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.
Motivated by inflation? Read… Mexico’s Central Bank Just Broke with the War on Cash
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The huachicoleros are working way too hard. Just become bankers and move to the U.S. No chance of prosecution for theft, just pay 1-2% “penalty” and resume your activities.
The opportunity for the huachicoleros to wipe their feet on the back of a supine U.S. Attorney General, Eric Holder, has passed, though. The official doormat for U.S. corporations is “gone”, and is contemplating being President in return for his magnificent efforts.
Steal a sheep and go to jail for life, steal millions if sheep, get rich and just pay a fune.
The only way to solve the problem is to just shut PEMEX down for a year or two to starve out both the gangs and corrupt employees. After that professional managers from outside Mexico need to be brought in to manage it.
It would make no difference whatsoever. The professional managers would be either killed, scared off, or dismissed and the crooks from the government would be right back at it.
“Here, Mexico. Let America show you how orderly pillaging should be!” At least local pilaging feeds into the local economy. Besides, rich people don’t get “starved out”. Poor people do. Gas prices skyrocket, blackmarket explodes…
Economic mobility and proportionality might help. Crazy idea.
These countries are a circus. Complete disregard for order and struture. I don’t blame them. When people are starving survival by any means neccesary is the law.
The problem is, complete disregard for order and structure is now the main meme in all “developed” world, let alone the developing one.
I am talking plundering of public resources by the elites, illegal immigration everywhere and all governments acquiescence of it and stealing taxpayers money to fund it, plundering of all social security and pensions systems..
Where do you stop?
Just my 2 cents
Poor damn Mexico has always been corrupt. I feel sorry for the people, but anybody with any get up and go wants out of there.
I know I shouldn’t, but I am always astonished at how Latin American idealists, such as Lopez-Obrador, seem completely detached from reality.
While personally honest, they seem to live in a parallel universe: see Jorge Giordani. While personally frugal and extremely honest, so much he’s nicknamed “el monje” (the monk), he set up the economic system which allowed Hugo Chavez to turn Venezuela into the tropical subsidiary of North Korea.
Lopez-Obrador can sincerely promise to build all the oil refineries in the world (perhaps as a hat tip to the firms north of the Rio Grande which will get to design and build said oil refineries), but these do nothing for existing Pemex refineries and especially chemical plants, which often have on payroll six times the people similar plants around the world employ. Being hired at Pemex in Mexico is a whole lot like being hired by a mass transit muni: it’s a job for life and you are nigh on impossible to fire. If you are grossly incompetent, you’ll just be given a desk/warehouse job where you cannot cause a disaster of epic proportions.
Trying to whitewash Pemex’s problems with one or two model plants set up and largely run by foreign firms hired at extravagant rates is a typical EM trick to kick the can down the road and avoid tackling said problems, a proposition which would ultimately entail firing a whole lot of people, closing a lot of plants and offices and cutting a whole lot of contracts.
Nobody likes that, but the alternative is not just more of the same, but the risk of another Bhopal, or worse.
How can one invest in huachicoleros, or short the Mexican government? This seems like a very profitable business model with high growth trajectory. We need some charts.
Just so you know, there was an ad titled “Pets Now Mining Crypto”
in my stream on this post. Adorable fuzzy cat, too!
“Fast growing tech company has created device that enables pets to generate money.”
I love it! Beats some of the stuff I’m seeing. Anything that makes me smile is worth something.
I was just thinking a little more on this….
I guess the unfortunate Crypto longs are really reaching for that last greater fool, “Cat Lady.”
Searching the dredges at the bottom of the speculative barrel. :)