Tangled Pipelines: The Oil Industry's National Security Nexus
When Complex Systems Produce Multi-Faceted Risks
Rachel Brooks
August 01, 2023
The safety dynamics of oil and gas production in the U.S. and the Americas have been called into question over the generations since crude oil has been extracted.
With major oil spills and plant accidents dotting headlines over the decades, Americans have called into question the harmful impact of oil production safety violations on workers, cities, and national security.
Security Events 2022-2023
In recent weeks, international waters have faced the struggle of regulating illegal shipments of oil. Authorities advised U.S. oil producers against unloading an Iranian oil tanker, seized off the coast of Texas, for concerns over retaliation from the Iranian regime. As similar incidents take place across the map, headlines draw attention to the complex realities of oil and gas production and international security.
Between 2022 and 2023, a series of world events impacted oil security and brought security concerns back to the forefront of thought.
On March 23, 2022, the Center on Global Energy Policy reported the immediate impact that the Russian incursion into Ukraine had on global oil markets, market supply stability, and the strain on the sanctions systems placed on regions where trade violates policy.
For example, world oil producers have put stiff sanctions on Iran because the leaders violate trade practices, and even sanctions themselves, such as when they sent “millions of barrels” of oil into Syria over six months, The Times of Israel reported on May 17.
Russia’s invasion of Ukraine’s territory placed a significant impact on global oil markets for complex reasons. The Gazprom II project, a Russian oil pipeline that was intended to run through Europe, was put on pause, as European leaders sanctioned Russia for its act of aggression against Ukraine.
In the hours to follow the wars outset, world leaders cracked down on the oil system. A series of changes were introduced in the United States by President Joe Biden, Brookings Institute highlighted.
Oil Security Factors
Areas of concern over oil security fall into categories of physical safety breaches, such as when tankers spill or people are injured, cybersecurity, when logistics engineering is interrupted by cyber threats, and then areas where corruption or oversight undermines policy.
Then, there are those areas where a foreign nation-state actor may attempt to manipulate or attack the oil production line to achieve some gainful purpose.
In the United States, there are 15 major oil producer companies. These companies have come under harsh scrutiny from the public in recent years for safety violations that led to the exposure of national security.
Motivations For Attacking Oil Security
Direct attacks on oil security are motivated by market disruption, which gives bad actors the means to disrupt and manipulate markets.
In a 2023 study, the Journal of Cybersecurity concluded that attacking data records of systems in the oil and gas pipeline sector had “lower monetary value” than stealing records labeled things such as “information.”
Historic pipeline shutdowns, such as the Colonial Pipeline ransomware attacks of May 2021, have caused by cybersecurity, however, show that cyber-attacks and other incidents on oil pipelines are major disruption events.
Economically, the oil and gas industry are considered “high risk”, Investopedia wrote, because of uneven supply chain distribution. Oil and gas has a unique relationship to other fragile national sectors, including the overlap with politics, that make the market and the supply chain sometimes unstable.
Rather than directly attacking oil production sites, bad actors, or people with harmful intentions that operate outside of regular process frameworks, likewise may try to exploit oil producers for financial or political gain or to take power over national resources, the Global Trends 2040 report by the National Intelligence Council explained in a outlook analysis published in March 2021.
Risks To Migrants and Vulnerable Populations
The complex risks associated with the oil trade as well as with migrant populations go hand in glove toward exacerbating the status quo of both issues.
The oil and gas industry is impacted by the vulnerability of at-risk groups in its operation region, including migrants who are frequently the target of illegal operations such as cartels and piracy groups, mainstream media reports in 2019 highlighted.
Vice versa, migrants are at risk from the exploitation of oil and gas security, which this analysis explains in greater detail below.
Risks From Explosions
The U.S. Department of Transportation has documented cases of oil and natural gas explosions. Over the past 10 years, explosions that were the result of pressure build-up and pipeline failure have had catastrophic consequences.
In 2018, an explosion in Merrimack Valley, Massachusetts resulted in one death, numerous injuries, and sweeping destruction to a town building, which, in 2020, resulted in the owner of gas company, Columbia Gas being sentenced to pay a $53 million settlement for damages, the Massachusetts Attorney General’s office announced on June 23, 2020.
Data from the Centers For Disease Control and Prevention found that, while explosions are not the leading cause of fatalities and risks to oil refineries, they are the leading cause of multiple deaths
Connection To Cartel Activity
Adding to the complexity of national security interests in oil production pipelines, foreign cartels are active in oil-producing U.S. cities.
There are complex issues arising from regional crime. The South of Texas is a region with a recent historic “high intensity” drug trafficking, the U.S. Department of Justice stated in 2007. This drug trafficking route has, in recent history, also crossed with associated criminal activity, such as illicit finance, which passes from Texas into southern and Eastern states, most notably Alabama, Florida, Georgia, Illinois, Minnesota, New Jersey, North Carolina, Ohio, and Virginia. Historic reports from the Office of Drug Control Policy found a high activity in McAllen, Texas, a locale that the Texas Drilling GIS reports have tracked as an active spot for oil-producing leases and drilling sites.
Risks To the Migrant Crisis
The overlap of oil refinery presence and cartel activity creates another layer of complex implications as migrant workers become vulnerable to oil security risks. This added layer of complexity puts an additional strain on the oil sector and national security. Because oil sector changes in the Gulf created significant economic challenges, it drove up directly impacting oil-related gang activity in the region, Reuters reported in 2018. Oil cartels side step legal processes, such as the decommissioning process, and violate trade regulations.
Oil risks overlap with the migrant crisis for a variety of reasons. In Latin America, the CEPAL organization found that a large number of people in migration, in crisis migration in particular, were less likely to find “decent” employment in legitimate industries. In regions outside Latin America, particularly in the Mediterranean, the critical risk status of migrant life has led migrants to see refuge aboard oil rigs.
Trade Policy, National Security, and Multinational Entanglements
Trade policy and national security are directly connected. To enforce U.S. national interests, the federal government creates strict guidelines for foreign enterprises.
In the case of oil, the complex international nature of oil production supply chains and oil distribution can make guideline enforcement a challenge.
The international nature of oil refinery production lines sometimes involves multiple nations when a security breach happens. This can mean that major corporations clash with government powers and global regulatory boards, sometimes all at once.
Risks to United States national security stem from the complexities of oil trade in states near U.S. sovereign borders. Such is the case with the Iranian oil tanker that, sanctioned by Western trade policy, likewise the cause of political tension, which cannot for these reasons be unloaded in Texas despite being reportedly moored within U.S. maritime sovereignty off Texas’ coastline.
In March 2023, the Associated Press reported that “shadowy brokers” had secured billions of dollars in Venezuelan oil. Experts interviewed by the news agency expressed that, even in a much more secure state than Venezuela, it is difficult to impose all the necessary restrictions needed to curb all illicit deals.
Legal text from the case of a lawsuit between the OI European Group BV, CITGO, which is headquartered in Texas, and the defense department of Venezuela, gives insights into the security issues that branch from these multinational business entanglements.
In Venezuela, the Maduro regime, which is not recognized as the official government according to case law in the U.S. Supreme Court, District of Delaware, exercises control over oil production in the region. The Maduro regime reportedly “seized control” over ships that were carrying oil products processed by CITGO Petroleum.
The oil asset siege happened after the Maduro regime’s appointed regulator seized total control of Venezuela’s Petróleos de Venezuela, S.A., abbreviated the PDVSA. The PDVSA has come under the 100 percent ownership and control of Venezuela's government and defense department, the Delaware Supreme Court background explained.
CITGO worked with judges to approve the sale of the PDVSA shares of its company in 2021. In a protracted legal battle, CITGO still needed U.S. government intervention to free itself from the ramifications of Venezuelan creditors which was given an extension into October 2023, Reuters reported on July 19.
Complex Legal Processes
Complex international prosecution of oil regulation crimes adds layers of difficulty for regulatory bodies to totally enforce national security protocols.
A court document was filed in public records on June 6, 2023, which details a lawsuit by the United States government in the Houston District Supreme Court against a PDVSA employee, Paulo Jorge Da Costa Casqueiro Murta, who had petitioned for violations of his rights over a speedy criminal trial.
This document explains that Murta was indicted in the United States in 2012 after an investigation into a bribery scheme “concerning energy and equipment contracts.” Murta was charged with crimes that were “serious offenses” and that the criminal charges could carry a sentence of up to “20 years in prison.”
The case was entangled in a lengthy and complex legal battle. Murta, a Portuguese citizen, had to be extradited from Portugal to face trial in the United States for the bribery scheme. Legal blogs noted that the case was dismissed and re-entered into U.S. courts more than once for complex reasons, including disputes over the United States’ lack of jurisdiction over the bribery offenses, and failure to issue a Miranda warning to Mura.
The Department of Homeland Security had summoned Mura to trial and wanted to interrogate him over the complex web of shell companies and bank accounts associated with the PDVSA and its bribery schemes. Murta stood accused of affiliation with Abraham Shiera, a Florida businessman who reportedly bribed PDVSA officials. Sheira, who was arrested in 2015, has since pleaded guilty to conspiracy to “violate the Foreign Corrupt Practices Act,” FCPA Blog explained.
Shiera was criminally charged along with Roberto Enrique Rincon Fernandez, of Woodland, Texas. Together Shiera and Rincon had mutually submitted bids to provide the PDVSA with both equipment and services.
Rincon would go on to become one of Venezuela's top oil contractors, providing the state owned agency with “$500 million” in oil equipment per year, a report by The Wall Street Journal, published on December 21, 2015, explained.
Oil production investigations face challenges due to the complex legal prosecutions that go along with international corruption cases, as well as the complex legal guidelines and regulations surrounding energy business and foreign business practices.
Boycotts and Other Complications
National security concerns are further complicated by the intricate nature of oil and gas industry boycotts and other sociopolitical issues that stem from politicized interests over energy transition.
Issues that stem from complex international market regulations are also present in financial markets, boycotts, other “gray area” entanglements, and, as explained further in a later section, in criminal enterprises that disrupt the supply and demand ratio.
In 2023, the Texas government added HSBC Bank, Europe’s largest bank, to its divestment list because HSBC had opted to blacklist funding for all oil refinery companies. Under Texas law, businesses are now required to sell off, redeem or divest HSBC financing to keep compliant with the Texas divestment list.
The Texas Comptroller Glenn Hegar added HSBC to its growing list of financial entities that have opted to halt funding to oil and gas companies. In Hegar’s view, HSBC and other financial entities are choosing the political agenda associated with climate change prevention efforts.
HSBC’s position on the Comptroller’s blacklist underscores a tense history in the greater region of Texas and Mexico. In 2019, and earlier in 2017, HSBC was sued by 30 members of families impacted by Mexican cartel activity, in a U.S. district court in New York under the Anti-Terrorism Act. The lawsuit was brought against HSBC’s Mexican and United States branches. HSBC is a United Kingdom based entity and filed to have the lawsuit dismissed on the grounds of “lack of personal jurisdiction.” The case was called “Zapata vs. HSBC Holdings PLC.”
In their lawsuit, the plaintiffs claimed that cartel members had opened bank accounts for currency exchange and other financial transactions that fell under money laundering activity with HSBC.
The court recorded, in its statement on the Zapata case, that HSBC had “admitted laundering of vast sums of money for international criminal organizations.” Within the lawsuit, the court sought to decide if HSBC, on top of the other sanctions it would face, would also be legally liable to pay damages to the plaintiff families that had suffered at the hands of the financed criminal cartels. The whole case was known as the HSBC Money Laundering Scandal, which dates back to the 2012-2013 era.
Cartels, Laundering, and Oil Theft
In the last decade, violent cartels in Mexico have been known to steal and illegally sell oil from state-owned oil-producing institutions, adding to an overlap of security issues between money, local money laundering, local trade violations, and the oil and gas sector.
In 2020, Reuters reported that violent cartels were able to steal large amounts of oil from Petroleos Mexicanos (Pemex) because “top government officials” had chosen to “look the other way.
Mexican authorities reportedly arrested gang leader Jose Antonio Yepez Ortiz in 2020 after he had operated on a “license” from former Mexican President Andres Manuel Lopez Obrador. Yepez, the leader of Santa Rosa de Lima Cartel, had been allowed to conduct a fuel theft operation because authorities had taken an “attitude of omission” toward the practice. This left monitoring oil theft to the oil worker’s union in the region, which reportedly failed to police the practice as well.
In 2022, columnist Austin Bay with the Sun Journal also noted that pirates “armed with machine guns” had stormed a Pemex oil platform in the Bay of Campeche in one of its theft operations. Bay listed his opinion that the Pexem assailants had presented “seven effects” of international security risks, which included the risk of oil price hikes, U.S. border security due to proximity to the United States, a threat to seaborne trade globally, inflation due to the impact on oil financial regulators, and other ecological threats.
Impact of Money Laundering on Oil and Gas
Money laundering can have a national security impact by changing legitimate businesses into “sterile” ones, or businesses that are no longer economically viable.
Due to the impact that this can have on supply and demand levels described throughout this report, money laundering in the oil and gas industry has complex “snowball” effects on security. U.S. case law has documented some examples of this in the past decade.
U.S. case law has documented some examples of this in the past decade.
In 2019, the case of the United States vs. Ayers in the U.S. District Court of Houston, Texas highlighted the national security impact of money laundering on oil and gas operations. In this case, which dates back to 2015, Avery Lamarr Ayers was criminally charged with wire fraud, after circulating a “fraudulent invoice” to Impact Oil and Gas, a United Kingdom-based company, for services to Minas and Hidrocarbentos.
The invoice was for $357,000, and was wired into Ayer’s Comerica bank account. Ayer’s opened the bank account ending 6718 in 2015 as a business account for Minas and Hidrocarbentos. The U.S. court documents explained that the wire was successfully sent to Ayer’s account because his D.B.A. name on the business account matched the name of the business the money was initially supposed to go to.
Oil Production and Cyber Security
In 2021, a cyber attack on the Colonial Pipeline exposed the ramifications of cyber attacks on oil and gas infrastructure when, as The New York Times reported on May 8, 2021, the attack halted “5,500 miles” of the pipeline’s system.
Canada’s Cyber Centre warned that the threat to oil production stemming directly from cybersecurity attacks and risks is “real” for the North American oil and gas sector. This assessment came as Canada revealed that, since 2019, about “one in four” of Canada’s oil producers had reported a cyber attack, Calgary Herald reported, June 28.
Rival Interests With U.S. Border Countries
Another risk to the United States' national interests stems from border states amplifying co-operations with U.S. international rivals, actions that reflect upon the complexity of the oil market at large.
This has been observed as Latin American states clash in complex rivalry and resulting in global regulations violating activities or criminal activities. It can also be observed as U.S. neighbors drawn economically and politically closer to rivals of the United States.
In 2017, a study conducted by LiUNA explained the impact of the Temporary Foreign Workers Program, a foreign liaison service that, at the time of the LiUNA report, extended between 2017 and 2019 and analyzed the links between migrant workers, unemployment and construction labor, particularly in the Alberta oil sands region. The study examined the impact of the Canada-China Free Trade program following the collapse of oil prices in the Canadian market in 2014.
While the specifics of the program detailed in LiUNA were documented between 2017 and 2019, the Council of Canadians noted in 2014 that the former Harper government had “locked in” Canada with a foreign investment promotion and protection agreement for “31 years” at the time of that report. Under the transition to the Trudeau government, the new prime minister had reportedly encouraged Chinese investment under the mutually assured foreign investment program in the oil tar sands, the Council of Canadians wrote in 2018.
As the United States and China’s foreign relations have been at all-time high tensions in recent weeks, the close and ongoing cooperation between borderline nations such as Canada with rivals adds a layer of international competition to the North American domestic oil market that can create pressures for national security.
Snapshot of National Security Issues
Ground truth can, to some degree, conflict with policy. Analyzing the margin of protocol versus practice helps concerned citizens, charity organizations, and public services to understand what goes wrong in major production lines and to call these issues to account.
Disruptive risks include the following kinds of risks:
Economic hardship and instability, such as when Chesapeake Energy filed for bankruptcy in 2020. Chesapeake reportedly filed bankruptcy after having to pay “millions” to settle charges of bid rigging. This represents the economic risk associated with illegal trade practices.
Physical risks: such as explosions and other accidents. One historic example of this is the Piper Alpha event on July 6, 1988, an incident where an oil rig exploded in the North Sea above the United Kingdom, killing 167 people. Decommissioning processes likewise use explosions to break down old platforms, which can create risks for refugees on the water.
Legal complexities and “red tape”: A situation like this was described in legal text when Magema Technologies sued Phillips 66 oil in the Houston, Texas District Supreme court over alleged patent violation for the practices and technologies it used when producing “marine fuel” in an “unusual” location of the Wood River, Texas. In the defending technology lawsuit brought against them, Phillips 66 argued that it had safety constraints for providing samples to the court because of the difficult extraction process of samples from the water bodies in Wood River, Texas that were in question. Faulty practices in extraction from the water table, and other land bodies can lead to dangerous oil leaks in the ground.
Money laundering, regulation evasion, and crime: The complex nature of market regulation has seen clashes where industry regulations are not enforced by states, which has resulted in exploitation by brokerage, evasion of international regulations by employees of state-owned oil entities, or the exploitation of corrupted or ethically compromised organizations by criminal enterprises and theft.
Cartel active production areas: the traffic of cartel organizations through areas where oil production is more prominent adds a layer of security risk to the employees and other administrative professionals who maintain oil rig sites.
Oil theft and money laundering: two separate but interlinked cases of economic malpractice where national security is jeopardized by a direct hit to economic processes.
Rival interests of border states: As U.S. border states ramp up oil partnerships with U.S. rivals, such as with the People’s Republic of China and its oil refinery financial programs, this can add an extra layer to national security issues.
Overt Operator’s Analysis
Looking deeper than the headlines, researchers with Overt Operator used open source intelligence, as well as information gathered from public databases, to track events of oil spills and other hazards that come from oil safety violations.
The oil and gas sector presents a complex landscape with a myriad of risks spanning from physical to financial security. These risks are compounded by the intricate international nature of the sector, which often results in a mesh of legal entanglements. These entanglements surround business processes of oil and gas industries, creating multifaceted challenges for businesses, regulators, and law enforcement agencies to navigate.
International regulations and financial systems underpinning the sector have unfortunately become targets of ethical breaches. This exploitation strains national security as it poses threats not only to the economic stability but also the geopolitical balance. For instance, unscrupulous players can leverage gaps in regulations to exploit markets or bolster criminal enterprises.
A prominent example is the rise of Latin American cartel oil theft enterprises. These operations have transformed local crime into a transnational issue, exploiting the complexities of the oil and gas sector and its associated international entanglements.
Further complicating the issue is the role of international cooperation. While it is crucial for dealing with transnational challenges, it also brings with it inherent pressures. The relationships between the U.S., its border and near-region countries, and other foreign powers significantly influence the Pan-American oil market dynamics. This can inadvertently put strain on U.S. national security interests, as international oil and gas relations often intersect with geopolitical alliances and conflicts.
Overall, it's clear that the complex and international nature of the oil and gas industry presents substantial and multifaceted security challenges. This necessitates robust international cooperation, stringent regulatory oversight, and proactive security measures to ensure the sector's stability and protect national security interests.
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