Note: this article, written by our Investigator Zack Kopplin, was originally published here.
Why Is the Pentagon Still Paying $10 a Gallon for Gas?
Amid a global oil collapse, the military is overpaying politically connected contractors to keep its jets fueled in Iraq.
As any American who’s passed a gas station in the past two months knows, global oil markets are melting down. Even before coronavirus lockdowns led billions of people to halt their daily commutes, cratering demand for gasoline, Saudi Arabia and Russia had increased production of crude oil, the main component in refined fuels, in an attempt to drive each other out of business. Oil prices plummeted. For a brief period last month, the price of a barrel of West Texas Intermediate Crude dropped 300 percent, to negative $37.63. Its price now hovers around $20 a barrel—less than 50 cents per gallon—and some experts warn that “the coronavirus oil shock is just getting started.” It’s a terrible time to be in the fuel business.
Unless, that is, you have the right Iraqi connections, and you’re selling to the United States military and its contractors.
On March 12, the Pentagon’s Defense Logistics Agency signed a contract with a Virginia-based war-zone logistics company, DGCI, to deliver 333,000 gallons of jet fuel to the Erbil International Airport in Kurdistan, Iraq’s semi-independent northern region. Even though crude oil costs less to produce in Iraq than almost anywhere else in the world, the DLA agreed to pay DGCI $10.04 per gallon of jet-propulsion fuel 8, or JP-8. That’s three to five times more than the worldwide average price, $2 to $3 per gallon, that the DLA had paid for JP-8 earlier in March.
“I know the price of gas I’m paying” at the pump, said Shruti Shah, the president of the Coalition for Integrity, a Washington-based anti-corruption nonprofit, adding that a $10-per-gallon purchase price is “definitely a strong red flag of mismanagement.” DGCI representatives did not respond to requests for comment, but the Pentagon said the inflated prices reflect a premium for short-term, emergency deliveries. “The subject fuel purchases from DGCI were individual spot market purchases due to interruptions to the supply chain supporting operations in Iraq,” said DLA Deputy Director of Public Affairs Patrick Mackin. “These emergency purchases were required to support the mission in an expedited manner to prevent mission failure.”
But relying on emergency purchases for mission completion is a bad practice, said Shah. “Any emergency procurement has a high risk of fraud, waste, and abuse by their very nature, because you may loosen some of your established protocols.”
The DLA sure buys a lot of “emergency” fuel. In March alone, it agreed to buy 1.46 million gallons of JP-8 from DGCI at an average price of $8.08 a gallon, along with millions of gallons of other types of fuels. While rates as high as the usurious March fuel purchases are rare, a review of contracts by the Government Accountability Project, where I work, reveals that the military has paid DGCI inflated fuel prices for years.
The U.S. military shouldn’t consistently overpay for fuel, especially in the middle of a historic oil glut that’s left supplies untapped and devalued. But Iraq and its Kurdish autonomous region are some of the most corrupt locales on earth, a fact that spurred a massive youth protest movement last winter. “Endemic corruption in Baghdad and Erbil, particularly in the energy sector, has gravely afflicted Iraq,” said Stuart Bowen, the former special inspector general for Iraq reconstruction, who oversaw investigations into misuse of government funds in Iraq until 2013.
This corruption has left the American military vulnerable to fuel price-gouging, with profits going into the pockets of local politicians. “The U.S. government has had a lot of trouble getting supplies of just normal fuel, like gasoline or diesel, because these transportation contracts are very lucrative,” said a former State Department official with experience in Kurdistan, who asked to remain anonymous in order to speak candidly about political realities in the region. “What the government doesn’t control is essentially controlled by the big families.”
That appears to be what is happening with the DGCI fuel. Sources say the company, based in McLean, Virginia, can charge a premium because of its cozy relationship with a Kurdish firm, Triple Arrow, whose political patronage gives it effective control over the supply of fuel coming into Kurdistan. “All refined products coming into Erbil can only come through Triple Arrow,” said a source in the oil industry who asked to remain anonymous for their safety.
“The kind of arrangement that you’re talking about is not unusual, it pervades the Kurdistan region,” said the former State Department official. “It’s like a giant Mafia.”
The Defense Logistics Agency also acknowledges this reality: “DLA Energy made a decision to obtain the fuel from the only known company eligible to receive government contracts that had demonstrated the capability to expedite fuel deliveries to the required locations,” Mackin said.
This monopoly couldn’t have been cheap. Shipping fuel across the Kurdish border “must take a lot of bribes to look the other way,” said Charles Tiefer, a law professor at the University of Baltimore and member of the post-9/11 congressional oversight commission on wartime contracting.
How does an American company like DGCI get that kind of juice overseas? In Virginia, Triple Arrow is registered to a company owned by DGCI’s chief financial officer. But in Iraq, Triple Arrow is operated by a man named Ali Hashim, who confirmed to me in a text message that he works for the Zozik Group, one of the region’s largest companies. Ostensibly an engineering firm, Zozik has close ties to the Patriotic Union of Kurdistan, or PUK, one of two Kurdish ruling parties.
Zozik’s connections to Kurdish officials have helped give it a competitive contracting advantage. During a 2013 dispute between an Emirati oil company and the Kurdistan government, an arbitration court determined that the Kurds had required the oil company to hire Zozik as a subcontractor, along with two other politically connected companies, Kar and Nokan, as a prerequisite to doing business in the region. “Nokan, together with Kar and Zozik, was a company affiliated to the PUK, the dominant political party in the Sulemaniya Province of the Kurdistan Region,” the London-based tribunal wrote in its judgment. (Nokan, like Zozik, is also associated with the PUK, but Kar is predominantly affiliated with Kurdistan’s other major party, the Kurdistan Democratic Party, which is controlled by Kurdistan’s ruling family, the Barzanis—who last year bought two Beverly Hills mansions for $47 million.)
Another lawsuit filed in 2013 by a Cypriot company identified Zozik as a channel to funnel bribes to Omar Fattah, a former deputy prime minister of Kurdistan and member of the PUK’s Politburo. A third arbitration case, filed by the government of Kazakhstan in a Swedish court in 2019, alleged that Zozik was used by a Moldovan oligarch, Anatolie Stati, to pay tens of millions of dollars worth of “looted” Kazakh money to Kurdish officials.
These cases look bad, said Shah. “One of the biggest red flags is when a foreign official says ‘Use this third party,’ and then you are forced to use that third party,” she said, adding that Zozik’s partners—including the U.S. Pentagon—should be concerned by public allegations of corruption. Hashim never responded to specific questions about Zozik’s businesses. The company’s owner, Kurdish businessman Ghaleb Bradosti, and Bashar Tawfiq, a primary vendor for several Zozik affiliated companies, also didn’t respond to my requests for comment.
While the DGCI deals raise questions about Zozik’s Iraqi government connections, other fuel purchases made by two large Northern Virginia-based military contractors—Sallyport Global Services and Pacific Architect and Engineers (PAE)—show how Zozik has used a network of shell corporations to disguise ownership of its subsidiary businesses, avoid a de facto Pentagon blacklisting, and potentially sell banned Iranian oil to the U.S. military establishment.
The web of connections is tangled, but overlapping corporate ownership, phone numbers, and leadership information, obtained from public and corporate databases, linked two blacklisted companies, Nesmet al-Shimal and Soor al-Fattha, to Zozik, along with several other subcontractors—including two, Khyrat al-Watan and Iraqi Frond, actively used to supply fuel to military bases in Iraq.
In the spring of 2018, because of a “security vetting issue,” the Department of Defense prohibited military contractors from buying fuel from Nesmet and Soor, along with a third, likely related company, al-Shimal Oil. “Those three have been barred by the DOD over the past two years, and should not be considered for fuel sourcing,” Tim Prewitt, then-director of the U.S. embassy’s Logistics Management Center in Baghdad, said in a March 2019 email to Sallyport. According to a person connected to Zozik, the blacklisted companies had been caught selling Iranian fuel.
After the email from Prewitt, Sallyport—which did not respond to requests for comment—stopped doing business with Nesmet, but continued to buy fuel from Khyrat, which was identified as sharing a vendor with Nesmet in the contractor’s documents.
According to two sources with knowledge of Sallyport’s fuel purchases, in 2019, Khyrat was selling Sallyport fuel at prices that ranged from roughly $3.50 to $3.60 a gallon. At the time of these purchases, sources identified the price set by the Iraqi government’s Oil Products Distribution Company for domestic fuel purchases on foreign military sales contracts, the type of contract Sallyport controlled, at roughly $2.29 per gallon, far less than Sallyport was paying. As of last November, Sallyport was buying over 500,000 gallons of Khyrat fuel a month.
While the markups are nowhere near as extreme as the prices paid to DGCI, Sallyport is still overpaying. “Either they’re not doing the due diligence or [they’re] turning the other way,” said Jessica Tillipman, a lecturer and dean at George Washington University’s law school and an expert on the Foreign Corrupt Practices Act.
PAE, which manages the U.S. embassy in Baghdad and did not respond to requests for comment, has also done business with Khyrat since Nesmet was blacklisted. It’s unclear how much PAE is paying for Khyrat fuel, but public contracting documents show the U.S. firm did millions of dollars of business with the Zozik-linked company in 2019. A leaked State Department document from January of this year showed Khyrat delivering roughly 1.7 million gallons of several types of fuel to U.S. diplomatic facilities, every month, on PAE subcontracts.
These purchases could cause Sallyport and PAE problems. “Contractors don’t have the benefit of the same kind of presumption of necessity as the government” when working with companies that have been legitimately blacklisted, said Tillipman. “The risk could be much more devastating than just paying a fine.”
The Department of Defense is also involved with another company that’s linked to this Zozik network, Iraqi Frond. Late last year, the Department of Defense awarded two six-month contracts worth about $2.5 million to a Kurdish company, Dashti Sanat, for “facilities support services.” According to internal State Department guidance, obtained by the Government Accountability Project, the money was for Dashti Sanat—identified in the document as either a parent of, or business alias for, Iraqi Frond—to deliver roughly 83,000 gallons of diesel fuel a month to two Iraqi military bases. Based on the value of the Dashti Sanat contracts, the Pentagon could have paid up to $5.03 per gallon for this fuel—66 percent more than the DoD’s current standard price for highest-quality diesel, and twice what it currently costs U.S. consumers, on average, at retail gas stations.
“We currently do not have any active fuel supply contracts,” Dashti Sanat said in an email response to questions about Iraqi Frond. “Note: all fuel movements must be approved by all Iraqi authorities and end user for the order to be delivered.”
By “end user,” they meant the Department of Defense, which continues to rely on emergency oil purchase contracts that waste taxpayer money and entrench local corruption, 17 years after first invading Iraq. The Zozik deals are “another dark zone of fraud, waste and abuse,” said Bowen, once the top military watchdog in the region.
“This sounds not-good all around,” said Tillipman. “That could be the headline: ‘Everything Is Awful.’”