How to be a fuel supplier in a war zone

One of the most improbable of the big energy stories of 2010 has been the role of oil trading in the fall of governments, specifically those of Kyrgyzstan, the hub for U.S. jet fuel powering the air war in Afghanistan. In April, the second Kyrgyz president in five years collapsed in a maelstrom of accusations of high-level corruption involving an American contractor, billions of dollars in fuel contracts, rapacity and bribery. Today, the ballyhoo continues to threaten the crucial U.S. Manas Air Base in Kyrgyzstan, and the incredibly lucrative business of Mina Corp., a U.S.-owned company that over the last seven years has received some $2 billion in exclusive contracts to buy fuel in Russia, and sell it both to Manas and the key U.S. military base in Bagram, Afghanistan. This is because the current Kyrgyz government accuses Mina of enriching Kyrgyzstan’s former regimes in order to maintain the fuel trade, and the U.S. government of abetting the whole scheme. Both the Obama Administration and Mina are howling that they are terribly misunderstood, and pleading for another chance. Given the opacity of this story, I asked some old acquaintances – current and former oil traders – to guide me through the opaque thicket of oil trading in the world’s war zones.

First, let’s get our definitions straight. When we are talking oil trading, we don’t mean the fellows who, as they did in 2007 and 2008, are driving up the price of petroleum toward $100 a barrel. Rather, we refer to an offshoot of this breed – a bold, fleet-footed and often eccentric sort with a rare talent for delivering crucial supplies to difficult places. It is a craft that involves the knowledge of – at turns – flattery, bribery, cajolery, and intimidation, in addition to logistics such as trucking, ocean shipping, railroads and barges; oh, and how to apply these skills in the turbulence of combat.

Historically, this profession generically falls under the rubric of war profiteering, a cyclical, inherently ephemeral category of business. I.E., fellows pile in, then in Darwinian-style either thrive or die. Those who survive become filthy rich, with the knowledge that soon enough the war will end, or tough locals will themselves want the spoils, so that the traders must have a ready exit strategy, such as a gassed-up car or private jet. When that time times, the most seasoned of the bunch get out in search of the next bonanza. Places to observe this phenomenon since 9/11 have been Iraq, Jordan and Kuwait; and Afghanistan, Pakistan and Central Asia.

The compensation for such individuals is considerable, meaning hundreds of millions of dollars (think Marc Rich). This is because wars are serious matters, and generals don’t have the time to fret over how the most crucial supply item of all – fuel – reaches them; they just want it there reliably, I am told. They certainly don’t pay attention to the peccadillos of the typical trader, which include exceeding reserve, paranoia, and also, frankly, often a bit of weirdness. One long-time oil trader pal of mine talks in such riddles that I frankly do not understand him. (We have previously discussed the peculiarities of Doug Edelman, Mina’s hippyish, secrecy-obsessed, multi-millionaire, burger-flipping owner. But more on that below.) As the Washington Post’s Andy Higgins described the fixation of the generals in Afghanistan (which applies for Iraq as well):

Without their supplies, the U.S. war effort would quickly grind to a halt. All American troops enter and leave Afghanistan on U.S. transport planes fueled by Mina in Kyrgyzstan. The firm also provides jet fuel for a fleet of C-135 aero-tankers that perform more than a third of all in-flight refueling operations over Afghanistan.

Yet, as suggested above, war profiteering has a life cycle, and Mina appears to be reaching the end of its time. It is hanging on (intellectually grasping the existence of the cycle and withdrawing gracefully are wholly different matters), and in the process Mina and U.S. officials – attempting to avoid a disaster in which the Manas base sinks along with Mina – have turned on each other. It hasn’t been a pretty sight.

For an excellent description of what we’re talking about, consider this law suit filed in Florida by a fuel trader in the Iraqi space – Supreme Fuels Trading – against a rival, International Oil Trading Company, known as IOTC. In the 2008 suit, Supreme accuses IOTC of bribing senior Jordanian officials for exclusive rights to ship fuel to Iraq, and to prevent rivals, including Supreme, from working the route. In a synopsis, the Federal Contractor Misconduct Database says, “In October 2008, the [U.S.] House Committee on Oversight and Government Reform, which looked into IOTC’s contracts, reported to Secretary of Defense Robert Gates that IOTC ‘appears to have engaged in a reprehensible form of war profiteering,’ and may have overcharged the U.S. government as much as $180 million.” Aram Roston has written powerfully about this suit.

No one should be shocked by such accusations, according to my oil trader sources, who say this is precisely how gonzo fuel suppliers must conduct business. (none of the traders with whom I spoke agreed to be identified. All called secrecy an obligation of the business, and suggested that blabbermouths can be risking their lives) Here is how one who has worked in both the former Soviet and Iraq spaces described the process in Central Asia and Afghanistan:

Along the way, you need to bribe a huge number of people – to get the Russian rail cars, to get on the Russian railway, to get through Russian customs, and then Kazakh customs on the other side of the border. Then Kazakh railways, and again Kazakh customs at the Kyrgyz border. Then Kyrgyz customs. Basically, every time you cross a border, you’ve got a bribe. Then when you are going to Afghanistan, you have to get the trucks licensed, and pay for protection from the northern warlords. This is a serious undertaking.

But while bribery is fairly straightforward, it’s also idiosyncratic. The fellows on both sides of the bribe are exceedingly nervous; once there is a deal, they are inclined to stick with it loyally and monogamously in order not to blow their “one and only chance to earn a few million dollars,” this source said. He went on:

One characteristic about bribery is that the guys getting it don’t admit it. They are taking money from someone they trust. To everyone else, they will say there just isn’t any capacity [to ship more fuel]. Those things tend to be natural monopolies.

This explains the use of offshore companies registered in highly secretive tax havens such as Gibraltar and Cyprus. There is no way to operate openly, because one’s accounting books can’t reflect an honest assessment of one’s expenses, not unless one wants to run afoul of U.S. or European anti-bribery laws. “Offshore companies are set up so they can pay [bribes to] these guys without anyone seeing,” this oil trader said.

In a desperate bid to save itself, Mina has hired a heavy-hitting and presumably expensive image-making and legal team, including for instance Bob Amsterdam, the aggressively garrulous Canadian lawyer who most recently was the public face for billionaire imprisoned Russian oligarch Mikhail Khodorkovsky.

Mina’s team has noted that investigators from a House subcommittee looked into bribery accusations against the company, and absolved it of any criminal wrongdoing. Their objective is to fend off a rear-guard action in which Washington appears prepared to throw the company overboard in an attempt to retain rights to Manas. In Bishkek, Secretary of State Hillary Clinton reportedly agreed to amend the fuels contract so that 20 percent to 50 percent of the deal would go to local companies. As Deirdre Tynan of Eurasianet.org reports, the Pentagon has additionally notified Mina’s foreign competitors with a suggestion that they resubmit their bids, giving them the impression that they might after all carve out part of the fuel trade. Kyrgyz authorities, meanwhile, are applying the usual local pressure tactics on Mina operations, which means raids by fellows claiming to be checking for compliance with various regulations.

Critics say the signs are that, if Mina is shoved aside, we will see shady Russian and Kyrgyz officials and companies getting fat under the same circumstances that receive such withering current criticism by the Kyrgyz government. “Kyrgyzstan produces and refines no oil.  What other reason is there to give them a fuel supply agreement but to co-opt its leaders?” Ed Chow, who used to ply the region as an executive for Chevron, told me in an email.  In terms of making a deal clean, he said, “A Russian partner is necessary since they actually deliver the fuel.  A [Kyrgyz] state company could be above board; it depends on where the profits go.” But in the end, says Chow, there is reality:

We ask our military to win a fight and they try to complete the mission, which requires delivering fuel to Manas by whatever means necessary. That means dealing with what the locals and Russians want.

The assertion – contested by the Kyrgyz – is that one set of foxes will simply replace another in the henhouse. But if so, that – at least according to oil traders – is the natural course of this tumultuous business.