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Milking the (Pipeline) System in Mexico: Pemex and the Growing Costs of Fuel Theft

Grace Lee | Country Analyst

As Mexico prepares to head to the polls this Sunday, July 1, to elect its next president, groundTruth Global has been tracking several issues likely on voters’ minds, including the ramifications of increasing organized crime violence. One way that criminal organizations fund and perpetuate violence is by illegally tapping - or “milking,” as the process is known locally - the oil pipelines of Mexican petroleum company Petróleos Mexicanos (Pemex) and selling the fuel on the black market. The company loses 30 bn pesos (US$1.65 bn) a year due to fuel theft, and the number of incidents is only growing.

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In 2017, Pemex reported a record 10,363 illegal taps, up from 6,873 the previous year. Compare this rate to five years ago when the figure was around 3,000. The hardest hit regions in 2017 were Guanajuato, followed by Puebla, Tamaulipas, Veracruz, and Hidalgo. This year, Puebla is on track to record the most breaches, with Hidalgo coming second.

The overall nationwide proliferation of fuel theft last year is due in part to concurrent gas price spikes in response to the Mexican government’s deregulation of Pemex and removal of oil subsidies. Furthermore, petroleum theft is a trade in which not only major drug cartels, like the Zetas, but also smaller gangs partake. As criminal organizations splinter off into smaller factions, many have increasingly turned to milking pipelines as a source of revenue. On the local level, shifts in the number of thefts also reflect the strength of rule of law. Police reform or an effective crackdown can cause a temporary lull in tapping, while neglect or a breakdown of order can be exploited by huachicoleros, fuel thieves, to re-engage their activities.

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Combating the illicit petroleum trade will require a multifaceted approach, and most actors involved will resist. Many local residents are happy to pay half the price for black-market oil, and the trade is lucrative for corrupt law enforcement officials and employees of Pemex, without whom the huachicoleros would not know pipeline locations and the ideal times to drill. One former policeman reportedly earned 2,700 pesos (US $135) every two weeks, but now makes 250,000 pesos (US $12,500) in a single week due to the illegal activity. Pemex has invested in more security and better technology, like a SCADA system to detect drops in pipeline pressure, while gas stations are being equipped with sales and inventory-monitoring systems, but criminals typically find ways around any new barriers.

The annual losses from petroleum theft may seem minimal compared to Pemex’s total debt of $84.5 bn, but the greater effect that this criminal activity has on Mexican society and the business environment cannot be understated. If Mexico wants to attract more foreign investment, especially in the energy sector, the next president, expected to be front-runner Andrés Manuel López Obrador, will have to ensure the stability of Pemex and reform local-level law enforcement. groundTruth Global will continue to monitor criminal activity in Mexico now and into the future to help businesses and companies better manage risk by seeing disruption before it happens.