Already Toast? Mexico’s Energy Reform Buzz vs. Oil Theft, Corruption, And Organized Crime

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Executive Report with Southern Pulse, Oil & Energy Insider, a premium publication that gives subscribers an information advantage when investing, trading, or doing business in the energy sectors. 

Oil theft from Nigerian pipelines tends to steal (literally) the media spotlight due to the sheer volume and the external markets that encourage it. But the same issue in Mexico receives little attention, and while it may not compare to Nigeria, it is an issue that continues to plague Pemex, not to mention endanger critical infrastructure, livelihoods, and lives. This week we are examining the oil and gas theft threat level in Mexico aided by the ongoing intelligence operations conducted by our partners at Southern Pulse.

On 16 December 2013 in the municipality of Tezoyuca, Mexico State, approximately 42 kilometers northeast of Mexico City, an explosion occurred on a Petróleos Mexicanos (Pemex) pipeline, allegedly caused by a leak from an illegal tap in order to steal liquefied petroleum gas. The explosion injured seven and forced the evacuation of approximately 800 families. Tezoyuca Mayor Arturo Ahumada Cruz affirmed that the pipeline that runs on the border of his municipality is perpetually tapped to steal gas.

Illegal diversion of gas and oil has occurred for years, but it is an increasingly widespread problem. Leaks and explosions in recent years have caused dozens of deaths and forced thousands of people to evacuate their homes. Pemex reports from October 2013 indicate that from January to 20 October 2013, the company found over 2,069 illicit taps, a significant increase over the 1,635 found in 2012. Earlier in October, the Energy Ministry confirmed that Pemex reported losses of approximately US$4.7 billion over the last five years due to fuel theft. In late November 2013, Pemex CEO Emilio Austin Lozoya put financial losses due to theft so far in 2013 at over US$587 million.

Many incidents of theft are by criminal organizations that then sell the fuel on the black market to finance their operations. In fact, there is a strong correlation between states where the most theft occurs and states where organized crime is strongest. Sinaloa, Tamaulipas, Veracruz, Nuevo León, and Puebla are the states in which most theft is reported, with Sinaloa and Veracruz reporting the highest instances. These states also contain the headquarters of organizations such as the Gulf and Sinaloa Cartels and Los Zetas. Local authorities affirm that in order to steal so much fuel, cartels depend on inside information from corrupt Pemex employees. Workers that assist cartels are just a small part of the massive corruption network involving staff of diverse departments and rank and implicated in acts including preferential contracts, overpayment of services, and payment for services never provided, according to energy sector officials.

President of the Mexican Petroleum Worker’s Union (STPRM) Carlos Romero Deschamps is arguably the single most representative symbol of corruption in the state oil company. He was involved in the ‘Pemexgate’ scandal during the presidential campaign of 2000, in which he was accused of electoral fraud after union funds were found to be diverted to support the Institutional Revolutionary Party (PRI) candidate, Francisco Labastida. Additionally, Deschamps’ daughter illustrates the wealth of the family, posting on social media pictures of her travels around the world, time on luxury yachts, and her designer bags worth thousands of dollars. Relatives of Deschamps, including cousins and nephews, are said to be on the Pemex payroll without working for the company in any capacity. Deschamps’ financial situation does not seem to be affected by the negative balance Pemex consistently registers in recent years. Many of its financial woes are due to incredibly high labor liabilities, particularly in the form of pensions, but also through high salaries to union leaders.

Will President Enrique Peña’s energy reform combat corruption?

The financial losses caused by corruption inside Pemex pose major fiscal challenges for the state-run oil company and underscore the need for energy reform. Both corruption and finances are being targeted in President Enrique Peña Nieto’s controversial energy reform, though corruption to a lesser degree. The reform aims to weaken the corrupt oil workers syndicate by removing the five oil workers union representatives from the Pemex Board of Directors. This is a respectable step in beginning to reduce the influence of the union and its president in Pemex. However, the reform will not be as effective as it could have been in minimizing corruption, as it has a much stronger focus on ramping up production and increasing competitiveness in Mexico’s energy sector, rather than eliminating wasted funds and fraud.

Considering that both Pemex and President Enrique Peña Nieto’s Institutional Revolutionary Party (PRI) have a strong notoriety for pervasive corruption, the President needs to show a stronger effort to curtail it, in order to decisively distance himself from the negative reputation of both. Executive Report with Southern Pulse, via Oil & Energy Insider.

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