Mexico's Drug Cartels Steal Billions In Oil, Threaten To Collapse Nation's Refineries

In a new mind-numbing report from Reuters, Mexico’s drug cartels are increasingly diversifying beyond narcotics and have recently entered into the petroleum business.

Cartels have jumped into the fuel theft game stealing billions of dollars worth of oil from pipelines controlled by the state oil company Pemex, which at current rates could paralyze the country’s top refineries.

 

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Organized crime gangs are taking advantage of Mexico’s deteriorating oil infrastructure that is suffering from years of underinvestment and declining production by tapping into pipelines to steal tremendous amounts of crude products. If that fails, cartel members resort to bribing and or threatening Pemex employees for critical information about operations. Some Pemex employees have fled the country following unbearable death threats, while others have been found mutilated for not complying.

While President Enrique Peña Nieto has been unable to govern the country amid the out of control cartel violence, fuel theft is turning into a national security threat draining revenue from the federal government. Reuters reports that fuel thefts have cut more than $1 billion in annual revenue from state coffers, along with creating an unfriendly environment that is deterring foreign investment to revamp the aging refineries. Its been reported that the federal government generates about one-fifth of its income from Pemex. Serious issues are emerging as the declining oil revenue could lead to funding concerns for the government, therefore jeopardizing the fight against cartels.

The Federal Police, under the authority of the Secretariat of the Interior, recently launched offensives across the country that toppled drug kingpins turning 16% of the states into a Level-4 classification via the U.S. State Department, meaning that the areas are on par with a war-zone in the Middle East. Cartels have been fractured but are still cash-strapped as their decision to enter the petroleum business is cheap and it implies less risk than drug trafficking.

“The business is more profitable than drug trafficking because it implies less risk,” said Georgina Trujillo, a ruling party congresswoman who heads the lower house energy commission.

“You don’t have to risk crossing the border to look for a market,” she added. “We all consume gasoline. We don’t all consume drugs.”

Pemex did not respond to detailed questions from Reuters about the cartels and fuel theft. Among other questions, Reuters asked about the cartels’ impact on the refineries, Pemex’s security measures and how the company responds to extortion and violence against its employees. One senior Pemex refining executive, who asked not to be identified, said, “We worry about the influence of organized crime,” but would not discuss the issue further.

Fuel theft is not new or unique to Mexico. But cartels are taking it to calamitous new dimensions and, in the process, bolstering their bottom line.

“Fuel theft just makes these groups more powerful,” according to one senior official from the U.S. Drug Enforcement Administration, who asked not to be identified.

By targeting refineries, already suffering from a lack of investment, Mexico’s most notorious criminals gain access to nerve centers for much of the country’s fuel supply. That threatens an oil industry that accounts for about 8 percent of Mexico’s economy and creates yet more uncertainty for a country already reeling from U.S. threats to dismantle the North American Free Trade Agreement.

“It hurts the national coffers, weakens national security and hinders the reform and development of Mexico’s energy market,” said Gustavo Mohar, a former Mexican energy and intelligence official.

Between 2011 and 2016, the number of unauthorized taps discovered on Mexico’s fuel lines nearly quintupled, according to a recent report by the federal auditor. Repair costs surged almost tenfold, to 1.77 billion pesos ($95 million).

A May 2017 study, commissioned by the national energy regulator and obtained by Reuters via a freedom of information request, found that thieves, between 2009 and 2016, had tapped pipelines roughly every 1.4 kms (0.86 mi) along Pemex’s approximately 14,000 km pipeline network.

After decades of poor upkeep, the refineries are bleeding money as well as fuel. In addition to unscheduled outages, which cause big operational losses, maintenance problems have led to fatal accidents, including fires and explosions.

Together, the refineries have accumulated annual operating losses of about $5 billion in recent years. Production of refined products, meanwhile, fell to just over 700,000 barrels per day in 2017. That’s about half the production levels at the refineries’ peak in 1994.

As Reuters details, Mexico’s cartels have dived into fuel theft, lured by high prices, rampant graft and the lure of easy money. In their wake, the gangs have left a trail of dead bodies in towns like Salamanca in the state of Guanajuato. Additionally, Mexico’s aging refineries are suffering from years of underinvestment and declining output, and have become targets for gangs who terrorize Pemex workers with offers of “plata or plomo” – silver or lead. 

 

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On August 11, 2014, President Peña Nieto approved the energy reform initiative. It ended political gridlock and decades of a monopoly controlled oil sector. According to Reuters, it phased out subsidies that kept retail fuel cheap, sending prices at the pump soaring by 25 percent since 2014, despite a haircut in crude prices on the CME exchange. With elevated oil prices, cartels, who are well versed in extorting other sectors including agriculture, transport and mining, were then able to use the same practices and target refineries.

 

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Using the habitual narco offer of “plata or plomo,” or “silver or lead,” gangs extort refinery workers into providing crucial information. Their tactics, coupled with fighting between groups jockeying for access to the racket, have led to a surge of violence in cities like Salamanca, home to a third of the fuel taps discovered in Mexico in 2016.

Mutilated corpses of refinery workers, police and suspected fuel thieves increasingly appear around the city, terrifying its 260,000 residents. Cartels routinely festoon Salamanca with “narcomantas,” banners that mark territory or spell out grisly threats to rivals.

In Guanajuato, the surrounding state, investigators opened 1096 murder cases last year, 14 percent more than in 2016. That is a 71 percent increase over 2013, Peña Nieto’s first full year in office.

Interviews with Pemex and Mexican security officials, authorities in Guanajuato and locals affected by fuel theft describe an increasingly desperate situation for the industry and the regional economy. Interviews with Arredondo, the former pump technician, and Juan, a cartel member and admitted killer turned federal informant, show the heavy toll inflicted on people on both sides of the theft.

Reuters describes the current situation at the Salamanca refinery, the second-oldest Mexican refinery in operation.

It was part of a nationalistic push by Mexico, 12 years after the government expropriated foreign oil assets and created Pemex, to assert economic and industrial might. Located in Guanajuato because of the state’s central geography, with easy access to Mexico City and far-flung corners alike, the refinery became a symbol of progress. It put Salamanca, previously a farming town in a sea of sorghum fields, on the map.

Quickly, though, Salamanca and the refinery would also come to be associated with some of the deadly risks of the oil business. José Alfredo Jiménez, a legendary singer of Mexico’s traditional ranchera music, penned a still-famous song after a brother died after getting sick at the refinery in 1953.

“Guanajuato Road,” as the song is titled, leads to places where “life has no value,” he sang. “Don’t pass through Salamanca,” he continued, “the memory pains me there.”

The refinery grew to dominate the local economy, its fortunes rising and falling along with those of the Mexican oil industry. Although thieves targeted the pipelines leading to and from the facility, they rarely caused significant loss.

Efforts to lure in private energy investment into Mexico has been lackluster, due to the oil thefts and out of control violence.

Last month, Pemex reached a preliminary deal with Japan’s Mitsui & Co Ltd to complete a $2.6 billion coking plant at its refinery in Tula de Allende, north of Mexico City, according to two people familiar with the decision.

But Pemex officials last year sought separate refinery funding from companies including Valero Energy Corp and Tesoro Corp, according to two people familiar with those efforts. Neither company was interested.

Mitsui, Valero and Tesoro, which last year changed its name to Andeavor, declined to comment.

“There is no incentive to invest in the Mexican refining system,” said John Auers, executive vice-president of Turner, Mason & Company, a global refining consultancy, citing “organized crime and corruption.”

The report commissioned by Mexico’s energy regulator assigns blame inside and outside the sector. “The problem is corruption, not just in security and judicial services, but also inside Pemex,” it read.

In a public statement, Pemex promised to crack down on the oil thefts, as the company continues to hemorrhage crude products from its facilities to drug cartels. In an attempt to curb the soaring threat, the company said in October that it had fired employees at Salamanca’s storage and distribution center, who provided insider information about Pemex’s operations to cartels.

“What we’re starting to see is that we’re approaching the end,” Pemex Chief Executive José Antonio González Anaya told lawmakers recently, referring to what he described as gains against fuel thieves. In late November, Peña Nieto named González Anaya finance minister and announced a new Pemex chief.

While the government has had mild success in fracturing the drug cartels into smaller units, organized crime has shifted from drugs into the oil industry. Cartels are now stealing billions of dollars in oil from Pemex, which decreases revenue for the federal government. If revenue declines, the government will have trouble funding programs designated to fight cartels. The situation has become critical in Mexico, as the country’s largest refinery is a “shithole.”