Mexico's drug cartels, now hooked on fuel, cripple nation's refineries

The first call, from someone claiming to belong to the Michoacán Family drug cartel , came in February 2015.

“They said they knew who I was and where I lived,” said Alberto Arredondo , who got the call at work as a pump technician at an oil refinery in the central Mexican city of Salamanca . “They wanted information.”

At first, Arredondo hung up.

“But they were insistent,” he said, calling back and demanding details of when fuels would be pumped and through which pipelines.

Over the next two years, Arredondo said, he would be hounded , kidnapped , pistol-whipped , and stabbed so severely that surgeons removed his gallbladder. In December 2016, he fled to Canada , where he now seeks asylum from gangs that steal fuel from Salamanca and five other refineries operated by Pemex, the state-owned oil company.

Fuel theft

is fast becoming one of Mexico’s most pressing economic and security dilemmas, sapping more than USD$1 billion in annual revenue from state coffers, terrorizing workers and deterring private investment in aging refineries that the government, following a 2014 energy reform, hoped instead would be thriving with foreign capital.

Because of government offensives that toppled narco kingpins in recent years, Mexico’s drug cartels have splintered and are eager for new sources of revenue. Now, their increasingly dominant role as fuel thieves pits two of the country’s biggest industries—narcotics and oil—against one another.

The cash-rich cartels , believed by the Mexican government to generate well over USD$21 billion each year, are an increasing threat to Pemex, which in 2016 reported revenue of about USD$52 billion and generates about a fifth of government income.

“The business is more profitable than drug trafficking because it implies less risk,” said Georgina Trujillo , a ruling party congresswoman who heads the lower house energy commission.

“You don’t have to risk crossing the border to look for a market,” she added. “ We all consume gasoline. We don’t all consume drugs. ”

Pemex

did not respond to detailed questions from Reuters about the cartels and fuel theft. Among other questions, Reuters asked about the cartels’ impact on the refineries, Pemex’s security measures and how the company responds to extortion and violence against its employees.

One senior Pemex refining executive, who asked not to be identified, said, “We worry about the influence of organized crime,” but would not discuss the issue further.

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.

By targeting refineries, already suffering from a lack of investment, Mexico’s most notorious criminals gain access to nerve centers for much of the country’s fuel supply.

That threatens an oil industry that accounts for about 8% of Mexico’s economy and creates yet more uncertainty for a country already reeling from U.S. threats to dismantle the North American Free Trade Agreement ( NAFTA ).

“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.

Mexico's drug cartels, now hooked on fuel, cripple nation's refineries

Bleeding Money and fuel

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 MXN$1.77 billion ( USD$95 million ).

A May 2017 study, commissioned by the national energy regulator and obtained by Reuters via a freedom of information request, found that thieves, between 2009 and 2016, had tapped pipelines roughly every 1.4 kms ( 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 USD$5 billion in recent years. Production of refined products, meanwhile, fell to just over 700,000 barrels per day ( bpd ) in 2017. That’s about half the production levels at the refineries’ peak in 1994.

The 2014 energy reform is the landmark economic initiative of President Enrique Peña Nieto . It ended more than seven decades of monopoly of the oil sector by Pemex.

It also gradually phased out subsidies that kept retail fuel cheap, causing prices at the pump to climb by an average of nearly 25% since 2014, even though global oil prices fell by as much as 75% during that period.

Higher prices

were meant to attract foreign oil companies and other private investors .

They also attracted criminals , who undercut licensed retailers by selling stolen fuel at a discount. With know-how gained from extorting sectors including agriculture, transport, and mining, drug gangs began applying their tried-and-true methods at refineries.

Using the habitual narco offer of “ plata or plomo ” ( silver or lead ), gangs extort refinery workers into providing crucial information. Their tactics, coupled with fighting between groups jockeying for access to the racket, have led to a surge of violence in cities like Salamanca , home to a third of the fuel taps discovered in Mexico in 2016.

Mutilated corpses

of refinery workers, police and suspected fuel thieves increasingly appear around the city , terrifying its 260,000 residents. Cartels routinely festoon Salamanca with “ narcomantas ,” banners that mark territory or spell out grisly threats to rivals.

In Guanajuato , the surrounding state, investigators opened 1096 murder cases last year, 14 percent more than in 2016. That is a 71 percent increase over 2013, Peña Nieto’s first full year in office.

Interviews with Pemex and Mexican security officials, authorities in Guanajuato and locals affected by fuel theft describe an increasingly desperate situation for the industry and the regional economy.

Don't miss the interviews with Arredondo , the former pump technician, and Juan , a cartel member and admitted killer turned federal informant, that show the heavy toll inflicted on people on both sides of the theft.

Fuel theft: A pressing economic and security dilemma

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