Mexico’s cartels are ditching drugs for oil

Mexico’s energy reform that ended a state monopoly has so far fared fairly well in the upstream sector, with oil majors snatching up offshore oil blocks in auctions.

In the downstream, however, aging refineries built before 1980 have been bleeding cash for years and made Mexico import increasing volumes of refined products to meet growing demand.

Operational and investment troubles aside, refineries in Mexico are bleeding as drug cartels have been racketeering refinery workers to help them tap storage facilities, trucks, and pipelines in a lucrative side business for the local narcos — fuel theft — Reuters reporter Gabriel Stargardter wrote in an investigative article this week.

Fuel theft deprives Mexico of more than $ 1 billion in state revenues every year. The security issues and rampant thefts scare off Mexico’s old and inefficient refineries even after the opening of the energy sector to private investment. Crackdowns on the drug cartels have prompted the narco lords to seek a less risky but lucrative source of revenue — fuels — as everyone buys gasoline, and not everyone buys drugs, said officials who spoke to Reuters’ Stargardter.

The drug cartels pose a threat to the refinery operations of state oil firm Pemex, which owns the nation’s six refineries. The number of illegal taps discovered along Mexico’s fuel lines increased fivefold between 2011 and 2016, while costs to repair them increased tenfold, to the equivalent of $ 95 million, according to a report from the country’s federal auditor, as quoted in Reuters.

The number of identified illegal taps of pipelines in Mexico jumped from around 710 in 2010 to some 6,260 in 2016, The Boston Consulting Group (BCG) said in an analysis in July 2017, citing figures by Pemex.

Pemex has taken some measures to try to counter the fuel thefts, and in October 2017 it said that it had terminated the contracts of several employees of its Storage and Distribution Terminal at Salamanca, “as they participated in some of the illegal activities.”

Fuel thefts orchestrated by the drug cartels add to the many other problems that Mexico’s refinery industry has been facing in recent years. Lack of investment into decades-old refineries has reduced Mexico’s refinery production. The downstream industry is also in need of investments to reconfigure the refineries that were built to process light crude oil to be able to also process heavy crude from oil fields currently in production.

The six refineries in Mexico have a combined refining capacity of 1.640 million bpd, but they operated at 59 percent of their total capacity in 2016, Platts said in a report on Mexico’s oil industry in August 2017. In December 2016, refinery production was 798,000 bpd, the lowest monthly production in 24 years, according to Platts.

In its 2017-2021 business plan, Pemex vowed to seek investments through joint ventures to reconfigure refineries. During the downturn, the Mexican state company slashed investments in all segments by 48 percent between 2014 and 2016.

Pemex hasn’t had much success in attracting international investment into its refining sector, due to the old infrastructure and some political and security concerns.

“Mexico’s own refinery capacity has not kept pace with the increase in domestic product demand and, in addition, some of the existing capacity is not well adapted to process Mexico’s increasingly heavy crude slate,” the International Energy Agency (IEA) said in a Mexico Energy Outlook in 2016.

Rising demand and dropping crude oil production have led to Mexico tripling its net imports of gasoline and diesel since 2000, mostly with imports from the U.S., the IEA said.

US exports of refined petroleum products account for more than 50 percent of Mexico’s domestic gasoline consumption, according to U.S. government figures.

The IEA doesn’t expect new stand-alone refinery capacity to come online in Mexico in the next 25 years. But investments of around $ 20 billion could improve equipment and units at existing refineries, and push refinery utilization rates to around 90 percent by 2040.

Yet, Mexico is struggling to attract investment into its inefficient refining industry, due to ageing infrastructure. Security concerns with local narco lords wanting a slice of the pie and sapping fuel lines surely aren’t helping the current Mexican downstream industry and its future prospects.

This article was originally published on Oilprice.com

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