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DOWNSTREAM OIL THEFT Global Modalities, Trends, and Remedies Atlantic Council GLOBAL ENERGY CENTER DOWNSTREAM OIL THEFT Global Modalities, Trends, and Remedies Dr. Ian M. Ralby DOWNSTREAM OIL THEFT Global Modalities, Trends, and Remedies Dr. Ian M. Ralby ISBN: 978-1-61977-440-7 Cover photo: Reuters/Rafael Marchante. Donkeys cross the closed border between Morocco and Algeria carrying petrol in Beni Drar, near Oujda, November 26, 2007. This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The author is solely responsible for its analysis and recommendations. The Atlantic Council and its donors do not determine, nor do they necessarily endorse or advocate for, any of this report’s conclusions. January 2017 ACKNOWLEDGEMENTS We extend a special thanks to SICPA for the generous support for this initiative, without which this report would not have been possible. This report was produced by I.R. Consilium LLC in conjunction with the Atlantic Council. Dr. Ian M. Ralby was the lead author, with contributing authorship by Rohini Ralby and Dr. David Soud. Dr. Ian Ralby, founder and CEO of I.R. Consilium, is a recognized expert in international law, maritime security, and the interdiction of transnational crime. He is a leading authority on the regulation, governance, and oversight of private security companies, having been involved in national and international efforts to develop accountability and standards for the private security industry. In addition, he is widely regarded as an expert on maritime security, both in developing national maritime strategy and in devising legally-grounded functional responses to emerging maritime threats. Dr. Ralby’s work frequently involves energy-related matters, both on land and offshore. From protection of oil and gas infrastructure, to human rights concerns regarding the use of private security companies by the extractive industry, to mitigation of theft and other illicit activity, Dr. Ralby has addressed a wide range of energy issues for government and private clients. In addition to being a nonresident senior fellow at the Atlantic Council, Dr. Ralby has served as adjunct professor of Maritime Law and Security at the United States Department of Defense’s Africa Center for Strategic Studies, and an advisor on security and counter-criminal matters to various international organizations including NATO, the United Nations, and the Indian Ocean Commission. He writes and speaks frequently on matters of international relations, law, and security. Dr. Ralby holds a JD from the College of William and Mary and a PhD in Politics and International Studies from St. John’s College of the University of Cambridge. Rohini Ralby is Managing Director of I.R. Consilium LLC. She has an extensive background in security and strategy. In recent years, her advisory work has focused on matters relating to the oil and gas industry. Dr. David Soud is Head of Research and Analysis at I.R. Consilium LLC. He holds a DPhil from the University of Oxford and has researched and published extensively on a wide range of subjects. In addition, I.R. Consilium’s team and global network provided invaluable support and assistance to the research, writing and refining of this report. Special thanks goes to Tammy Merther of I.R. Consilium for extremely long and late hours, and to the experts who provided peer review of the report. This report is the first comprehensive study of the theft of refined oil products around the globe. It provides insight into the modalities and trends in oil theft, the culprits responsible, the stakeholders affected by illicit activities, and recommendations that could change the dynamics. It is divided into three parts. Executive Summary .....................................................................................................................Page i Part I: Culprits, Modalities, and Amounts .......................................................................... Page 3 Part I focuses on refined oil theft in ten case studies: Mexico, Nigeria, Ghana, Morocco, Uganda, Mozambique, Thailand, Azerbaijan, Turkey, and the European Union (including the United Kingdom). Together, these cases illustrate the nature and scale of illicit activities that take place on a global basis. Part II: Trends in Illicit Hydrocarbons Activity ..............................................................Page 79 Part II analyzes the myriad methods of stealing refined oil products and considers a taxonomy to group them by trends. Not every form of theft is indicative of a trend and not all the groupings are discrete, but this undertaking frames the activity of refined oil theft in a way that enables some of the dynamics that underpin it to be better understood. Part III: Stakeholders and Recommendations .............................................................Page 93 Part III concentrates on who has the power to change the status quo and how they might go about doing so. By identifying the stakeholders who have an interest in refined oil theft, we are able to see who might alter the dynamics of downstream illicit activity. This part also reviews some of the recommendations others have made in the past, and offers a series of recommendations for how to address some of the exigent issues presented in Parts I and II of the report. Appendix .......................................................................................................................................Page 109 Downstream Oil Theft: Global Modalities, Trends, and Remedies EXECUTIVE SUMMARY At peak prices, tapping a Mexican pipeline of refined Illicit activity is highest in states where oil is refined, oil for only seven minutes could earn a cartel $90,000. but the most common determinant of oil theft is a In 2012 alone, hydrocarbons fraud cost the European significant price discrepancy between one state and Union €4 billion in lost revenues. In Nigeria, 30 its neighbor. Other factors in neighboring states— percent of all hydrocarbons products are smuggled instability, currency imbalances, and lack of border into neighboring states. An estimated 660,000 cars in controls—also impact the extent to which a state Morocco and Tunisia run all year long on fuel smuggled experiences downstream illicit activity. Areas where from Algeria. there are few fuel distribution centers are particularly ripe for organized criminal groups to fill the void. At In its first year, a fuel marking and vehicle tracking the same time, security forces, regulatory authorities, program in Uganda reduced the amount of adulterated company insiders, terminal workers, and officials fuel from 29 percent to as little as 1 percent. But at at every level are all potential participants in illicit the same time, the regulators who test the state’s fuel hydrocarbons schemes that rob governments of marking program routinely steal 22 liters per truckload, revenue and enrich the individuals involved. amounting to 1.2 million liters per year at one border crossing alone. Some mitigation efforts—most notably fuel marking and vehicle tracking—have proved extremely useful Theft, fraud, smuggling, laundering, corruption. in efforts to stem illicit activity and regain lost tax Hydrocarbons crime, in all its forms, has become revenue. But others, including closing borders, have a significant threat not only to local and regional had little, if any, effect. prosperity but also to global stability and security. Combating this pervasive criminal activity is made This report is divided into three parts. The first only more difficult by the reality that many of those focuses on the culprits, modalities, and amounts of in a position to curb hydrocarbons crime are the ones downstream illicit hydrocarbons activity. It details benefiting from it. each of the case studies and examines the forms of hydrocarbons crime, highlighting who benefits, who This is the first major study of refined oil theft around suffers, and, to the extent possible, how much is being the globe, and while Part I provides only a limited lost by governments in the process. snapshot of the problem, it offers useful insight into the modalities of theft, the culprits responsible, the Part II draws on the details of the case studies to stakeholders who suffer, and the approaches that analyze trends in the global illicit market. Part III then could change the illicit dynamics. Part I examines the focuses on the various stakeholders and their reasons contours of illicit hydrocarbons activity in ten case and opportunities for mitigation, and provides concrete studies: Mexico, Nigeria, Ghana, Morocco, Uganda, recommendations about what might be done. Mozambique, Thailand, Azerbaijan, Turkey, and the European Union (including the United Kingdom). Fuel is vital to human life, and everyone wants a discount. Across the globe, people are willing to break The modalities of theft across these geographically the law in order to pursue that discount. and contextually disparate cases range from low-level tapping, siphoning, adulteration, and smuggling to The global scourge of illicit downstream hydrocarbons extremely sophisticated maritime operations involving activity remains relatively invisible. This study, in extensive networks of actors to brazenly corrupt shining a light on it, constitutes the first step toward dynamics in which states lose billions of dollars per effectively addressing this pervasive, yet unrecognized year while their officials profit from those losses. threat to global security, stability, and prosperity. ATLANTIC COUNCIL i PART I
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