Qassem Zein/AFP/Getty Images
Oil boom: Iraqi employees attended a March 15 ceremony opening a Najaf refinery. Oil production is expected to top 3 million barrels per day in 2008.
Sam Dagher
Black Smoke: On Monday, mortar rounds fell near Iraq's Oil Ministry. Its offices are close to Sadr City, where US and Iraqi troops continued to fight Mahdi Army militiamen.

Basra strike against Shiite militias also about oil

Iraq's oil minister says the assault helped curb oil smuggling.

The recent fight in Basra between Iraqi forces and Shiite militiamen was about more than a government bid to reassert itself in a city where Moqtada al-Sadr's Mahdi Army was digging in. It was also about oil – and smuggling.

Before the assault began on March 23, the Iraqi government drew up a list of about 200 suspected oil smugglers it hoped to round up – including the brother of the governor of Basra Province and, according to Iraqi Oil Minister Hussein al-Shahristani, several leaders linked to Mr. Sadr's militia.

For the government, which relies on oil revenues to fund most of its budget, the financial stakes are immense. While there are no accurate figures, an Iraqi parliamentary committee says that losses from oil smuggling run $5 billion a year.

"We have cleansed large swaths on both sides of Shatt al-Arab that were being used to smuggle oil products and other materials," says Mr. Shahristani, who spoke during an interview at the Oil Ministry in Baghdad on Monday, describing the government achievements in Basra so far.

"Many of the gangs are colluding with local officials, powerful parties, or militias; it's a web of interrelations," he says.

Shatt al-Arab, a haven for smugglers, is the 120-mile waterway formed by the confluence of the Euphrates and Tigris rivers at Qurnah in Basra Province and runs to the Persian Gulf.

Shahristani says the Basra assault, which was led by Iraqi forces and backed up by the US and British militaries, will allow better control of vital oil resources and facilities, curb smuggling, and help boost production to 3 million barrels per day (b.p.d.) by the end of the year, which would be the highest level in 20 years.

For rival Shiite groups – from Iraqi Prime Minister Nouri al-Maliki's coalition to the members of Sadr's movement – the equation is simple. Whoever controls the oil speaks in the name of the Shiite south and has the leverage to map the country's future and work out deals with the two other competing groups: the Sunnis and the Kurds.

The potential income from Iraq's vast oil is only beginning to be realized. Already, more than 90 percent of the revenues of this year's budget of $48 billion will come from oil exports. And just three months into the year, the government is reaping a $5.4 billion windfall on top of this from rising oil prices that are now hovering above $100 per barrel.

US lawmakers estimate that Iraqi oil revenues for 2007 to 2008 will total $100 billion. Iraq now produces an average of 2.5 million b.p.d., the bulk of it in Basra. Of that amount, an average 1.6 million b.p.d. is exported via the southern province and only 0.3 million b.p.d. via the northern pipeline, according to Shahristani.

To be sure, many question the government's power and will to stop oil theft and smuggling since the botched operation in Basra. The government would also have to convince average Iraqis that its crackdown on smuggling is being done for their benefit – and that of the economy as a whole – and not to serve the agenda of ruling Shiite political parties.

Shahristani says responsibilities for protecting oil facilities and guarding against smuggling and theft in Basra shifted at the start of the year from the Oil Ministry's Oil Protection Force (OPF), which has been abolished, to a newly created unit of the Interior Ministry known as the Oil Police. The Interior Ministry is widely viewed as being dominated by Mr. Maliki's Shiite allies.

The OPF in Basra was under the sway of the Fadhila Party of Gov. Muhammad Mosabeh al-Waeli. Shahristani says tribesmen loyal to the government are being actively recruited now into the Oil Police.

The governor's brother, Ismail al-Waeli, was believed to be Basra's No. 1 smuggler, says Shahristani. "He has fled outside Iraq … his name was among the gangs involved in oil smuggling, in fact he was at the top of the list."

The word in Basra is that Governor Waeli is under some sort of house arrest and that his brother Ismail has fled to Kuwait. The head of the local provincial council, Muhammad Sadoun al-Abadi, who belongs to a branch of Maliki's Dawa Party, is now running day-to-day affairs in close coordination with Maliki, according to a Basra-based scholar familiar with the situation.

Shahristani says among those arrested so far are Yussif al-Mussawi, the head of a small party in Basra called Thaar Allah (God's Revenge), because of his involvement in "kidnapping, extortion, and several smuggling rackets including oil."

The Basra-based scholar, who spoke on condition of anonymity for security reasons, says that while government forces control Basra's center and several other areas, the Mahdi Army remains largely intact in its traditional strongholds – poor working-class areas of the city.

"I expect lots of assassinations and sleeper cells to act up. There is a strong desire for revenge now," he says.

The intra-Shiite struggle for power and resources in the south is nothing new and has been under way since the fall of Saddam Hussein in 2003. But the battle in Basra has now drawn a clear line between those Shiites in the ruling coalition – including Maliki and the powerful cleric Abdul-Aziz al-Hakim – and two main rivals that split from it last year: Sadr's movement and the Fadhila Party.

Although Basra is largely quiet at the moment, the fighting between US-Iraqi forces and the Mahdi Army militia has intensified again in Baghdad, with at least 30 people killed since Sunday. The government is demanding that the Mahdi Army disarm; Sadr is refusing this before US troops leave Iraq and is now threatening to escalate the fight further.

Muhammad-Ali Zainy of the London-based Center for Global Energy Studies, says it's a positive development for Iraq's future – and its oil industry – that Maliki is targeting militias and exerting control in Basra. But it remains to be seen, he adds, whether Maliki is willing to go all the way or whether he's just carrying out the agenda of Mr. Hakim's Islamic Supreme Council of Iraq (ISCI) party, which sees Basra's economic might as giving it greater influence in the south.

"The government must act evenhandedly and make sure the smuggling enterprise is not simply taken over by other militias," he says, adding that smuggling continues to be a highly lucrative business. The average price of one gallon of gas in Iraq is $0.40 versus $2 to $3 in Iran and neighboring countries.

Shahristani, who is very close to Maliki, says the security situation in Iraq continues to prevent foreign companies from doing much-needed repair work to facilities nationwide, not just in Basra. He says vital pipelines linking the country's largest refinery in Baiji, in the Sunni heartland, with Baghdad and Mosul are badly damaged by sabotage.

He says a substantial number of fuel tankers leaving Baiji end up falling prey to insurgents and gangs. Maliki's government is also at loggerheads with the Kurdish regional government over the authority to sign oil contracts, thereby stalling the passage of a new oil law.

The Ministry of Oil itself is in a fortress-like compound in Baghdad on the edge of Sadr City. Three mortar rounds fell on the nearby home of the interior minister Monday, sending a thick black plume of smoke into the air.

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