East Asia, India, Natural Gas, Oil, Oil Refinery, Regulatory Regime, Security, South Asia, Southeast Asia

The Impact of ISIS on Iraq’s Oil Industry

  • Majority of oil fields located far from ISIS controlled areas; Iraq’s oil industry largely unaffected in short-term

  • Iraq’s top export countries to be affected if ISIS moves south of Baghdad

  • Iraq oil industry to suffer standstill in investment, infrastructure, and human capital

In June 2014, ISIS (Islamic State of Iraq and Syria) launched an offensive on Northern Iraq, specifically targeting the country’s second largest city- Mosul. ISIS successfully took control of Mosul, and has since been consolidating its power and forces among the Sunni Muslim minority community.

ISIS seeks to establish an Islamic caliphate in the Middle East, primarily in Iraqi and Syrian territory. Driving aggressively towards this goal, ISIS has been recruiting thousands of soldiers to join their military. In order to finance their ambitions, they have been selling oil on the black market.

Who is ISIS?


ISIS (Islamic State of Iraq and Syria), also known as IS (Islamic State) and ISIL (Islamic State of Iraq and the Levant), is an insurgency group made up of militant jihadist Sunni Muslims.

The group was established in 2003 as a branch of Al-Qaeda. In 2014, Al-Qaeda severed ties with the group due to their use of extreme violence toward Shia Muslims and Christians. Since the fall of Saddam Hussein’s regime, they have been gaining traction in Iraq due to the government’s political discrimination of Sunni Muslims in Northern Iraq. At the moment, the group has a reported 10,000 fighters among their ranks in both Syria and Iraq.

Why Iraq?

Flag of Iraq

ISIS has made a strategic move by targeting Iraq. Iraq is well-endowed with natural resources, where in 2011 Iraq’s hydrocarbon industries made up 72% of the country’s total GDP.

The country currently holds the world’s 5th largest proven oil reserves (141 billion barrels) and has been slowly ramping up production since the end of the Iraq War. Moreover, the unstable political environment and political discrimination of Sunni Muslims in Northern Iraq has given ISIS a built-in community from which to recruit fighters and supporters.

ISIS’s Territorial Control

Iraq’s Oil Fields

Iraq’s Hydrocarbon Resources

Iraq Hydrocarbon Resources

Iraq has eight supergiant oil fields. Six of these supergiant oil fields are found in Southern Iraq and account for 60% of the country’s proven oil reserves. The remaining two are located in the north and central part of the country. As of April 2014, Iraq was reported to be producing an estimated 3.3 million barrels per day, making up 4% of the world’s oil supply. Of the 3.3 milllion barrels per day produced, 75% is reported to be produced from the south and 25% from the north and central regions of Iraq.

As of August 2014, ISIS currently controls many Northern and Northwestern provinces of Iraq. Notable cities include: Mosul, Tal Afar, Sinjar, and Fallujah. The city of Zumar and the Ain Zalah oil field in the Kurdistan Regional Government has also recently fallen into their hands. This turn of events is significant as ISIS can leverage their control of the Ain Zalah oil field to sell crude oil on the black market. It has been reported that ISIS is making up to $1 million per day off the sale of Iraqi crude oil — at a rate of $30 USD per barrel — significantly below the market price of ~$100 USD per barrel.

Control of Terrain in Iraq- August 10, 2014

August 10- ISIS Control Zone

The capture of the Ain Zalah oil field will enable them better funding to launch an offensive for one of Iraq’s largest oil fields- the Kirkuk oil field. After which ISIS is anticipated to consolidate their claims over the northern and Kurdish territories to ultimately head for Baghdad.

Iraq’s Pipelines and Ports

A major factor in Iraq’s ability to export its crude oil is through its network of pipelines and ports, which are currently largely unaffected by ISIS.

In terms of ports, ISIS has little interference with this infrastructure. Iraq is able to maintain a business-as-usual scenario since the country exports the majority of its crude oil through its port systems along the Persian Gulf. This is done primarily through the main Basrah Oil Terminal (capacity is an estimated 1.5 million bbl/d) and 5 other ports along the Persian Gulf. In 2012, Iraq upgraded its export capacity by an additional 1.6 million bbl/d via the completion of two mooring systems. The third, and last, scheduled mooring system is reported to be still under construction and would push the country’s export capacity to 4.5 million bbl/d.

Iraq Oil Infrastructure

Iraq Oil Infrastructure

In terms of pipelines, ISIS has little control over the current infrastructure until they are able to take control of the Kirkuk supergiant oil field. The Kirkuk oil field is connected to the country’s main export pipeline running from the Kirkuk to Turkey. The pipeline is reported to have a capacity of 1.65 million bbl/d, but is in need of severe maintenance due to neglect reducing its actual capacity to around 600,000 bbl/d. In addition, militant attacks along the pipeline have closed off certain sections.

ISIS taking control of Kirkuk could potentially open this pipeline up to the black market, but they will first have to fight off Kurdish forces first. Iraq’s two other pipelines, located in the West and East, will be a non-issue for ISIS as they have fallen into disuse.

ISIS’s Impact on Iraq’s Oil Industry


ISIS’s control of Iraq is largely concentrated in the Northern and Northwestern Iraq, far from the country’s top producing oil fields and export infrastructure. As such, Iraq’s oil industry will be largely unaffected in the short-term. This point is illustrated by the lack of price hikes to global crude oil prices up to this date.

2012 Iraq Oil Exports

Iraq 2012 crude oil exports

Risk, however, will still exist for Iraq’s top export destination countries which include China, India, South Korea, and the United States. These countries may need to start looking at other suppliers when ISIS starts heading further south. However, this seems unlikely as Southern Iraq is dominated by Shiite Muslims, offering ISIS few opportunities to gain the type of support, traction, or manpower they received from Sunni Muslim communities in the North.


The true impact of ISIS on Iraq’s oil industry will not be felt for a few years.

Before the June 2014 ISIS offensive on Iraq, the International Energy Agency (IEA) predicted Iraq to account for 45% of the world’s global production growth through 2030. This meant an estimated 40% increase in production growth by 2019. However, with the political instability and infighting ISIS has presented, Iraq will be hard-pressed to achieve these goals.

For one, Iraq needs investment, infrastructure, and human capital to achieve their oil export dreams. This applies to the entire supply chain of the oil industry, from downstream exploration and production, to midstream pipelines, and to upstream refining. Iraq has a severe lack of resources, making the country’s economic growth extremely vulnerable in the years to come.

This is troubling for world markets facing increased demand for oil. We can expect Iraq’s oil production and export capacity to stay stagnant, which means that global crude oil prices may dramatically increase over the next decade.


China, East Asia, Oil, Russia, Security, Southeast Asia, Vietnam

China Thinks They Can Bully Vietnam Over the Paracel Islands — Here’s Why


China firmly believes it has the dominant hand over Vietnam as they quarrel over the Paracel Islands

On May 1, 2014, one of China’s leading oil and gas companies, CNOOC, deployed its largest oil rig, the HD-981, to the Paracel Islands. The end location was to be stationed in disputed waters, about 120 nautical miles off the coast of Vietnam.

What are the Paracel Islands?

South China Sea Map

The Paracel Islands are located in the South China Sea and are under territorial dispute by China, Vietnam, and Taiwan. To the Mainland Chinese, the islands are collectively known as Xisha (西沙), whereas to the Vietnamese, they are known as Hoàng Sa.

Like the Spratly Islands, the Paracel Islands are strategically placed in the South China Sea. They are a main sea lane passage point to Northeast Asia and have abundant fisheries around their waters. However, a major factor in the continual dispute is the vast oil and gas resources rumored to be found under the archipelago’s seabed.

The Paracel Islands are only one part of what China deems is rightfully part of their territorial sovereignty within the South China Sea. Other territories under dispute are all located within what the Chinese government calls the “9-Dash Line.”

China is betting that Vietnam has everything to lose

Territorial disputes in the South China Sea are not new. Over the years, countries in the region have vied for sovereignty over a number of islands in order to have exclusive economic control over these waters. However, China’s deployment of CNOOC’s oil rig to the Paracel Islands is uncommon and very provocative.

China has certainly done its homework, and as a result, will be increasing its assertiveness. This situation holds many parallels to Russia’s situation with Crimea. The PRC government is betting that Vietnam is too economically dependent on China, and therefore will treat any Vietnamese threats as empty posturing. China’s calculation depicts Vietnam as having two options: start an all-out war in the name of patriotism and sovereignty, or protest loudly but do nothing.

There are three reasons why the mainland is clearly betting on the latter.

1. China’s increasing influence has backed Vietnam into a corner

Vietnam is isolated internationally and regionally. Vietnam has a communist, authoritarian government whose closest ally has traditionally been China. It has weak ties to the U.S., due to ideological clashes in which the U.S. government backed the opposing Southern Vietnamese government in the nation’s civil war during the 1960s-70s. Vietnam has been warming up to the U.S. in recent years, however, their relationship cannot be compared to neighboring countries like the Philippines, Malaysia, South Korea, and Japan- as evidenced by President’s Obama’s 2014 Asia tour.

In Southeast Asia, Vietnam has little regional support for its territorial disputes with the economic behemoth. This is evidenced by the May 10-11, 2014 ASEAN Semi-Annual Summit in Myanmar, where ASEAN members were unwilling to address Vietnam’s territorial disputes as a collective entity. China is a massive donor and trade partner for the region, and taking China on in such a manner would harm countries like Cambodia, Laos, Singapore, and Thailand who have no territorial stakes within the South China Sea. The incentives do not line up for Vietnam’s neighbors. However, due to these very same factors, China is more than willing to reclaim what they deem is rightfully theirs within the infamous “9-Dash Line.”

2. Taking lessons from Russia, Crimea, and Western non-action

CNOOC’s deployment of their oil rig near the Paracel Islands is timed in the wake of the Crimea crisis, where China has drawn similarities between themselves and Russia. If Western powers did not act in Ukraine, they also will not rush to Vietnam’s side. China has several reasons to expect Western non-action.

First, China has calculated that the U.S. has bigger ties to protecting Ukraine than they do to Vietnam. In 1994, the U.S. signed the Budapest Memorandums promising to protect Ukraine’s territorial sovereignty in exchange for giving up their nuclear weapons. The United States and Vietnam has no security agreements or alliances. If the U.S. did not protect Ukraine’s sovereignty despite having a formal agreement, why would they assist Vietnam?

Second, in the wake of the Crimea crisis, much was said by the U.S. and Europe to denounce Russia but not much action was taken. Sure, U.S. imposed sanctions on Russia’s top seven elite, but there has been little intervention in the aftermath of the Crimea Referendum and Russia’s annexation of the region.

Moreover, the most important factor for China is that the U.S. is tied closer to the Chinese economy than it is to the Russian economy. As seen in the tables below, China is the USA’s number 2 trade partner behind Canada. In comparison, Russia is not even ranked and has only 1% of the U.S.’s trade:

USA 2013 Top 3 Trade Partners Source: U.S. Census Bureau

USA 2013 Trade w. Russia and China

Source: U.S. Census Bureau

If the U.S. and the European Union are not intervening in Ukraine, China is certainly betting that there is even less of a probability that they will intervene on Vietnam’s behalf: getting mired in a dispute over some islands on another continent is simply not worth the risk of potentially damaging relationships with a major trading partner.

3. Vietnam’s Economic Dependence on China

China’s growing economy has benefited Vietnam, with the PRC’s share of FDI in Vietnam peaking in 2013 behind South Korea with $US 2.28 billion.

The third and most important reason for China’s surge of confidence in its territorial disputes with Vietnam is the dependency Vietnam has on Chinese Foreign Direct Investment (FDI) and trade.

Historically, foreign investment in Vietnam have been made by countries like South Korea, Japan, and Taiwan. However, with China’s economic growth, growing influence in the region, and energy interests in Southeast Asia– investment in Vietnam has steadily increased. In 2013, China was second to South Korea in investing $US 2.28 billion. This qualifies as 10.2% of Vietnam’s total FDI inflow for the year. This is in stark contrast to previous years, where China invested $0.3 billion and $0.59 billion in 2012 and 2011, respectively.

In regards to trade flows, China tops out Vietnam’s charts in both 2013 imports and exports. For exports, China ranks fourth after the United States, Japan, and all other exporting trade countries with $US 13.26 billion or 10.5% of Vietnam’s total exports for 2013.

2013 Vietnam's Top Exporting Countries- Graph
Source: General Statistics Department of Vietnam

For imports, China takes the top spot. With Chinese imports coming in with $US 36.95 billion or 28.6% of Vietnam’s total imports for 2013. In total, China makes up 19.6% of Vietnam’s total import and exports for 2013.

2013 Vietnam Top Importing Countries- Graph
Source: General Statistics Department of Vietnam

For Vietnam, this is bad news as the country is still considered a lower middle income country that will require significant trade and investment over the next decade. But with China as a major stakeholder, the Vietnamese government may have to make a difficult choice between patriotism and economic growth.


Vietnam’s negotiating stance in the Paracel Island conflict is unfavorable. Vietnam is increasingly dependent on China’s FDI and trade and has few allies internationally and regionally willing to go against the economic giant.

China has hedged its bets by observing Russia’s actions in Crimea. Judging the international response to the Crimea situation, China feels that they can act and raise tensions in the South China Sea with impunity. The United States and Western European powers do not have a stake in Vietnam; count on them to cast critique and judgment, but they will stop far short of sending any military backup to stop China.

What remains to be seen is what happens when China takes the oil rig out of the Paracel Islands on August 28, 2014 to avoid the monsoon season. Will they keep out of the region, or return the very next year and provoke Vietnam again?

Featured image via CNBC

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