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THE FUEL SECTOR of NORTHWEST SYRIA Untangling the Web for Humanitarians DECEMBER 2019

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THE FUEL SECTOR of NORTHWEST SYRIA Untangling the Web for Humanitarians DECEMBER 2019 THE FUEL SECTOR OF NORTHWEST SYRIA Untangling the web for humanitarians DECEMBER 2019 1 / 22 EXECUTIVE SUMMARY The fuel sector in Syria has changed radically since the outbreak of the Syrian conict in 2011. In the past nine years, the sector has transitioned from a market strictly regulated by the Syrian government, to one completely driven by the forces of demand, supply and the status of supply lines. As the conict erupted the Syrian Petroleum Storage and Distribution Company (SADCOB), the sole distributor of gasoline, diesel and gas in Syria, suspended operations and withdrew from areas beyond the Government of Syria’s control. Domestic oil reserves in the northeast were separated from the distribution network based in Damascus. The nation’s infrastructure and economy, 95% reliant on fossil fuels prior to 2011, was left at the whim of smuggling across lines of control, cross-border trade navigating extensive sanctions, and ongoing changes in suppliers, leading to signicant supply and price uctuations. The fuel sector in northwest Syria epitomised this volatility. Longstanding public dissatisfaction with fuel prices, poor fuel quality, and inconsistent availability provided the Syrian Salvation Government an opportunity to intervene in the lucrative sector. Less than six months after the establishment of the Salvation Government, the Watad petroleum company emerged. Since 2018, Watad fuel company, Hay'at Tahrir al-Sham (HTS), and the Salvation Government 2 / 22 have worked together to gain complete control of the fuel sector in northwest Syria. Not only is Watad the only company permitted to import petroleum into the area from Turkey, it has also worked with HTS to consolidate control of the crossline and smuggled fuel trade, from both Government of Syria and Kurdish self-administration (KSA) areas. Within a matter of months, Watad company became the sole distributor of gasoline, diesel, and gas throughout the opposition- controlled areas of northwest Syria. Investigations revealed two fuel sources remaining outside Watad’s control in Idleb and western Aleppo areas: The rst is fuel coming from Government of Syria areas suitable for vehicles, either smuggled by commercial trucks or on foot, to opposition-controlled areas in southern Idleb. The second stream is Asali fuel, suitable for generators and heating, smuggled from the northern Aleppo countryside via local residents. This is being sold across northern Idleb and the western Aleppo countryside. HTS is listed as a proscribed terrorist organisation by the United States, United Kingdom and like-minded countries. This report sets out the high degree to which Watad and HTS are intertwined, providing humanitarian organisations operating in Idleb and western Aleppo (and so purchasing fuel for their operations) the information to make informed procurement decisions. This report demonstrates the fragility of the supply lines that makes the fuel sector open to manipulation to meet political means. The fuel sector in northwest Syria is a microcosm of the overall Syrian context, in that external actors have the means (ownership of supply, control of borders, air power) to directly affect the livelihoods of local populations. UPDATE FOR THE CHRISTMAS 2019 IDLEB OFFENSIVE - 24 December, 2019 Prior to Operation Peace Spring, the majority of fuel supplied to Idleb and western Aleppo came from KSA-controlled areas in northeast Syria. This supply line has been cut since October 16, following the launch of Operation Peace Spring. Attempts by KSA to reopen it were thwarted by Russian airstrikes (see below). The secondary source of fuel to the area, from Turkey via the Watad company, is still available but in limited quantities and inated prices. The third, and minor, source of fuel was smuggling from GoS areas, but this has been severely impacted by the launch of military operations on December 20. (1) Syria’s two main reneries are located in Homs city, Homs subdistrict and Banyas, Tartous subdistrict. 3 / 22 Watad’s reported counterpart on the Turkish side of the border, Transpet, is permitted by Ankara to exclusively export fuel to Syria via the Bab el Hawa crossing. It is unconrmed why Watad has not increased imports from Turkey to meet the extra demand. There are two possible causes; 1) Transpet is operating at its logistical capacity, or 2) Watad has reached its own nancial or logistical capacity to import more fuel. The latter is far more likely, and aligns well with reports that Watad and Transpet are exploring opening imports to other Syria-based traders. New traders would bring extra nancial capital, the likely bottleneck for Watad given the drop in value of the Syrian Pound. These traders would benet from the security of selling the fuel via Watad’s monopolised distribution network. However, the fact that they would be buying from Turkey in Lira or USD, and selling in SYP, means their own capital would quickly be exhausted if the SYP continues to weaken. Should this introduction of new traders eventuate, it would be the most likely short-term solution to the fuel crisis in NWS. However if the SYP continues to devalue, the solution would be short- lived, and in all scenarios the underlying structural weaknesses of the fuel sector will remain unresolved. BACKGROUND ON THE SYRIAN FUEL SECTOR Although Syria has never been a major global fuel exporter, prior to the conict it beneted signicantly from oil and gas elds in the Al-Hasakeh and Deir ez-Zor governorates, and reneries in Homs and Tartous. (1) In the 1980s the GoS began to rely on its oil elds to fund its massive public sector, provide cheap fuel to the domestic market, and run the majority of the country’s power plants. Due to the intensive extraction this required, by 2012 Syria’s extractable oil reserves had fallen from 6.9 billion barrels of oil equivalent (BBOE) to just 2.6 BBOE. Meanwhile, Syria’s extractable natural gas reserves fared better, dropping from 371 billion cubic meter (Bm3) to 311 Bm3. Before 2011, the Syrian Company for Storage and Distribution of Petroleum Products (SADCOB), a subsidiary of the Government of Syria Ministry of Oil and Mineral Resources known colloquially as (1) Syria’s two main reneries are located in Homs city, Homs subdistrict and Banyas, Tartous subdistrict. 4 / 22 “Mahroukat,” was the sole distributor of gasoline, diesel, and gas in Syria.(2) Despite tight government control of the fuel market, Syrian fuel products have been at the forefront of cross- border smuggling in the region. Several factors have encouraged the cross-border smuggling of fuel products such as gasoline, kerosene, and diesel from Syria to neighboring countries. The most signicant factor was the price disparity of fuel products between Syria and Turkey, Lebanon and Jordan. Beneting from lower prices in Syria, vehicles in border areas use extra tanks to smuggle fuel to neighboring countries and sell it at rates many times higher than the original price. Such practice generated high revenues. Figure 1: Regional Gasoline Price Comparison 2.6 2.52 2.54 2.4 2.2 2.0 1.88 1.87 1.8 1.6 1.44 1.44 1.4 1.2 1.13 1.11 1.0 1.02 0.88 0.86 0.85 0.8 0.78 0.79 0.65 0.71 0.6 0.6 0.61 0.45 0.45 0.46 0.4 0.2 USD 1998 2000 2002 2004 2006 2008 2010 2012 Figure 2: Regional Diesel Price Comparison 2.4 2.33 2.2 2.03 2.0 1.8 1.62 1.63 1.6 1.4 1.2 1.12 1.0 0.97 0.8 0.78 0.76 0.77 0.66 0.62 0.6 0.53 0.47 0.43 0.45 0.4 0.36 0.31 0.25 0.2 0.14 0.13 0.13 0.13 0 USD 1998 2000 2002 2004 2006 2008 2010 2012 Jordan Lebanon Syrian Arab Republic Turkey (2) Since its establishment in 1974, the Syrian Company for Storage and Distribution of Petroleum Products (SADCOB), transports, stores, and distributes petroleum products, whether produced domestically or imported, to the various consuming sectors in the country. The company receive petroleum products from two main reneries, Homs, Homs subdistrict and Banyas, Tartous subdistrict; while imported through the Prime Ministry’s Ofce of Oil Marketing. The company has branches in: Damascus, Rural Damascus, As-Sweida, Aleppo, Daraa, Homs, Hama, Tartous, Deir-ez-Zor, and Lattakia while its main ofce remained located in the Government of Syria Ministry of Oil and Mineral Resources building in Damascus city since its establishment. (3) Locals in border areas such as Sarmada, al-Dana subdistrict in northern Idlib countryside and Azaz, Azaz subdistrict in northern Aleppo countryside buy fuel at a rate of 20-25 SYP/(0.038-0.048 $) per liter, transport it to Turkey to be sold at a rate of 50 SYP (0.097 $) per liter. Reportedly this practice has signicantly reduced since the outbreak of the Syrian conict in 2011. 5 / 22 The Syrian conict completely disrupted the Syrian fuel sector. While SADCOB withdrew from areas outside of GoS control, the GoS lost control of oil and gas elds throughout the country. Without direct access to fuel, the GoS relied on various crossline arrangements with actors in northeast Syria and intermittent oil shipments from Iran. Meanwhile, the vacuum left by SADCOB’s absence in areas outside of GoS control was quickly lled by local traders. Although fuel smuggling to neighboring countries ended due to heightened border security, the emerging domestic crossline fuel trade proved just as protable for many traders. There are three main factors believed to have contributed to the rise of cross-zonal smuggling: 1.
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