Mexico drug cartels stealing billions of dollars in oil from Pemex

Reuters has an astonishing report about Mexican drug cartels tapping into oil pipelines owned by the state oil company Pemex in order to steal enormous amounts of fuel from the Mexican oil industry.

Apparently, oil has become a target of the cartels because it is cheap to steal and the risk of being caught is negligible.  The cartels employ several methods to steal the oil, including bribing and threatening Pemex employees and directly tapping the pipelines that bring gasoline and other fuels to the people.

The practice has skyrocketed over the last few years, scaring off foreign investors and severely cutting into the profits of one of Mexico's largest industries.

Fuel theft is not new or unique to Mexico.  But cartels are taking it to calamitous new dimensions and, in the process, bolstering their bottom line.

"Fuel theft just makes these groups more powerful," according to one senior official from the U.S. Drug Enforcement Administration, who asked not to be identified. ...

"It hurts the national coffers, weakens national security and hinders the reform and development of Mexico's energy market," said Gustavo Mohar, a former Mexican energy and intelligence official.

Between 2011 and 2016, the number of unauthorized taps discovered on Mexico's fuel lines nearly quintupled, according to a recent report by the federal auditor.  Repair costs surged almost tenfold, to 1.77 billion pesos ($95 million).

A May 2017 study, commissioned by the national energy regulator and obtained by Reuters via a [F]reedom of [I]nformation request, found that thieves, between 2009 and 2016, had tapped pipelines roughly every 1.4 [km] (0.86 mi) along Pemex's approximately 14,000[-]km pipeline network.

After decades of poor upkeep, the refineries are bleeding money as well as fuel.  In addition to unscheduled outages, which cause big operational losses, maintenance problems have led to fatal accidents, including fires and explosions.

Together, the refineries have accumulated annual operating losses of about $5 billion in recent years.  Production of refined products, meanwhile, fell to just over 700,000 barrels per day in 2017.  That's about half the production levels at the refineries' peak in 1994.

It's estimated that annual losses in revenue to the Mexican government as a result of the thefts amount to more than a billion dollars.

The drop in production over the last couple of decades is due to Mexico's antiquated and inefficient oil infrastructure.  Energy reforms in 2014 were supposed to encourage foreign investment in the oil industry, changing longstanding policy that prevented it.  But there have been few takers because of Mexico's downward spiral into failed state status as a result of violence by the cartels.

Efforts by Mexico's state-owned oil company Pemex to attract about $5 billion in capital to help modernize its two largest refineries so far have proved futile, according to two people familiar with the process who declined to be named because they were not authorized to speak publicly. ...

Among those to rebuff overtures from Pemex over the past year are U.S. refining giants Valero Energy Corp (VLO.N) and Tesoro Corp TSO.N, the people said.

Valero and Tesoro declined to comment.  Those and other companies were deterred by operational, political[,] and market concerns, the people said.

Pemex officials said they "categorically reject" the notion that they are struggling to find investors.

"There has been interest," a company spokesman said Thursday. "We've had talks with many companies whose names we can't reveal."

Pemex has said publicly it's seeking investment from Korean, Japanese and Chinese firms. The company hired Bank of America last year to seek potential partners.

The world's oil companies are showing little confidence in Mexico's ability to deal with the cartels.  They have good reasons.  Why pour money into projects that have been compromised by criminals?  Pemex is bleeding red ink, and the irony is, the company won't start making money again until foreign investors can be enticed to become involved, but foreign investors refuse as long as so much of the oil is being siphoned away by the cartels.

Mexico has had some success in bringing down drug kingpins.  But that success has resulted in an even bigger problem: the fracturing of drug cartels into many smaller entities, only compounding the misery of the country.  The violence and political corruption flowing from the drug trade is rapidly making Mexico into a failed state.  The consequences of that for the U.S. are obvious: a growing number of Mexican citizens looking north for salvation.