Systematic “Petro-Plunder,” as we’ve come to call it, eats into Mexico’s energy sector.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

In the early hours of Wednesday, September 12, a massive leak of highly flammable liquefied petroleum gas (LPG) escaped into the quiet air of Villa Frontera, a suburb on the northern edge of Mexico’s fourth largest city, Puebla. Authorities evacuated thousands of local residents. The apparent cause of the leak was a botched pipeline tap by one of Mexico’s notorious gangs of oil thieves, or huachicoleros (pronounced “watchy-coh-leh-rohs”), who are terrorizing communities, draining national coffers, and threatening the viability of Mexico’s already debilitated energy sector.

The gas leak in Villa Frontera is the latest sign that the huachicoleros are diversifying their activities, having discovered a lucrative new niche to exploit: the theft of LPG. The number of gas line taps registered by authorities nationwide increased from five in 2012 to 61 in 2017. This year is set to be another bumper year, with 36 new taps discovered in the first five months.

The theft of LPG — which includes propane and butane — and its illegal distribution to Mexican households is generating estimated losses of 1.1 billion pesos ($58 million) per month, as well as prompting gas companies to stop distributing along certain routes, reports the business magazine, Manufactura. Most of the costs are being borne by Mexico’s state-owned oil giant, Pemex, which is already buckling under the combined weight of shrinking output, rising losses, and growing debt.

The theft of gas tankers is also rising. “In the past the huachicoleros would just tap pipelines; now they’re stealing tanker trucks and making them their own,” said César Garza, the executive president of the Mexican Association of LPG Distributors (Amexgas).

In the central region of the country, around 23,000 tons per month are stolen, says Luis Landeros, president of the Association of Liquefied Petroleum Gas Distributors (ADG). “At the national level the total reaches around 58,000 tons. In all these cases, what is stolen ends up in the exact same markets we’re competing in.”

This is all happening as Mexico’s black market for black gold keeps growing. According to one estimate, thieves are making off with about 23,500 barrels of fuel every day, much of which is sold to taxi drivers, bus companies, and long-haul truckers at a sharp discount to the price at local gas stations.

In 2017, 10,363 illegal pipeline taps were found, compared with less than 700 in 2010. In other words, an average of 28 new pipeline taps were found each and every day last year. The growth shows no signs of stopping. In the first two months of 2018, 2,274 illegal taps were found — 38% more than during the same period of 2017 and 352% more than in the first two months of 2014.

In total fuel theft is estimated to be losing Pemex more than $1.6 billion a year, the company’s soon-to-be-replaced director-general, Carlos Treviño, said in April. The petro-plunder, as we’ve come to call it, is also discouraging private investment in the sector, especially in Mexico’s refinery sector.

Until not so long ago, Pemex was a huge cash cow, providing over a third of government revenues. Today, it the world’s most indebted oil company. Riddled with corruption and chronic mismanagement, it is a constant net drain on Treasury funds. The huachicoleros’ ruthless plunder of the company’s lifeblood (oil, and now LP gas), helped along by local politicians and Pemex contractors, is further exacerbating an already fragile situation.

The more the black market for oil and gas grows, the harder it becomes for Pemex and the government to counter it, which in turn fuels higher prices at the pump, providing a further fillip to black market vendors. “We’ve had to pour 110 billion pesos [about $6 billion] per year from the central bank into the oil company for the last four years,” Manuel Jose Molano Ruiz, an economist at the Mexican Institute for Competitiveness, told Rolling Stone. “It’s serious damage to the treasury, money out of every Mexican’s pocket.”

The cost is not just measured in money; it is measured in lives lost. Years ago, when oil theft was a small niche market, many of those doing the plundering were amateur opportunists who lived close to the major pipelines that crisscross the country. Today, the market is controlled in trademark gory fashion by Mexico’s most ruthless and organized drug gangs.

The rush for oil has triggered a wave of violence across regions of Mexico that had heretofore managed to escape much of the bloodshed that had accompanied the government’s War on Drugs. In the last two years — two of the bloodiest in Mexico’s history — many of the most violent regions were also the regions richest in oil and gas (Veracruz, Tamaulipas, Nuevo Leon and Puebla).

Until recently, the city of Puebla, the university capital of Mexico, was a veritable oasis of peace in a desert of violence, a place where even many of the capos and captains of Narco gangs would send their children to study in relative security. But that peace was shattered in 2016 by the sudden explosion of oil fever in the surrounding area. At the very heart of the violence is a vital strategic region dubbed the “Red Triangle”, where dozens of oil pipelines intersect.

Now, state authorities in Puebla are working closely with Pemex to try to tackle the problem. Coordinated efforts between the two enabled Pemex to reduce the number of illegal tappings from 284 in April to 143 in July. But the weak rule of law in Mexico means that many of the thieves arrested are not prosecuted in the courts, while Pemex workers caught moonlighting for huachicoleros are sometimes not even dismissed.

The country’s president-elect, Andres Manuel Lopez Obrador, has said he will make fuel theft a more serious felony. He has also pledged to build a new $8 billion refinery as well as step up production from Mexico’s six chronically under-performing refineries. But to do that, he will need to be able to assure investors that their investment is not at risk of being petro-plundered. Against the current backdrop, that is not going to be easy. By Don Quijones.

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