While the term “bunkering” describes the process of loading oil onto a ship, it’s become synonymous with oil theft. Illegal bunkering means illicit removal of oil from a pipeline or other distribution system (including ships). Thieves then transport the oil elsewhere to be sold or refined.

Tapping pipelines

“Hot tapping” or “pressure tapping” is the most common method of oil theft in places with extensive pipeline networks. The method involves accessing a high-pressure operational pipeline and diverting a percentage of the oil flow. This allows the theft to remain undetected as the pipeline continues to operate at full functionality. The complexity of the hot-tapping method usually means that it often requires technical support from former or current petroleum company employees, who can also advise on security patrols and inspection schedules.

Illicit networks also employ “cold tapping” to pilfer crude oil by cutting or even blowing up a section of pipeline, which disables the pipeline for several weeks. During this time, offenders set up an underground tap to divert a continuous supply of oil to their storage facilities. After workers fix the pipeline, the constant flow of oil into the illegal pipeline won’t cause any fluctuation in overall pressure, and therefore no one will likely detect the tap.

Ship-to-ship transfers

Thieves transfer illegal fuel from their vessels to more reputable ships, i.e., those from well-known companies. This way, they can pass off the illegal fuel as legitimate and sell it on an open market. Often traders use purpose-built ships, some disguised as fishing trawlers, to take in and distribute illegal fuel without drawing too much attention during the process.

Piracy and armed robbery at sea

Piracy is an attack against a vessel committed outside a territorial sea; armed robbery at sea is an attack against a vessel inside a territorial sea. In both cases, the culprits board the ship with the intent to commit theft by using force. Dealing with pirates often requires an international, coordinated effort involving nearby countries.

Bribing corrupt officials

Criminals often bribe politicians, security forces, militants, oil-industry staff, oil traders and members of local communities, so they can continue to steal oil without any interruption.

Smuggling

Thieves smuggle oil products into another country to obtain profit through arbitrage because of price differences.

Laundering

Laundering involves moving stolen or illicit oil or fuel through mechanisms that appear legitimate in an effort to hide the criminal origin of the product. Such operations often involve counterfeit certificates of origin and layering intermediary companies between suppliers and final purchasers.

Adulteration and stretching

Perpetrators add unwanted chemicals to petroleum products but sell them at the full price of a pure product. Adulterated products often cause engines of cars or vessels to develop various faults or even break down completely.

White-collar theft

Various forms of corrupt and fraudulent behavior can — at a high level — make a range of oil and fuel products disappear via forged documents. This usually involves crooks funneling huge amounts of money to individuals and entities even when no fuel or oil is produced, traded or provided.

How to stop it?

According to Ralby, the first and most pivotal step in tackling the problem of downstream oil theft is to recognize how pervasive and pernicious the problem is. It’s important to develop and implement a mix of concrete countermeasures to reduce the scale of this issue. These countermeasures involve collecting data from a range of sources and coordinating action within and among states and international bodies. They also include more extensive, sophisticated and reliable metering and monitoring along the supply chain, GPS tracking of tanker trucks, automatic identification system (AIS) and other vessel-tracking measures, digitized documentation and molecular marking. I describe these below.

Fuel-marking programs

While dye markers have proved largely ineffective because criminals launder them out, entities have successfully started using molecular markers — unique chemicals that don’t affect the oil but are impossible to remove — to mark legitimate fuel and assist in detecting any attempts to adulterate or commingle fuel.

For example, Albania’s fuel-marking program has yielded $100 million in reclaimed governmental revenues for several consecutive years. Similarly, in Tanzania, the government saw a $143 million benefit its first year of using molecular markers.18 And in Uganda, the rate of adulteration dropped from around 30 percent to less than 1 percent in six months.¹⁸

Pipeline monitoring

The most widely used methods for pipeline monitoring are foot and car patrols and aerial surveillance using helicopters or light aircraft. However, these methods have several limitations and are expensive. Many companies are now looking for more cost-effective solutions, such as drones or aerostat balloons. For example, Brazil has recently started using aerostat balloons that provide video and thermal surveillance of their pipelines, which previously have been susceptible to tapping.

Importantly, the company providing the technology also worked to make sure that their data could be admitted in court to aid prosecutions by equipping their balloons with high-sensitivity thermal cameras with zoom capability.¹⁹

Other electronic forms of monitoring pipelines have also proved effective but do come with the risk of being susceptible to cyberattacks.

Installation of meters at oil wells, export terminals and oil-tank farms

Accurate metering makes a big difference. It’s more common to install meters at the export terminals and oil tank farms but not at the oil wells. This is because companies mix oil collected at the production fields with water, sand and other residual matters, which makes it difficult to determine the volume of oil accurately. However, this practice is often necessary, because thieves steal oil at production sites, too. For example, Nigeria lost about $64 million between 2015 and the first quarter of 2017 to poor metering of its oil wells.²⁰

GPS tracking of tanker trucks, AIS tracking of vessels

Tracking vessels and vehicles promotes safety and security. These solutions provide a real-time picture of the vessel or tanker truck movements, and companies can use the data in legal cases, investigations and negotiations.

Focus on supply-chain integrity

Transparency in the supply chain ensures accurate and consistent information on petroleum products from production to consumption, thus reducing the possibility of fraud along the way. Partnering with counter-parties to share data and good practices could aid in developing effective strategies.

Not just lost dollars

Governments and companies are increasingly aware of the extent of oil and fuel crimes around the world and their worrying implications. While the economic losses are huge, it’s also critical to understand the connection between illicit hydrocarbons activities and a serious array of security problems. “We all need fuel, and we all want it at a discount,” Ralby says. “But we can’t allow that desire for less expensive fuel to cause us to turn a blind eye to this global problem. We’re all stakeholders in this issue, so we must all be stakeholders in resolving it.”

Anastasia Nazarova, CFE, is a corporate auditor at Chevron Products UK Limited in London. Contact her at anastasia_wish@yahoo.com.

Sources

1. “Algeria turns off tap on Morocco’s smuggled petrol trade,” by Isabelle Mandraud, The Guardian, Oct. 15, 2013
2. “Nigeria loses N2.6trn to crude oil theft in 2 years – NNRC,” by Michael Eboh, Vanguard, Aug. 1, 2018
3. “Mexico’s oil company is losing more than a billion dollars a year to cartels - and its own employees are helping them out,” by Christopher Woody, Business Insider, April 13, 2018
4. “Fuel theft is a big problem,” by Jeff Desjardins, Business Insider, May 7, 2017
5. “Fuel Theft — The Costs & Effects,” Western Global, June 11, 2018
6. “Downstream Oil Theft,” by Ian M. Ralby, Atlantic Council, Jan. 6, 2017
7. “Explainer: Mexico’s fuel woes rooted in chronic theft, troubled refineries,” by David Alire Garcia and Marianna Parraga, Reuters, Jan. 20, 2019
8. “Fuel Theft — The Costs & Effects,” Western Global, June 11, 2018 
9. “Mexican oil theft even reached drilling rigs, president says,” by Adriana Barrera and Michael O’Boyle Reuters, Jan. 15, 2019
10. “Mexico Declares Victory Over Fuel Thieves. But Is It Lasting?” by Kirk Semple, The New York Times, May 5
11. “Massive Oil Theft By Pirates Costs Nigeria $1.5 Billion Every Month,” by Irina Slav, Oil Price, April 27, 2016
12. “Nigeria’s Oil Theft Epidemic,” by Shadow Governance Intel, Oil Price, June 6, 2017
13. “Oil Theft Around the World: Cartels And Exploding Donkeys,” by Zainab Calcuttawala, May 31, 2017, Huffington Post
14. “Shady triangle: Southeast Asia’s illegal fuel market,” by Henning Gloystein and John Geddie, Reuters, Jan. 18, 2018
15. “Malta ‘fuelling Libya instability’ by failing to tackle oil smuggling,” by Carlo Bonini, Giuliano Foschini, Fabio Tonacci, Giulio Rubino, Cecilia Anesi and Lorenzo Bagnoli, May 9, 2018, The Guardia
16. “Launderers turn to fuel smuggling after diesel marker stumps them,” by Deborah McAleese, Belfast Telegraph, March 28, 2016
17. “Fuel theft is a big problem,” by Jeff Desjardins, Business Insider, May 7, 2017
18. Source for both Albania and Tanzania is a presentation by Gadi Gonen of SICPA at the conference “Technology for Maritime Security, Governance and Development in the Gulf of Guinea,” Freetown, Sierra Leone, Nov. 16, 2018
19. “Balloons for Internet access,” by Yuri Vasconcelos, Pesquisa FAPESP, July 2017
20. “How Nigeria ‘lost N2 trillion to poor metering of oil wells’ in two years,” by Ediri Ejoh, Vanguard, May 14, 2017