Blog dedicated to reporting on Mexican drug cartels
on the border line between the US and Mexico

Friday, December 24, 2010

Oil: The Mexican cartels’ other deadly business

MEXICO CITY— Globe and Mail

Mexico’s warring drug cartels have long freelanced in criminal activities that range from smuggling migrants to assassinating public figures and extorting Christmas bonuses from school teachers. Their latest pursuit is even more audacious: taking on Petróleos Mexicanos, the state-owned oil company better known as Pemex.

Although it has a reputation for operational inefficiencies and must deal with a powerful workers union, revenue from Pemex accounts for some 40 per cent of Mexico’s federal budget. At the same time it represents a fat target for organized crime, whose activities include stealing oil from clandestine pipeline connections, selling refined petroleum products and kidnapping oil workers – some for ransom; others have simply disappeared.

The situation raises questions about the government’s ability to defend the company, which was created after the 1938 expropriation of the petroleum industry and is now an important symbol of sovereignty and self-respect for Mexicans. The prospect of Pemex and economic hubs such as the northern city of Monterrey coming under attack by the cartels represents an even greater challenge for the government of President Felipe Calderon than the turf wars being waged over drug territory, said Malcolm Beith, author of the The Last Narco. about the hunt for drug lord Joaquin (El Chapo) Guzman.

“Once Pemex … comes under regular attack from the cartels, rather than just random, disorganized thugs, then you have far more serious national security problems – much worse in the government's eyes than a bunch of homicides in the slums of Ciudad Juarez,” Mr. Beith said. “The government's management of Pemex has long been questionable, but the fact that it can't secure its pipelines from organized crime … shows just how insecure parts of the country are and could become.”

The issue of Pemex’s vulnerability emerged in dramatic fashion over the weekend with the explosion of a pipeline in San Martin Texmelucan, 95 kilometres southeast of Mexico City. The blast killed 29 people, including at least a dozen children, and left at least 50 people injured. It was the consequence of a decades-old illegal trade in which petroleum products are siphoned from pipelines, fenced on the black market and retailed through a system of service stations notorious for selling adulterated gasoline to unsuspecting motorists.

Other forms of violence have flared in prime Pemex production zones such as the Burgos Basin, site of Mexico’s biggest natural gas field in the state of Tamaulipas, bordering Texas. Last spring gunmen seized the Gigante Uno gas plant and kidnapped five Pemex workers. The unsafe conditions are preventing Pemex from extracting 150 million cubic metres of natural gas in the Burgos Basin, according to a recent press release from the Mexican Senate.

Kidnappings have been reported in other parts of Mexico as well. The Grupo Reforma newspapers highlighted the oil town of Reforma in Chiapas state, where at least 30 Pemex employees – ranging from executives to labourers – have been kidnapped over the past year. The Senate press release says at least three gangs exclusively target Pemex employees. They include Los Zetas, the ruthless band of former soldiers notorious for the violence with which they pursue the drug trade. The Zetas’ operations against Pemex include the theft of refined petroleum products, which are often stolen from illegal pipeline connections or driven straight out of refineries in tanker trucks.

Mr. Beith surmises that the cartels have kidnapped employees in order to use their knowledge to steal the oil discreetly and in large quantities.

Pemex officials on Monday blamed thieves for sparking the massive explosion in San Martin Texmelucan while attempting to steal petroleum through an illegal pipeline connection. More than 50 illegal connections had previously been on the same pipeline, the company said.

Pemex CEO Juan Jose Suarez Coppel told W Radio in Mexico City the company has discovered a total of more than 580 clandestine pipeline connections this year – more than triple the 136 detected in 2005. Pemex lost nearly $2-billion through pipeline theft in 2008, according to documents published in the newspaper El Universal.

Meanwhile, a regulatory vacuum is allowing organized crime to corner the market for stolen petroleum products as it diversifies away from its original business of moving drugs through the country.

“Organized crime tries to make money on the downstream distribution of gasoline,” said David Shields, an independent energy analyst in Mexico City. “There’s no effective regulation of the gasoline business. … You don’t have a national norm or anyone controlling it.”

And there’s no effective way for Pemex to fully protect its installations either, says George Baker, publisher of Mexico Energy Intelligence, an industry newsletter, due to the size of the country and the fact that the drug wars have resulted in the army and police focusing their efforts on urban areas.

Mr. Shields doubts that the targeting of Pemex by organized crime will end any time soon.

“Pemex is a big target for organized crime,” he said. “The Mexican government hasn’t been too successful in fighting organized crime. Pemex and other institutions are not left out of this.”

Special to The Globe and Mail

Pemex points

How important is the oil industry to the Mexican government?

The Mexican government depends on oil revenue for approximately 40 per cent of its budget. Politicians have preferred to depend heavily on Pemex revenue instead of raising other taxes, leaving the company indebted and lacking adequate funds in past years for exploration and maintenance. Non-oil tax revenue amounts to approximately 10 per cent of GDP, one of the lowest rates in Latin America.

How common are thefts from pipelines?

Pemex CEO Juan Jose Suarez Coppel put the number of illegal pipeline connections at more than 580 so far this year. This compares with 136 illegal connections detected in 2005 and 396 in 2008.

How much money does Pemex lose through the theft of refined petroleum products?

Figures from the federal government obtained by the newspaper El Universal in 2008 put the figure at 20 billion pesos, or about $2-billion.

Why is organized crime targeting Pemex for theft?

Problems with theft generally begin after the refining process, says industry analyst David Shields, as the rules regulating transportation and retailing of gasoline are less strict than those for the exploration, exploitation and refining of petroleum. “The part between the refinery and the gasoline station has very little control,” Mr. Shields said. “That's what makes the business attractive to organized crime.”

(Imelda Medina/Reuters)Hide caption
A man walks past a burnt car at the site of an explosion of a Pemex pipeline in the village of San Martin Texmelucan near Puebla December 19, 2010.

Two men watch the fire after the explosion of a Petroleos Mexicanos (PEMEX) pipeline in the village of San Martin Texmelucan in Puebla State, Mexico, on Dec. 19, 2010.

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