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Mexico battles rising fuel theft

8 May 2017, 10.24 pm GMT

Mexico battles rising fuel theft

Mexico City, 8 May (Argus) — Mexico is cracking down on fuel theft, with lethal consequences.

Four Mexican soldiers were killed and 10 wounded in an open firefight last week when military forces responded to reports of illegal fuel pipeline tapping in the southern state of Puebla.

Despite various attempts over the years, state-run Pemex and the country's security forces have failed to significantly reduce fuel theft — a phenomenon that has caused losses estimated in the billions of dollars and could discourage potential investors, observers told Argus.

Illegal tapping, also known as "milking," has existed for decades in Mexico, but has become a bigger problem as the country liberalizes price controls in its fuel market, a key pillar of the 2014 energy reform. Official fuel prices rose 14-20pc in January, making fuel theft even more profitable. The country is seeking private investment to build much-needed fuel infrastructure.

Widespread fuel theft, accompanied by financial losses at Pemex estimated at more than $1bn/year, is likely to deter potential investors, sources said.

"No private company will want to invest in pipelines in Mexico with this problem," an adviser with the energy ministry's fuel division told Argus.

Pemex recently stopped releasing data related to fuel theft.

In a March interview on a local radio show, Carlos Murrieta Cummings, who heads Pemex's downstream division, estimated that the company had lost about 26,000 b/d throughout 2016, costing the company 30bn pesos ($1.5bn).

Sources have told Argus that Pemex is likely underestimating losses.

According to previous Pemex declarations, pipelines that register the highest number of occurrences are the Cadereyta-Madero, the Minatitlan-Mexico-Puebla and the Tula-Aguascalientes-Zacatecas segments, with fuel theft occasionally leading to shortages in gasoline and diesel in the region.

Pemex has just completed its first-ever open season for fuel transportation and storage capacity this month. The company awarded 320,679 bl of terminal capacity for regular, premium, and diesel storage, and 9,535 b/d of pipeline capacity for three years in the northwestern state of Baja California and Sonora to US refiner Tesoro.

More open seasons will follow in other states along the US border and the rest of the country throughout 2017.

Pemex Logistics, the division in charge of operating Pemex's infrastructure, first said it would not be responsible for any fuel stolen to third parties using Pemex's infrastructure. But Mexico's energy regulatory commission (CRE), which has the power to rule on these types of issues, quickly established that the transporter — in this case, Pemex Logistics — will be responsible for the products.

According to the CRE, the rules establish that if the transporter has invested to prevent and mitigate the risks of fuel theft, the commission will agree to incorporate in the transport tariff a portion that reflects those investments.

But sources, including an energy official, told Argus that Pemex had little money to invest in prevention, and can resort to its pipeline maintenance budget to attend to illegal oil tapping-related damage.

Fuel theft became a large-scale phenomenon in the late 2000s in the wake of former president Felipe Calderon's war on drugs, which begun in 2006.

With dwindling drug trafficking revenues, organized crime groups increasingly relied on alternative streams of income, such as extortion, kidnapping and fuel theft. "In some states, it brings cartels more cash than selling drugs," a former member of Mexico's intelligence services (CISEN) familiar with the topic told Argus.

"The problem has become very profound, as authorities themselves are often involved," the government source added.

In 2015, authorities arrested two high-ranking police officers in Puebla, for taking part. Authorities found arms and gallons of stolen fuel inside the vehicle one of the officers was driving.

Marcial Diaz, a consultant at Lexoil, who assists a number of Mexican retailing groups in fuel infrastructure security, adds that criminals on the outside would also need inside information to know when to tap the pipelines, as fuel does not flow continuously but at random times of the day and night — a measure Pemex says is designed to prevent fuel theft.

"You need two to tango, not just the one guy outside," Diaz said. Diaz, who once worked at Pemex, says stolen gasoline and diesel is very easy to put on the market, with cartels threatening fuel retailers into selling it alongside regular product.

Pemex has launched various initiatives to try and address the problem. In 2014, it invested $282mn in a new security system to monitor pressure drops. The following year, Pemex said it would start transporting unfinished products, which it would finish mixing in storage and distribution terminals, instead of refineries.

Pemex did not respond to requests asking whether the plan had been fully implemented.

The company also launched a new defense strategy unit, led by the military, to clamp down on oil theft and Mexico's congress had its own initiative, raising the maximum prison sentence from 10 to 35 years.

But the efforts have not brought the expected relief. In January of this year, Pemex asked that the state step in. By the end of that month, military forces had increased their presence in hard-hit regions by nearly 60pc.

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