Mexico Kicks Off War On Its Vast Black Market For Oil

(Wolf Street, Don Quijones, 1.Jan.2019) — “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.”

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.

But it’s going to be tough; AMLO will need more than luck to pull it off.


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