Mexico: Fuel theft to increase costs for foreign investors


20 Oct 2016

Mexico: Fuel theft to increase costs for foreign i...
  •   The theft of fuel from pipelines, tanker trucks and storage facilities in Mexico is a major criminal industry that shows no signs of abating, in spite of low oil prices and the recent passage of measures to counter the theft.
  •   The prevalence of oil theft raises important security and legal considerations for international oil companies (IOCs) looking to invest in the country’s oil sector, especially those involved in imports and mid and downstream activities. 

 

Fuel theft continuing to grow

Fuel theft has grown significantly across Mexico in recent years. According to figures from state oil company Pemex, pipeline theft rose by 52 percent in 2015, which followed a 43.7 percent annual increase in 2014. Pipeline theft was reported in every state, with Guanajuato state registering the highest number of illegal taps in 2015, ahead of the key oil-rich state Tamaulipas. Aside from pipeline theft, criminals also steal refined fuel from storage centres, refining facilities and tanker trucks. Altogether, Pemex estimates its losses from theft amount to 23,500 barrels of oil daily, some USD 1.17 bn every year, although the real figure may be even higher as many instances go either unreported or undetected.

Fuel theft has grown despite the global decline in oil prices since 2014. Criminals from small groups through to major drug trafficking organisations have become increasingly attracted by the profitability of fuel robbery, which requires low start-up costs, and has little risk of being caught. The drug trafficking groups involved in the industry, most notably Los Zetas, Knights Templar Cartel and Gulf Cartel, have developed increasingly sophisticated siphoning techniques, including the use of specialised vehicles, to maximise the amount of fuel taken from pipelines.

Measures put in place by both the government and Pemex to combat the phenomenon have been largely ineffective. In December 2015, new legislation was passed that increased the sentences for perpetrators from a maximum of 14 years to 25 years. However, the measure has not served as an effective deterrent due to low rates of detention and prosecution. In February 2015, Pemex announced it would only send partially processed gasoline and diesel through its pipelines, which is unsuitable for use in vehicles and therefore harder to sell. Figures for the first quarter of 2016 indicate the measure has been ineffective in dissuading pipe tapping, which increased by 12.3 percent compared to 2015. This measure also fails to address fuel theft from refineries and storage and distribution terminals, which, according to an internal Pemex report obtained by the newspaper El Economista, accounts for 60 percent of fuel stolen every year.

The implication of oil theft for IOCs

Fuel theft poses a major threat to investors in Mexico’s oil and gas industry. Fuel theft will be of particular concern for any service companies who construct pipeline infrastructure, or who are seeking to profit from a change in fuel import regulations passed in April that allows IOCs to import fuel through Pemex pipelines. Oil theft will also pose important issues for companies in mid and downstream activities, who may unknowingly purchase illegal fuel given the increasing complexity of supply chains, thus raising the risk of legal proceedings. In 2012, Pemex launched a lawsuit in the US against Shell, ConocoPhillips and Marathon for the use of more than USD 246 mn of natural gas condensate stolen from Mexican oil fields by drug trafficking groups. The complaint acknowledged that the companies likely did not know the product had been stolen, but still said they were liable. The suit was defeated in a Texas court two years later.

IOCs will need to budget for security spending and repairs to potential damage from fuel theft. The introduction of surveillance systems for any newly built pipelines will be necessary, with Pemex estimated to have spent USD 197 mn between 2015 and 2016 on its SCADA surveillance, which immediately detects any drops in pressure in the pipeline network. The military is also known to frequently accompany Pemex employees who travel to dangerous pipeline sites, although this physical protection is unlikely to be afforded to private companies to the same extent. High levels of security, around both resources and personnel, will also be required for refineries, storage units and tanker trucks which are frequently targeted by fuel thieves. Oxxo Gas, which is a new entrant to the downstream market, has installed automated communications systems for all their tanker trucks to monitor their location 24-hours a day. Alternative means of transporting oil in vehicles costs as much as five times the amount as pipeline transport, and the threat of theft is a major concern. A 2015 report by the Transported Asset Protection Association (Tapa) showed that 80 percent of cargo theft in the country took place while in transit. An additional cost may come from any clean-up and repairs required should an oil spill or explosion take place during illegal siphoning. For example, in September 2014 more than 500 people were hired by Pemex to assist in the clean-up of 4,000 barrels of crude spilt into the San Juan River following an accident during a fuel theft attempt.

The strengthening of internal anti-fraud and whistleblower policies at IOCs will be necessary to deter employees from being co-opted into fuel theft, especially for companies who partner with Pemex, where corrupt practices are often reported. The extent of complicity between Pemex employees and fuel thieves is difficult to determine, and Pemex never agreed to the Federal Institute for Access to Information’s request to reveal the number of employees fired or penalised for involvement in oil theft. There have even been allegations that complicity in fuel theft may go to such high levels as the head of the main Pemex union STPRM, Carlos Romero Deschamps. In February 2015, the leaders of two other unions sent a letter to the president claiming that Deschamps is complicit in the fuel theft and that the STPRM controls all pipelines, including its illegal taps. The allegations failed to prompt any official investigation into Deschamps but could resurface should STPRM opposition to Pemex reforms increase.

Outlook for fuel theft

The widespread nature of fuel theft is unlikely to decline, at least in the medium-term, due to its lucrative returns and the failure of the government to improve the security environment. The fragmentation of gangs resulting from the government’s crackdown on drug trafficking has seen groups increasingly turn to fuel theft as a source of revenue, which has been facilitated by high levels of corruption in the police force, judiciary and public administration that allow criminals to act with impunity. Although Mexico remains an attractive prospect for exploration companies as the sector liberalises, security will continue to be a paramount consideration for onshore operators, especially those operating in mid and downstream sectors.

For further analysis of the political, regulatory and security risks facing international investors in Mexico, listen to our September webinar  here.

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