Demise of Isil makes oil sector a little safer

Islamic State’s defeat makes Middle Eastern oil seem a little safer, for now. At the height of its power, the terrorist group could have held the entire world economy to ransom if it had succeeded even momentarily in seizing control of vast energy resources spread across the region.

Us-backed militias in Syria finally snuffed out the last stronghold of the self-proclaimed caliphate this month. The end was a long time coming. Three years earlier, its fighters were at the gates of Iraq’s Baiji refinery on the outskirts of Baghdad. After setting fire to part of the plant, they threatened to push on and potentially take control of giant oilfields further south.

Captured oil wells in Syria and Northern Iraq were already providing the murderous group with a significant and reliable revenue stream. US officials estimated in 2015 that Islamic State of Iraq and the Levant (Isil) was earning $500m (£383m) a year from the sale of crude products within its conquered territories and from smuggling beyond these borders. The group was then estimated by the US government to control up to 45,000 barrels per day of production spread across its territory before airstrikes reduced output to a trickle.

Its oil and gas operations were also well organised. The group had its own de facto oil ministry led by the mastermind Abu Khattab al-iraqi. His inner circle co-ordinated output activities and sales until they all were killed during Coalition military operations in June, 2018. Even as its empire crumbled, Isil managed to fund itself from the sale of oil. The US Treasury Department was forced to impose sanctions on several entities and individuals to halt the illicit fuel trade between Syria’s government under President Bashar al-assad and the remnants of Isil. Despite financing a reign of terror for a decade, Isil’s captured oil was barely visible in a daily global market of 100m barrels. However, the threat it posed to the oil riches in southern Iraq and Kurdistan was real. Iraq is the second-largest producer after Saudi Arabia in Opec.

Although Iraq’s biggest fields are located in the Shia-controlled south, Isil was allowed to get far too close to these strategic assets. Security had to be beefed up around these strategically important wells to protect them from insurgents. Attacks by the group on Shia mosques in the oil-rich eastern province of Saudi Arabia in 2016 even raised concerns over the security of the kingdom’s energy sector. Yet oil traders largely shrugged off the risks Isil posed to this vital oil producing region and they now appear dismissive of its demise.

With Isil gone, production in Syria could begin to slowly recover back to its pre-civil war levels of around 400,000 barrels per day, from just 20,000 barrels per day pumped at present, according to Paul Sheldon, chief geopolitical adviser with S&P Global Platts Analytics. “The largest upside production potential probably comes from fields in Syria, where a reduced Isil presence and ambiguous US plans to withdraw its military create prospects for a deal between Us-backed Kurds and the Assad government.”

Producing ever greater volumes of its own crude, the US has become less concerned about acting as the Middle East’s oil security guard. The world’s largest economy is now also the biggest producer of petroleum liquids and has significantly reduced its own dependence on importing Middle Eastern crude since the boom in shale over the last decade. However, Washington would be foolish to entirely turn its back on the region’s complicated energy security issues, especially with crude trading again close to $70 per barrel.

Iran’s repeated threats to shut the Strait of Hormuz – used to transport over 17m barrels per day of crude – remain a persistent worry. On the other side of the Arabian Peninsula, oil tankers sailing through the Red Sea’s Bab al-mandeb channel could again be targeted by Iranian-backed Houthi militants from the Yemen.

Meanwhile, warlords and splinter groups linked to Isil have continued to fight over huge oilfields in Libya since the downfall of the former dictator Muammar Gaddafi. Isil also remains a dangerous malevolent force now its jihadi fanatics in their thousands have been sent underground into hiding.

“A lingering militant presence will pose sporadic risks to infrastructure in and around Kirkuk,” said Sheldon.

The final defeat of Isil in the remote northern Syrian town of Baghouz is one less risk to oil for the market to worry about. But in the volatile Middle East, new unforeseen dangers are never far away.

‘Even as its empire crumbled, Isil managed to fund itself from the sale of oil’