Assessment on the Threat of the Drug Cartels for the Mexican Oil Industry

Key Judgements

• Fuel theft has exploded as a form of financing for the cartels and criminal gangs, which seek to diversify their sources of income to fight the pressure placed on them by the Mexican government.
• It is highly probable that this criminal activity will increase over time and bring out old and new criminal groups, if the Government and Pemex do not find a solution to the problem in the short and medium term.
• The economic damages that the theft of fuel creates to Pemex could break the oil company, whose oil production could be so seriously affected as to drastically increase imports from other countries, such as the United States, which would have a direct impact on the price of gasoline for the industry and the population.
• Pemex workers are the great asset of cartels and criminals, because they have information about the passage of oil through refineries and pipelines, so the fight against internal corruption of the company must be central in the plan to stop the theft of fuel, while offering greater security to workers who receive threats from criminals.

Introduction

Drug trafficking, kidnappings and assassinations are among the main security concerns in Mexico, but in the last decade there has been an unstoppable increase in a criminal act of lesser importance, but with a great economic impact, the theft of fuel, whose authors are called “huachicoleros”, and their actions have a serious impact on the activities of Petróleos Mexicanos (Pemex), which receives 52 billion dollars a year, and directly affects government revenues, given that the industry accounts for a fifth of these.

Background

Since the beginning of the war against drug trafficking undertaken by former President Felipe Calderón and continued by the current president, Enrique Peña Nieto, the Mexican government’s strategy consisted of beheading the cartels to end the internal structure of these. While this strategy involved the destruction of the cartels, they were divided into much smaller criminal groups, with the same objectives, but with fewer resources and more competition. These criminal gangs, and the cartels still in existence, seek to diversify their sources of income in order to survive the attacks of the Government and not to depend excessively on drug trafficking; the whole population uses gasoline to run their cars, and in the day to day of society, oil is almost as important as water, it is a business with high profitability and relatively low risks, for this reason the oil industry was a clear target for criminals.

Assessment

The demand of fuel from the cartels to diversify their sources of income has led to the number of clandestine intakes of fuel stolen directly from the Pemex pipelines increasing from 710 intakes in 2010, to 10 363 in 2017, a 868% increase in seven years, and 51% more than in 2016. The Mexican government estimates that the cartels earn 20 billion dollars from illegal traffic of fuel, and experts say that the cartels amass 20% of the national crude.

The business is much more profitable than drug trafficking because it hardly involves risk to criminals. This low risk lies in several factors, the main one is the vast oil pipeline network that Pemex has throughout the Mexican territory, some 57,000 kilometers that cross lands with different orography, which makes the protection of all this infrastructure very difficult. Secondly, the ease of selling the stolen fuel, given that it does not have to be exported across a border like drugs, but it is sold directly in carafes to the population, wholesale to large factories, or through gas stations that accept this illicit gasoline. And finally, the extensive information that criminals possess about oil movements in refineries and through oil pipelines, and knowledge for their extraction; information obtained through bribes or threats to Pemex workers, who often have no choice but to yield, since occasionally the local authorities are accomplices of the cartels.

Not all Mexican States suffer fuel thefts, some regions such as Baja California, Colima or Queretaro do not suffer these incidents; the states most affected by fuel theft are Guanajuato, with 1,852 intakes, followed by Puebla, with 1,443, Tamaulipas, with 1,100, Hidalgo, with 1,064, and Veracruz, with 1,012; followed very closely by the States of Jalisco, Sinaloa, Nuevo León, Tlaxcala and the State of Mexico. These states are the most affected because they have a large industrial fabric that demands fuel, which is transported through oil pipelines that run through these states; furthermore, in many of these territories the cartels have an important presence. In the case of Puebla, it should be noted that the so-called “red triangle” is located on its borders, an area where the Minatitlán-Mexico pipeline transports 40% of the national crude, which makes Puebla a priority for this type of criminals

The leading players of the theft of fuel vary according to the affected region. Remnants of the extinct Zetas perpetrate these robberies in the territories of Tamaulipas, Nuevo León, Tabasco, Puebla, Campeche and Veracruz; once one of the most dangerous criminal gangs in the world, they are currently seeking to survive the government’s effective plan to hunt them down, which has led them to steal fuel as a funding channel, since the Zetas have never been linked to drug trafficking, but with extortion and human trafficking. Remaining groups of the historic Gulf Cartel have also made use of this practice but are concentrated mainly in Tamaulipas and some areas of Nuevo Leon. In Guanajuato, the new Santa Rosa de Lima cartel has proclaimed itself as the main perpetrator of these robberies and threatens to blow up the presence of the Cartel Jalisco Nueva Generación (CJNG), which entirely dominates the robberies that occur in Jalisco. The Sinaloa Cartel, considered the most important cartel in the world, has also set itself the objective of diversifying its sources of income and dominates the intakes produced in the State of Sinaloa, being the architect of 13% of the intakes nationwide.

Both Pemex and the Mexican government have launched a series of measures to end this activity. Pemex will stop transporting gasoline in tankers, and will move to transport an untreated product that would hinder its use by the huachicoleros, on the other hand, the trucks will now be equipped with hidden GPS systems that will facilitate their recovery by security forces; legally, the penalty for fuel theft has been increased, which is now considered a serious crime punishable between 15 and 25 years in prison, at the same time that large fines amounting to 107,000 dollars are established. However, the most important measure is an agreement between Pemex and the Government to strengthen the surveillance of the national pipeline network with land and air patrols.

Outlook

The theft of fuel is one of the most damaging criminal activities in Mexico, given that its consequences have repercussions in various areas.

Economically, the fuel losses have cost Pemex one billion dollars in 2017, to which we must add the cost of repairing the damages caused to the pipelines by the huachicoleros. This happens when Pemex is at its worst, given that in 2017 its refineries have only operated at 60% capacity for various reasons, which has reduced production to 1 948 000 barrels per day in 2017, 9.26% less than in 2016, the lowest figure since 1980. This situation could cause an economic collapse of the company, given that an increase in criminal activity would only result in more economic losses for Pemex, which loses income annually and has a huge debt that exceeds one hundred billion dollars in 2017.

In the political sphere, this new criminal activity could undermine the liberalization of the oil sector undertaken by Enrique Peña Nieto, which aims to attract foreign investment to modernize the obsolete Pemex extraction technologies, which despite investing more money every year, its investments are distant from the multi-million-dollar investments of giants like Exxon Mobil, which last March announced investments of 20 billion dollars on the coast of the Gulf of Mexico. The situation of insecurity is already driving away several companies and threatens to hinder government efforts to boost the sector and suppose a loss of up to four points of Mexican GDP.

Socially, the situation could cause a serious shortage problems for the population of one of the largest oil producing countries, as has been the case in some Mexican states in recent years, which would lead directly to an increase in oil imports, mainly from the United States, which would further increase the price of gasoline, which after the liberalization of the sector grew by 25%; this in turn would directly affect the theft of fuel, since the cartels and criminals sell gasoline at a cheaper price than the official, which would lead them to increase their market share, and this criminal activity, by an increase in demand for cheap gasoline.

Another aspect, barely considered, is the environmental one, given that the rupture of clandestine extraction valves produces oil leaks and even large explosions that affect the environment and entail large costs to offset some damages that are sometimes irreparable.

The benefits of fuel theft could further trigger criminal activity because of the cost-benefit ratio of the business. Therefore, the Mexican Government and Pemex must put an end to this criminal activity by increasing the safety of oil pipelines and tankers, to discourage criminals from stealing them. One of the most important aspects that the authorities must fight is the internal corruption of Pemex, given that none of the cartels would be able to carry out this activity if it were not for the valuable information stolen from the oil company’s workers, either through bribes or threats, along with the materials for extraction stolen from the company thanks to these workers.