Scaring off sorely needed investments in fuel distribution systems.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
A year and a half after Mexico opened its fuel market to private competition, almost all gasoline sold at BP and Royal Dutch Shell stations continues to come from state-owned Petróleos Mexicanos, A.K.A. Pemex.
Mexico lacks a sufficiently advanced and coordinated network of oil pipelines and storage terminals that would allow the flow of imported products from the port to the gas stations. As the company’s chief executive, Jose Antonio González Anaya, said in a recent visit to Washington, Pemex has a “grotesque lack of storage and transportation capacity.”
Mexico allowed private companies to import fuel for the first time in April 2016 under broader reforms aimed at encouraging competition and investment. So far, 32 private companies have sent diesel to Mexico and 17 have brought in gasoline, according to Mexico’s Energy Secretariat. But the volumes are a tiny fraction of the nearly 800,000 barrels per day that Pemex imports.
“Fuel can be imported, but there is no place to store it and transportation is expensive,” said Roberto Díez de León, president of Onexpo, Mexico’s gasoline retailers association.
Companies such as Monterra Energy — backed by KKR & Co — Mexican Invex, Glencore and a joint venture between TransCanada and Mexican firms Sierra Oil & Gas and Grupo TMM have announced pipeline projects at the Tuxpan fuel import center on the Gulf Coast. Other firms, such as Howard Energy Partners and BioUrja Trading LLC, have shown an interest in importing oil via newly built pipelines from the U.S.
But there’s one problem: security.
Mexico is one of the worst places in the world for fuel theft. It’s already costing Pemex around $4 million a day. That’s about $1.4 billion a year. Those doing the plundering include armies of amateur opportunists who live close to the major pipelines that crisscross the country as well as some of Mexico’s most ruthless and organized drug gangs.
Since 2008, Pemex has spent 28.3 billion pesos ($1.5 billion) on 15 programs aimed at tackling fuel theft, but to little avail. Despite the firm’s increasing use of costly pipeline tracking systems, radar, drones, planes, boats and other tactical vehicles, the number of illegal pipeline taps has risen by 2,000% in the last decade. Things have gotten so bad that in one recent incident in Queretero, one of Mexico’s biggest and fastest growing industrial centers, thieves directly tapped pipelines on a Pemex gas station.
Much of the plunder is taking place in the central state of Puebla, which, through a pure accident of geography, is located slap-bang between the vast oil fields of Veracruz and Mexico’s gas-guzzling capital Mexico City. Just one of the state’s gas pipelines, the “Minatitlán-México” line, accounts for 34% of all the oil stolen in Mexico. The Sierra Poblana is one of Mexico’s poorest regions, accounting for many of the migrants who cross the border into the U.S. Now, local communities are finding job opportunities in the black market for oil.
Until recently Puebla was one of Mexico’s safest regions, but since Mexico’s government decided to mobilize the army to crack down on fuel theft, clashes between soldiers and fuel thieves have raged in the region. At the beginning of May, one such battle claimed the lives of four soldiers and six suspected oil thieves, who used local civilians as human shields.
Fuel theft has intensified this year since the government decided on January 1 to withdraw public subsidies that had helped keep gasoline prices artificially low in Mexico, just as inflationary pressures were building. The result was an instantaneous 20% surge in prices, which triggered nationwide riots and blockades of fuel depots. It also gave an almighty boost to Mexico’s already buoyant black market for oil.
As the market has expanded, so too has the violence. And this has begun to worry many of the international investors that have been piling into Mexico’s oil market since President Enrique Peña Nieto’s sweeping energy reforms, in 2014. “It is part of a worrying trend that investors will see and take into account in the price of the offers they make and the amount they decide to invest in Mexico,” said John Padilla, CEO of energy consulting firm IPD Latin America.
So far, Pemex has covered the full cost resulting from fuel theft, but it is not clear whether the state oil company will try to transfer some of the costs to private importers in the future.
On paper, 2017 has been a much better year for Pemex than 2016 or 2015, when it racked up its biggest losses ever (over $30 billion). Instead of losing money hand over fist, it’s actually making some. In July it reported 32.8 billion pesos ($1.8 billion) of second-quarter profits, spurred by higher sales, lower financial costs and a stronger peso.
But Pemex has also made severe cutbacks in investments in physical infrastructure. In the first half of 2017 the firm spent 105 billion pesos ($5.57 billion) on physical infrastructure, compared to 154 billion pesos ($8.17 billion) in the first half of 2016. In the first half of 2015 the total outlay was 200 billion pesos ($10.61 billion). In other words, total investment in physical infrastructure has shrunk by almost half in just two years.
And that’s where the irony lies. For Pemex to turn a profit, it must invest less and less in long-term maintenance and operations. And that can only have one long-term result: an even more “grotesque” lack of storage and transportation capacity in the country.
In other words, the dependence of private-sector operators on Pemex imports is likely to continue for the foreseeable future — unless, of course, those operators are willing to take up some of the slack. For that to happen, they will first seek guarantees from the government that their primary product won’t be stolen on its way to market. Given that gas theft represents one of the biggest source of funds for organized crime in Mexico, a country that has spectacularly failed to stem the rise of organized crime in the last 30 years, such guarantees may be hard to come by. By Don Quijones.
Rebuilding with no insurance and little government aid. Read… The Steep Price of Disaster in Mexico
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This is an astonishing story. Mr. Quijones, do you know how exactly thieves tap into oil infrastructure? It seems absurdly difficult. So it’s worth the effort to have hire criminals with oil pipline infrastructure experience siphoning off oil, presumably stored in an oil tanker standing by? Then the thieves sell to whom? Some corrupt middleman? And then ultimately who buys the stolen oil? The retail customer or do the oil companies buy it back. I’m fascinated about how this works.
Apparently the Mexican Oil Theft Industry enjoys significant vertical and horizontal integration, adequate infrastructure investment, and competent management. Which suggests that maybe Mexico should simply fire Pemex and hire the other oil thieves.
They operate by following the pipelines (which are conveniently marked by yellow “do not dig” signs when buried) and when a convenient location is found, they dig and uncover a section of the pipeline, and dill into it and install a tap. Many thieves die in the process due to fires and gas fumes intoxication. When they have successfully installed a tap, they camouflage the operation and then start filling containers which can be distributed by a network of roadside peddlers. They sell the gas and diesel at a fraction (usually 50-70% of the price at a gas station) and do not even bother to hide its origin.
Thanks for this. I need to get more detail. This is fascinating. (I’m not thinking of getting into the business of gas theft mind you.)
Like money in financial distribution in America…
Here’s how you solve that problem: pump raw petroleum through the pipeline and refine it into gas and diesel close to the cities. It costs significantly more to pump petroleum but there is no value in stealing it. Fracked oil in North Dakota is sent by train to Illinois for refining.
In the US, pipelines are often buried when you get close to population centers just to ensure the local population doesn’t know where they are. Americans aren’t any better than Mexicans, just less skilled and given less opportunity for these kinds of things.
It seems ending this theft will require mercenary forces,ala the Pinkerton men of the 19th century. I would imagine Blackstone is capable of hiring and training foreign soldiers of fortune along with domestic ones, most likely recruited from the drug cartels to secure the transportation and delivery system. It would be better for the USA if a company from Europe or Asia were hired.
This would raise plenty of objections, but Mexico is not known as a bastion of civil liberty.
I don’t like the thought of this, but what other options do Pemex and the government of Mexico have?
RE: Mexico lacks a sufficiently advanced and coordinated network of oil pipelines and storage terminals that would allow the flow of imported products from the port to the gas stations.
How is importing fuel of ANY net benefit to the aggregate Mexican socioeconomy?
Importing fuel which can be produced domestically, at competitive prices [costs], simply eliminates Mexican jobs and dissipates Mexican foreign exchange. It is the lack of adequate jobs, with reasonable compensation/benefits. that drives the Latin American un[der]employed into the US, at huge expense to the local governments/taxpayers, for example multilingual schools and social services.
didn’t realize how bad the problem was until your article spurred me to do a little research.
Here’s something I found on YouTube: https://www.youtube.com/watch?v=QP-gHVZJ1-c
It’s three years old but still revealing (at least to me). No easy solution as long as people are poor.
Why would anyone invest in fossil fuels, considering alternative fuels are claimed to be cheaper?
Once Mexicans learn this from Americans, PEMEX will go broke.
All human misery is a business model.