Mexico Kicks Off War on its Vast Black Market for Oil

“We’re not just talking about the theft of oil, but about a plan involving government insiders and a complex distribution system. It’s not easy to distribute and sell the pilfered contents of 600 pipelines each and every day.”

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

Mexico’s new government has launched a multi-pronged offensive against the rampant oil theft that is costing state-owned oil company Petroleos Mexicanos (Pemex) billions of dollars a year and destabilizing entire swaths of the country. Upon its orders, around 4,000 federal police agents, soldiers, and marines will be posted to protect 58 Pemex facilities, six refineries, 39 supply terminals, and 12 pumping stations.

The government will also launch an investigation of civil servants and managers of Pemex’s logistics division suspected of involvement in the oil theft. President Andres Manual Lopez Obrador (AMLO for short) told a news conference his government would combat the theft “outside and inside” Pemex, saying authorities were also complicit in many of the crimes (as we have previously reported).

“This is the theft of national assets, of public funds, of money that belongs to all Mexicans,” he said. “We’re not just talking about the theft of oil, the tapping of the pipelines, but about a plan involving government insiders and based on a complex distribution system. After all, it’s not easy to distribute and sell the pilfered contents of 600 pipelines each and every day.”

Three officials at Pemex have already been arrested for facilitating the oil theft. All three have been sacked and will be facing criminal charges, Mexico’s Attorney General Alejandro Gertz Manero said.

These are drastic measures for a drastic situation that keeps getting worse. In 2016, about 26,000 barrels of gasoline were stolen per day in Mexico, according to the CEO of Pemex. By 2018, the daily average theft had jumped to 58,000 barrels. An average of 600 illegal pipeline taps were discovered daily in 2018.

As the problem grew, Pemex did something nobody could have predicted: it slashed its spending on security. According to the newspaper El Universal, the company’s total outlay on security shrank from 1.66 billion pesos in 2014 to 539 million pesos in 2017. During the same period the number of people employed and trained by Pemex to detect and counteract oil theft fell by 90%, from 1,248 to 117.

In the meantime, the gangs of oil thieves, or huachicoleros, have been diversifying their activities, having discovered a lucrative new niche to exploit: the theft of liquefied petroleum gas (LPG, such as propane or butane). This niche is generating estimated monthly losses of 1.1 billion pesos ($58 million) for LPG producers as well as prompting gas companies to stop distributing along certain routes.

For Pemex, the financial fallout keeps growing. Oil theft set the company back 30.9 billion pesos in 2016 ($1.67 billion at the prevailing exchange rate on Dec 31 of that year), 50.1 billion pesos in 2017 ($2.55 billion) and $66.3 billion in 2018 ($3.37 billion), working out at a grand total of $7.6 billion. That’s a lot of money for any company to lose over a three-year period, particularly one that is already buckling under the combined weight of shrinking output, rising losses, and growing debt.

Over the past decade, Pemex’s crude oil production has been declining at a rate of around 5% a year, dragging Mexico’s share of global output down from 5% to 2%. Today, four years after the passage of former President Enrique Peña Nieto’s sweeping energy reforms, Mexico’s oil output languishes at a historic low of 1.77 million barrels per day (b/d), down 8% compared to the same month last year and well below the 3 million b/d that Peña Nieto promised back in 2015.

AMLO, like Peña Nieto before him, is determined to reverse this trend, setting a production target of 2.6 million b/d by the end of his administration in 2024. Whereas his predecessor sought to achieve it through deregulating and opening up the market to outside investment and expertise, AMLO sees the answer in revamping Pemex’s creaking refineries so that the company can refine its own crude for the internal market rather than export it to the U.S. only to import it back as finished gasoline.

It’s a costly plan, with an estimated $8 billion needed just to build the new oil refinery AMLO has promised for his home state of Tabasco. To that end, the government has increased Pemex’s budget for 2019 by 19% to over $23 billion. It has also suspended auction bid rounds for deepwater and onshore shale oil and gas projects for three years.

Neither of these policies have pleased U.S. rating agencies. Both Moody’s and Fitch have raised alarm bells about Pemex’s $106 billion of debt — the biggest of any global energy company — and have threatened to downgrade Pemex’s credit rating to junk if AMLO proceeds with his plans. If they carry through on that threat, investors, including many pension funds and sovereign wealth funds which are contractually bound to hold assets of investment grade quality, may have to dump Pemex debt, with potentially problematic consequences for the finances of both Pemex and Mexico.

Nonetheless, in the current standoff AMLO shows little sign of backing down from his stated mission to rebuild Mexico’s oil industry, revitalize Pemex, and develop a more nationalistic approach to energy policy. Indeed, by pledging to crack down on Mexico’s legions of petro-plunderers, he has reaffirmed his commitment to re-energize Mexico’s oil industry. By Don Quijones.

But it’s going to be tough; AMLO will need more than luck to pull it off. Read…  Defiant Energy Policy of Mexico’s President-Elect Rattles Moody’s and Fitch  
 

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  19 comments for “Mexico Kicks Off War on its Vast Black Market for Oil

  1. Gershon
    Jan 1, 2019 at 3:19 pm

    Mexico’s military, police, and judiciary are all riddled with corruption. This much-ballyhooed “offensive” is so much smoke and mirrors, signifying nothing. As long as so many security officials are on the take from the bad guys, the systematic plundering of the countries resources by criminals will continue.

    President Calderon unleashed the Mexican military on the drug cartels in 2006, and 2018 was the bloodiest year so far in the so-called drug war, with no end in sight. So how will the military fare any better against fuel theives?

    • Jan 1, 2019 at 3:30 pm

      Or the new government could just sit there and do nothing?

      • Atu
        Jan 2, 2019 at 3:08 pm

        It would at least be honest.

        It is funny how modern political boundaries fuse, or cross-over in the ultimate quest for whatever is promised. You have a socialist leader who sends in the military where in principle – well hey just tax everyone for the losses… and you have a french neo liberal who – well hey just tax everyone for the losses.

        I guess the difference is that the neoliberal taxes everyone , mostly the poorer in a country that you have to be poorer to be better off, whereas the socialists just tax the rich… so that everyone has to be poorer to be better off. The neoliberal just carries on till the poor get so poorer that they vote socialist, and the socialist just carries on till the poor get so poorer they vote neoliberal.

        So you see what happens when you ask for something to be done ? You end up like Venezuela where they send in the guns and tax everyone and everybody is poor and corrupt.

        I swear politicians have it in for everyone.

    • Jan 1, 2019 at 4:51 pm

      While true that Mexico’s police and armed forces are riddled with corruption and there is a very real risk that the war on the huachicoleros could backfire, just as happened with Calderon’s War on Drugs, doing nothing is clearly no longer an option.

      Even more important than protecting Pemex’s facilities will be trying to clean up the company from the inside out — an admittedly gargantuan task. Rumours are swirling that AMLO plans to fire Carlos Romero Deschamps, the long-time leader of Pemex’s labor union and one of the most corrupt public officials in the country, about whom I wrote a couple of years ago (https://wolfstreet.com/2016/04/16/pemex-sinkhole-of-debt-corruption-gets-mexico-taxpayer-bailout-wall-street-thrilled/).

      If that happens, it will mean that the AMLO administration is serious about at least TRYING to clean up the company, which will be a massive improvement on the current state of affairs.

      • Cynic
        Jan 2, 2019 at 9:23 am

        One really has to hand to the Latinos: they took inveterate Spanish corruption and lack of civic virtue to a wholly new level. Spain’s greatest gift to world culture?

        I enjoy reading about Mexico, for the simple reason that all the ‘problems’ of life in a functioning state look very petty indeed compared to what goes on there – something one can lose sight of so easily in the self-absorbed whinge- culture of the West. ..

    • Briny
      Jan 1, 2019 at 11:44 pm

      Not all of their military. Their Marines are the ones tapped when they need something done *despite* corrupt officials.

  2. Petedivine
    Jan 1, 2019 at 5:10 pm

    The problem AMLO faces is public demand for cheaper gasoline. Gasoline in Mexico goes for $4 a gallon. That’s too high for your average Mexican trying to make ends meet. Illegal gasoline sold on black market acts as an energy subsidy. Pull that subsidy away and AMLO might find himself in the middle of a storm.

  3. Howard Fritz
    Jan 1, 2019 at 9:49 pm

    Honestly, I sometimes wonder whether the only viable option for long-term change would be to completely privatize PEMEX, much like enormous swatches of industry were sold off at the end of the Soviet Union. The main issue with this was that for years carbon products essentially funded the nation (not entirely I know) and were able to fund many services to its citizens with low level of taxation (somewhat like Saudi Arabia, with key differences. I guess the solution would be to allow mixed foreign state ownership?

    • Bookdoc
      Jan 2, 2019 at 9:47 am

      Privatization in a country like Mexico? What is to stop them from nationalizing again in the next crisis-after investments have been made?

    • jon laughing
      Jan 3, 2019 at 11:04 am

      And do you imagine that the new private owners would allow the petro thefts to continue? Or do you imagine that they would do exactly what AMLO is attempting to do – stop the thefts? So somehow when the government tries to stop theft of public assets it is socialism at its worst or absolute proof of government incompetence, but if a private company did it then it woud be a roaring capitalist success. Hm. Something needs rethinking.

  4. Javert Chip
    Jan 2, 2019 at 12:06 am

    Kind of interested to see how that “4,000 federal police agents, soldiers, and marines will be posted to protect 58 Pemex facilities, six refineries, 39 supply terminals, and 12 pumping stations” thing goes.

    Of course if you run a country in such a manner that 10% of all living citizens born since the 1960s evacuate to the country next door, you might have a problem that marines & bullets can’t really solve.

    • Javert Chip
      Jan 2, 2019 at 12:33 am

      FYI: 4,000 guys with guns guarding a total of 109 Pemex facilities averages 37 guys per facility. With 24/7/365 staffing, that gets you about 9 guys on-duty per facility at any point in time, or 980 guys for all 109 locations.

      Not exactly a lot of boots on the ground for a multi-billion dollar theft of physical property growing at 50% per year. As Emerson said “When you strike at a king, you must kill him”.

      Via con dios.

      • Tom Jones
        Jan 2, 2019 at 1:47 pm

        I think it is supposed to be “Vaya con dios”, because it’s an imperative and therefore takes the subjunctive.

  5. Pattycake
    Jan 2, 2019 at 10:28 am

    Mexico is so corrupt. The Marines helped El Chapo unite the cartels under El Chapo. No order in Mexico . The military, police, govt all take the $ from bribes. Colombia finally got tough& changed things around. Maybe Mexico needs to learn from them.
    Mexico a great country, but, to dangerous to visit currently. Lots of Americans would retire there if it was safe.

  6. Bruce A
    Jan 2, 2019 at 12:09 pm

    Got news for you – this is not only happening with a commodity such as oil, also precious metals and worldwide as well. The BIG question is …..who is buying the stuff??

  7. Maximus Minimus
    Jan 2, 2019 at 12:18 pm

    “By 2018, the daily average theft had jumped to 58,000 barrels. An average of 600 illegal pipeline taps were discovered daily in 2018.”
    That must be due to consumer price inflation; you need to drill more holes to keep abreast.
    Seriously, this is a country with which the northern non-country has a visa free travel due to a Darwinian award deserving electoral choice. Soon, one wall will not be enough.

  8. Jan 2, 2019 at 6:15 pm

    Kind of a conflict with AMLO’s version of a Mexican GreenNewDeal. Winding down oil production–which will end on its own soon enough–would be smarter.

    Of course, there would be initial pain in the transition, and humans hate pain. Too bad we spent the last century building a society that is inherently unsustainable, and the piper’s here.

  9. WES
    Jan 3, 2019 at 12:45 am

    This reminds me of Nigeria in Africa! They drill and tap their pipelines ie crazy too!

    They are so good at tapping that they even tap pipes running on the ocean floor from offshore drill rigs!

  10. Juanfo
    Jan 7, 2019 at 1:41 pm

    Down here there is so much corruption it’s a pathological, organic instinct. Leave a worthless empty cracked bucket with holes in it unattended on the sidewalk and overnight or sooner it is already gone.

Comments are closed.