Oil prices flatline as U.S. drilling counters OPEC output cuts
* Sustained rally difficult, analyst says (Updates prices, adds market comment)
* Crude oil from Mosul area smuggled to Turkey
* Some oil refined in Syria and sold as gasoline in Mosul
* Oil monopoly is major source of Islamic State power
* Smuggling to Iran via Kurdish areas raised $1 mln/daily
By Ahmed Rasheed
BAGHDAD, July 23 Islamic State militants seized four small oilfields when they swept through north Iraq last month and are now selling crude oil and gasoline from them to finance their newly declared "caliphate".
Near the northern city of Mosul, the Islamic State has taken over the Najma and Qayara fields, while further south near Tikrit it overran the Himreen and Ajil fields during its two-day sweep through northern Iraq in mid-June.
The oilfields in Islamic State hands are modest compared to Iraq's giant fields near Kirkuk and Basra, which are under Kurdish and central government control. Most of the Islamic State-held oil wells - estimated by a Kurdish official to number around 80 - are sealed and not pumping.
But the monopoly over fuel in the territory it has captured gives the Islamic State leverage over other armed Sunni factions who could threaten its dominance in northern Iraq.
Iraqi officials say that in recent weeks the group has transported oil from Qayara to be processed by mobile refineries in Syria into low quality gasoil and gasoline, then brought back for sale in Mosul, a city of 2 million people.
Larger shipments of crude, some of them from Najma, are also sold via smugglers to Turkish traders at vastly discounted prices of around $25 per barrel, they said.
"We have confirmed reports showing that the Islamic State is shipping crude from Najma oilfield in Mosul into Syria to smuggle it to one of Syria's neighbours," said Husham al-Brefkani, head of Mosul provincial council's energy committee.
"The Islamic State is making multi-million dollar profits from this illegal trade."
Petrol stations in Mosul are now selling fuel supplied by traders working with the Islamic State, which charges either $1.0 or $1.5 a litre depending on quality - a huge increase on previous prices, one petrol station owner in the city said.
"The fuel is brought from Syria ... It's triple the price before, but drivers have to buy it because subsidized government fuel was halted," he said.
Brefkani said the Islamic State was the sole sponsor of the imports from Syria, where the group also controls oilfields in the Syrian province of Deir al-Zor. "They use part of it for their vehicles and sell the rest to their traders in Mosul."
MILITANTS KEPT OILFIELD INTACT
Najma and Qayara had been operated by Angola's state-owned firm Sonangol, but it pulled out last year declaring force majeure amid rising development costs and security concerns over Sunni militants in the area, even before last month's assault.
Qayara, which has estimated reserves of 800 million barrels, had been producing 7,000 barrels per day of heavy crude before the Islamic State took over the field and a nearby 16,000 bpd refinery. Qayara refinery and second smaller plant at Kasak, northwest of Mosul, stopped operating when staff fled.
But Qayara oilfield itself has kept pumping after the militants asked Iraqi employees to stay at their posts, promising to protect them - as they have done at most oil facilities in order to maintain production.
Iraqi official gave the example of the battle to seize Baiji refinery in the north, Iraq's largest, where the Islamic States and other insurgents have been trying since mid-June to control the site without damaging its facilities.
"(The Islamic State) were keen to keep energy installations inside Qayara intact. We did not realize why they did not destroy facilities, but a week later they started to fill the trucks with Qayara crude. They were planning from the beginning to profiteer the field," said an engineer who works at Qayara, speaking on condition of anonymity for fear of reprisals.
Iraqi government sources said it was hard to assess how much money the group makes from selling crude or the fuel refined in Syria as the number of trucks fluctuates daily. One source said that a separate - and now terminated - smuggling operation into the Kurdish enclave and into Iran generated nearly $1 million a day earlier this month.
One dealer and shipping company owner in Mosul said he buys 250-barrel truckloads of crude from the militants for $6,000.
"The next step depends on our cunning in dealing with the Turkish traders," he said.
FROM TAXES TO NYMEX?
As another revenue earner, the Islamic militant group levies taxes on all vehicles and trucks bringing goods into Mosul.
A large truck must pay $400, while small trucks are charged $100 and cars $50 if they are also carrying goods.
Ahmed Younis, a Baghdad expert on armed groups, said the Islamists were in effect establishing an economic state based on the increasing resources and infrastructure under their command.
Considering its spread across the Syria-Iraq border, its grip over oilfields there and its growing economic activity, the Islamic State will "transform into an economic giant with assets of billions of dollars," he said.
"In future, will they buy shares in NYMEX? Everything is possible," Younis said.
Further south Islamic State fighters control another two oilfields east of Tikrit, home town of Saddam Hussein.
One of them, Ajil, produced 25,000 bpd of crude that were shipped to the Kirkuk refinery and 150 million cubic feet of gas per day piped to the government-controlled Kirkuk power station.
The gas is still pumped - albeit at lower volume of about 100 million cubic feet daily - because, according to energy experts, Kirkuk power station supplies many towns in the region and the militants want to avoid energy shortages.
The militants are moving only small amounts of oil from Ajil because of fears that their primitive extraction techniques could ignite the gas, according to an engineer at the site.
The other small oilfield captured by the Islamic State is Himreen, with a capacity of 5,000-6,000 barrels per day from five operating oil wells.
"The militants brought technicians from outside Tikrit to deal with crude from Himreen and they started to dig up craters and siphon crude out of the wells using small water irrigation pumps," said an oil ministry employee working at the field.
An Iraqi security official said trucks used to smuggle crude from Ajil and Himreen into Iraqi Kurdistan and Iran. Kurdish peshmerga forces used to turn a blind eye.
But Iraqi national security forces as well as the peshmerga began to halt the trade on July 12, he said. The army used helicopters to bomb trucks heading east from Tikrit, while Kurdish security forces seized trucks with smuggled crude crossing into territories under their control.
"We have managed to destroy more than 50 trucks as of July 12," Iraqi counter-terrorism spokesman Sabah Nouri said. "Our helicopter strikes hit the smuggling process hard and cut a vital source of finance to the terrorists."
An oil ministry adviser estimated that in the first two weeks of July, before the operation was halted, the Islamic State made around $10 million - nearly $1 million a day.
The mayor of Tuz Khuramto, a town on the route between Tikrit, the Kurdish enclave and Iran, said the smuggling route had been shut down 10 days ago.
"Before that, between 30 to 60 trucks moved into the Kurdish region, but now we can say number is zero," Shallal Abdul said. (Additional reporting by Isabel Coles in Arbil and a reporter in Tikrit whose name is withheld for security reasons; Editing by Dominic Evans and Giles Elgood)
* Sustained rally difficult, analyst says (Updates prices, adds market comment)
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