* Islamic State tightens grip on oil-producing areas
* Militants estimated to get up to $2 mln in daily oilrevenues
* Traders seeking profit re-sell oil in government-heldareas
By Suleiman Al-Khalidi
AMMAN, Sept 18 (Reuters) - In an oil field in northeasternSyria, a queue of trucks lines up daily to load crude soldcheaply by Islamic State militants who have hijacked parts ofthe country's energy industry in their bid to build a caliphate.
Sales at Shadada field, described by an oil trader, are justone example of how the group, which has seized land in war-tornSyria and neighbouring Iraq, is creating its own economy througha series of pragmatic trades.
It is cutting deals with local traders and buyers, evenbusinessmen who support Syrian President Bashar al-Assad, andsome of its oil has made its way back to government buyersthrough a series of middlemen.
"Islamic State makes not less than $2 million daily thatallows them to pay salaries and maintain their operations," saida former Western oil executive who worked in a foreign oil firmoperating in Syria before the crisis and who is familiar withthe nascent oil market.
The United States, which has been bombing Islamic Statepositions in Iraq, has said it is prepared to extend thecampaign into Syria, which has been racked by civil war for morethan three years, and has said it will train more than 5,000Syrian rebel fighters to counter the advancing group.
But oil sales mean Islamic State, an al Qaeda splintergroup, can rely less on foreign donations and attract morerecruits and supporters with its newfound wealth, something thatis likely to make the group harder to stamp out in Syria.
Islamic State has taken oil fields from Western-backedSyrian rebels and the government in recent months and isbelieved to control hundreds of wells, depriving Assad'sgovernment of a major source of income.
Damascus says Syria's production fell to an average of28,000 barrels per day (bpd) in 2013 from 164,000 bpd in 2012.Oil sales made up nearly a quarter of state revenues before thewar. The government says it has lost $3.8 billion in stolen oilbecause of the conflict.
Boosted by arms seized in neighbouring Iraq, Islamic Statehas consolidated its grip on the eastern oil-producing area ofDeir al-Zor in recent months, coming closer to the north east,where the largest oil wells are controlled by Kurdish militias.
It is estimated to have taken control of hundreds of smallwells in Deir al-Zor that produced around 130,000 bpd of mostlylight crude, according to a senior oil engineer now working inDamascus.
Half of Syria's estimated pre-war production of 380,000 bpdin 2011 was located in Hasaka province, which the Kurds tookcontrol of in mid-2012 as Assad's forces relocated westwards tofight Sunni Muslim rebels in Aleppo.
If Hasaka were eventually to fall to Islamic State, thegroup will have control of nearly all of the country'sinstallations.
However, the group has yet to fully exploit the fields italready holds due to a lack of technical expertise. The mainfields it controls - Shadad, al Omar, Tenak and Ward - were oncemostly operated by international oil companies.
But Royal Dutch Shell Total and PetroCanada have long since abandoned the area, making fulluse of the fields a formidable challenge.
"Many wells were shut down and foreign firms withdrew andthe equipment was looted by rebels, who emptied warehouses,"said one former oil executive with a foreign company.
Few people with technical expertise remain in Islamic Stateareas. In Kurdish-held territory many staff have remained, andsome still get their salaries from Damascus's oil ministry.
TRADING WITH THE ENEMY
A lack of expertise in extracting and refining oil meansthat most of Islamic State's revenues come from direct sales tolocal businessmen, smugglers and profiteers and oil traders.
They resell the mainly light crude to refiners across rebelheld parts of Syria and have won a variety of customers byselling it at an average of $18 per barrel.
Some of the crude is sold to fuel smugglers that take itinto Turkey, but the amounts are small because of tight bordercontrols, Syrian border traders said.
Instead a local market has developed with amulti-million-dollar refinery business, run on an ad hoc basis.Local investors bring in Chinese and Turkish-made makeshiftrefineries via Turkey, some of which process 500-1,000 bpd.
These then sell to wholesalers and retailers in oil tradinghubs across several towns in rebel-held parts of northwest andeastern Syria. Prices for the refined oil range from $50-$60 perbarrel, nearly three times the price of the crude.
A litre of gasoline from this locally refined crude sellsfor around half a dollar, a third of the price of good qualitygasoline sold in government-held areas, according to oil tradersin Idlib in western Syria contacted by phone.
In a country where the conflict has produced manycontradictions and strange bedfellows, traders with connectionson both sides of the war have sought to make hefty profits byreselling fuel in government areas.
Crude buyers, directly or indirectly, include businessmenclose to Assad's ruling circle.
They are driven mainly by wide profit margins, according toone broker who runs a network of oil lorries that transportcrude oil to Latakia, a hub of pro-Assad support on the westerncoast.
There are tacit arrangements between Islamic State and localstate officials to ensure that basic services such aselectricity and water are not disrupted or destroyed.
"There is an equation that no one talks about in the Syrianwar. It has not so far gone to all-out war. Parties that arefighting each other still exchange services and find bargains,"said Samir Aita, a Syrian economist living abroad.
Oil traders say that since taking control of oil wells fromrivals, Islamic State has continued the practice of guardingsome pipelines transporting crude pumped by Kurds in their fields in northeast Syria to a government-run refinery in Homsin exchange for protection money.
"They would take fees and transit fees so the oil would gothrough without blowing it up," said a Kurdish oil executiveworking in Qamishli who requested anonymity.
Traders who buy crude from Islamic State and known middlemenacting on behalf of prominent loyalist business figures havebeen active buyers in recent months, according to aDamascus-based businessman familiar with the local oil market.
"This is a lucrative trade for some businessmen who aremainly war profiteers who can also find buyers any time at theright price," he said. (Editing by Sylvia Westall and Will Waterman)
