Refined-fuel theft and oil duct illegal tapping in Mexico
Global Operations Officer at Drum Cussac || Country Risk Analysis
Once a minor phenomenon with marginal effects in the country, refined-fuel theft in Mexico has turned, over the last years, into one of the most concerning issues for the national government. As of today, billions of dollars are drained from the more than 35.000 km long Pemex national pipeline network. Mexican authorities have increasingly tried to crack down on these illicit activities in the face of a new era of liberalization for the country’s energy industry. However, the positive effects of the new measures are still to be seen as illegal tapping remains to be one of the most profitable businesses for highly organized criminal groups operating nationwide. The mission of this report is to explain thoroughly the magnitude of the problem by explaining the geographical reach of the illegal networks, the role of the different actors/players involved and the implications of the problem. At the end, this paper will conclude with an assessment of the situation.
The great increase seen in oil theft and fuel smuggling activities over the last years has been dramatic. In the time period from 2000 to 2013, this type of activities have jumped by a 1548%. In 2010, Pemex, the Mexican public oil company that makes a third of the country´s federal budget, reported 691 incidents. By 2013, 2800 illegal tappings were reported, equaling $545 million in losses. In 2014, economic losses ascended this time to over $1 billion.
Data from 2015 accounts for a 58% increase of these incidents during the 1st quarter of the year, going over 3000 illegal tappings by August 2015. Pemex officials have recently stated that 8.5 million fuel barrels are stolen in a year, when 2014 estimations were about 7.5 million barrels. These numbers show how this business has remained profitable even in times of global low oil prices. Criminal organizations operate now in virtually every Mexican state and the phenomenon has truly reached epidemic proportions.
However a problem for every state with a substantial fuel traveling underground, some Mexican states are more likely than others to be the object of refined-fuel theft.
Around a 50% of all fuel theft occurs in 5 states, namely: Tamaulipas, Guanajuato, Puebla, Jalisco and Tabasco.
Tamaulipas in particular has arguably become an oil theft hot spot. The Zetas and the Gulf Cartel run around a 15% of the gasoline business in the northeastern state. Tamaulipas had the highest rate of fuel theft for 3 years in a row. The government implemented tougher security plans in this state in order to curb criminal activities in 2014, results have been limited.
Despite the frequent criminal activities related to fuel theft in Tamaulipas, other Mexican states have seen illicit activities of this kind consistently over the years. For example, in 2014, in Guanajuato, several Pemex employees were arrested for stealing fuel. Guanajuato is one of the Mexican states where fuel theft has increased the most in the last 3 years.
Nuevo Leon suffered in 2015 gasoline shortages due to intensive oil tapping and the San Juan river was contaminated in a gasoline spill that threatened Monterrey’s main water supply source. Hundreds of people worked in the clean up of the river for months.
The state of Puebla still remembers a huge explosion in one of its pipelines in 2010. The explosion killed 29 people. The Zetas cartel was blamed for the incident. In 2015, also in Puebla, several police officers were arrested for hiding and protecting a large scale oil tapping operation.
Even relatively untargeted states such as Oaxaca have suffered environmental crises related to oil illegal tapping. As in July 2015, when a gasoline spill contaminated 5 km long stretch of a local water stream.
The refined-fuel theft networks can reach as far as the United States. In 2011 a former head of a Texan oil company was convicted after selling stolen condensate. Enter the United States have become common practice for Mexican cartels who often process crude oil in the neighboring country in order to sell it back in Mexico.
The national energy company, that has been in hands of the state since 1938, is facing a historic process of liberalization. This process will open parts of the company to private national and foreign investment. This new stage for the company comes in difficult times for the industry, as global oil prices have plunged as low as $23 a barrel. In light of these global events, several infrastructure projects have been cut. These budget reductions will probably delay $2.9 billion plans to modernize and extend the automated duct pressure surveillance system. The delay to secure the pipeline network will keep it vulnerable to criminal actions.
Internal corruption is also a problem in the company’s fight against fuel theft networks. It has been made clear that hundreds of workers have been either extorted or coopted into these criminal groups. The number of Pemex employees linked to the oil theft networks is unclear as the Mexican company keep these details undisclosed to the public. Nonetheless, it is well know that specific technical knowledge is crucial in order to carry out illegal tapping operations. Corruption is likely to be present throughout the storage and distribution chain within Pemex.
Another crucial factor in this picture is the retail end of the distribution chain. Many of the gas stations work as cartel franchises, some of them without even knowing. As soon as the sector decentralize, most of these people will be dealing with an uncertain scenario given the strategic importance of this particular business for the criminal groups dealing with illegal fuel. The potential presence of international companies on the ground adds more uncertainty to the overall situation.
In an attempt to creatively adapt to current circumstances, Pemex has recently ceased transporting fully refined gasoline and diesel fuel through its pipeline network. The company will finish the mixing process in their refining centres across the country before it goes straight to the consumer. In this way, the company is trying to reduce illegal oil tapping and deter customers from buying illegal fuel, raising awareness of the prejudicial consequences. The results of these measures are still to be seen.
Peña Nieto government faces a great challenge to curb financial losses due to refined-fuel theft across the country. So far, the parliament has approved one of the most ambitious reforms in the Mexican energy sector in decades. Opening the energy market to private investment will help bringing new air to a highly bureaucratized sector.
At the same time, criminal sanctions against these type of crimes have increased in 2014 and 2015. Now, people involved in these activities will face from 15 to 25 years in prison. The penalties have been toughened to further deter potential criminals from tapping oleoducts or stealing gasoline. Also, people manipulating gasoline measure systems and pumps will face from 3 to 6 years of prison.
Even though these measures may seem promising, corruption is also a significant issue within governmental and judicial ranks. Particularly relevant was the arrest of a local oil tap kingpin in Tabasco in July 2014 who was released on bail by a local judge only one month after his arrest. Nonetheless, the Mexican government has a strong commitment in fighting corruption.
It is obvious that the country needs a healthy energy sector if it wants to be competitive in the global arena. On this note, it is unacceptable for the Peña Nieto administration to keep losing so many resources, while at the same time the oil theft incidents keep increasing steadily year by year.
The remarkable increase of refined-fuel theft in Mexico over the last years also obeys to the general situation of the biggest criminal organizations in Mexico. Since the most powerful cartels have been warring against each other for the control of disputed areas, their weakening has become a reality. The lack of national leadership has eroded criminal capabilities to perform traditionally more lucrative businesses as usual, such as international drug trafficking.
In light of these barriers to operate transnationally, criminal cartels have turned into local activities as kidnapping, extortion, or, in particular, oil theft and smuggling. The rewards for the criminal groups are significant while the possibilities of conviction are still low. State security forces still have more pressing issues in Mexico than oil illegal tapping. Therefore cartels are able to make massive profits by selling gasoline far lower than official market prices. Reportedly, Zetas and the Gulf Cartel make up to $270 million a year out of illegal oil business activities, something close to the amount made from drug sales.
This phenomenon illustrates a business diversification in cartel criminal operations. As these organizations branch out into fuel smuggling countrywide, companies looking into coming to Mexico to work in the energy sector will need to take more into account security costs.
On the one hand, low prices from the illegal market have an immediate positive impact for a population in a country with 53 million people living in poverty. At the same time, these illicit business activities give employment to thousands of people working at different levels of the business chain. This adds up to governmental difficulties to tackle the problem which has deep roots within Mexican society.
On the other hand, negative effects probably outweigh low prices and stable employment. Several people have died in fires related to the illegal exploitation of the Mexican pipeline network. Environmental risks have sometimes supposed a relevant threat for public safety interests. Vital water supplies have been contaminated by spills caused by these activities.
At the same time, while participating in the shadow-criminal economy, it becomes more and more difficult for the state to have revenues. It is important to know that oil revenues make a substantial part of the whole state budget. Therefore, the state has less resources to combat poverty or to provide social services
In the case that refined-fuel theft goes on at this rate, consequences for Mexico will be, at least, unpleasant. The great increase in this type of criminal operations poses one of the biggest challenges for the country, as it is showcasing its oil assets to potential buyers worldwide amid the process of liberalisation.
Firstly, continuity of oil illegal tapping will have adverse effects for Pemex. Private investors will be reluctant to buy segments of the oil company business, since it will be unable to offer properly managed assets to potential international or national investors.
Secondly, state revenue will keep shrinking by recurrent loss of fuel resources, one of the country’s economic pillars. Global economic conditions will not help to the national economic scenario as oil prices are not expected to rise significantly in the next years ahead.
There is an ongoing trend showing a certain shift of these activities from northeastern states to states in the centre of the country. It has been reported that the biggest rises in oil illegal tapping activities are taking place in the region of Tierra Caliente, as emerging criminal gangs bandwagon on the northern leading cartels’ gains. This trend could potentially escalate into a broader turf war between criminal groups for the control of the refined-fuel business at the national level.
In a more optimistic vein, progressive participation of foreign and national companies, taking control of liberalized segments, in the Mexican fuel distribution chain, might lead to further competition. This will hopefully lead prices to a significant reduction. Relatively low gasoline prices will make illegal fuel prices less attractive for the final consumer.
All this being said, and taking all the pieces of this puzzle together, refined-fuel theft is highly likely to continue posing a problem for the foreseeable future at a local, national and regional level. Recent dynamics show how Mexican cartels have been constantly reinventing their operations, even crossing into the US in order to fully refine the fuel. The rewards from operating these illicit networks exceed by far possible sanctions.
The gloomy economic short term scenario makes difficult for Pemex and the Mexican government to implement highly needed projects to protect the oil infrastructure. Private investment could provide an alternative to this shortage of funds, but unfortunately, these are not good times for investors to disburse significant amounts of money. Under these circumstances, Pemex will either be unable to sell their assets at reasonable market prices or retain its assets in absence of interesting buyers.
If criminal groups keep running sophisticated distribution networks for the fuel they steal, the financial future of the Mexican state will remain at stake. Under these conditions, government power is likely to decrease progressively as less taxes are collected. This will increase poverty and popular discontent with the current cabinet bringing another political party into office the next general elections.
Hopefully for Mexico, criminal groups will keep fighting each other, leaving more room for police and military intervention. This scenario will enable the government to make the Mexican oil sector more attractive for investors, even for US smaller shale gas companies. Nevertheless, Mexican security forces’ resources are fighting an extenuating battle in many fronts, making of other issues such as kidnapping, murder or drug trafficking a higher priority.