Energy Dependency is Energy Insecurity

The small Mexican town of San Martin was rocked by an explosion December 19, 2010.The incident happened about 60 miles from Mexico City where a Pemex gas pipe line had been tampered with in an attempt to tap the gas.The failed theft and resulting explosion killed 30 people and injured 50 Pemex, Mexico’s national oil company is just another victim on the list of drug cartel targets.

Pemex employiees have fallen pray to kidnappings, firefights, drive-by-shootings and  corruption scandals known as “plata o plomo”  (silver or lead, take the bribe or take the bullet) Thefts and hijackings of all kinds have increased across Mexico and the drug war marches on. The governments of Mexico and the United States have been meeting quietly on the topic of energy security. During Secretary  Clinton’s trip to Mexico the issue of cartel violence and Mexico’s energy sector was on the table. For Mexico and Pemex, the up-swing in the war on drugs and its carnage is the latest in a series of security issues that is plaguing the oil giant.

In an attempt to diversify the cartels have branched out and are now involved in projects like illegal gold mining extortion kidnapping and the theft of oil. Pemex is ether unable or unwilling to solve the problem. Many believe that low level company officials are getting rich from cartel bribery. It is a open secret that the cartels are syphoning oil from pipe lines purposely left unguarded by Pemex. It is believed that the Los Zetas have stolen millions of barrels of oil on a yearly basis to be sold on the black market.

The drug war in Mexico is being fought on two fronts. First, roughly seven major drug trafficking organizations, or DTOs, are fighting each other for control of lucrative drug smuggling corridors, or plazas, into the United States. Second, they are also fighting a massive military and law enforcement offensive under the direction of President Felipe Calderón who stated that drug trafficking and  violence would not be tolerated.

The DTO’s took exception to Calderon’s new mandate, and fought back with blistering attacks against each other and against the government. Dismembered bodies litter the streets  beheadings, assassinations, mass murders and grenade attacks all have become common place.The interconnection of oil and the Mexican government have made Pemex a soft target for the DTO’ s to strike back at Calderon. Mexico is the only owner of the oil reserves, production, licensing and concessions. Pemex is the nation’s operator and controls the first-hand sales and must not share revenues, production or reserves. This fundamental political reality continues to affect development of the nation’s huge oil resource potential by restricting private and foreign investment. For Mexico’s economy oil generates over 15% of current export earnings. Pemex also is responsible for 40%  of the government’s budget.

In 1994 when the Peso tanked Mexico neared default, the United States orchestrated an international bailout of roughly $50 billion. Mexican oil sales were used as collateral for the roughly $20 billion in US loans to Mexico.

Leaders for years have depended upon and pointed to the windfall of the nation’s oil patch for its economic well-being and, during the good times, growth. Without broad tax and fiscal reform in the nation, Pemex will remain a financial linchpin, albeit an increasingly tenuous one. Oil theft from Pemex pipelines, money laundering by way of service stations, and, worst of all, provocative kidnappings of the company’s executives and those of service companies working with the state firm, are all on the rise.

Unofficial figures place thefts from the Pemex network at roughly $2 billion annually. And security experts point to this as an important source of revenue for drug cartels especially as the Mexican government continues to crack down on them. Thefts from the Pemex network are not new, but the increase and the strain it is placing on the already-taxed company is important. And the illegal tapping has grown significantly in the areas where the drug war is the most pervasive.

The spike in fuel thefts and illegal trading, as well as kidnappings, has led some to question whether Pemex is fully in charge of all its facilities across the nation.

For some experts following the situation, the answer is a resounding no. Indeed, many analysts indicate that the physical security and monitoring of pipelines belonging to Pemex are severely lacking. According to Mexican daily El Universal, oil looting has occurred in almost every state in Mexico, while the Wall Street Journal, citing Pemex statistics, indicated that between January and November 2010, Pemex discovered 614 illegal siphons 368 in liquid fuels pipelines, 196 in oil pipelines, and 50 in liquefied petroleum gas ducts. Pemex has begun installing systems to detect declines in pressure in some oil product pipelines but the project is expected to take years to complete.

Kidnappings of Pemex executives and subcontractors, including workers from international firms, have taken place across the country but most notably in Tabasco, Tamaulipas and Nuevo Leon, sending shudders throughout the company and Mexico.

One analysis, published by Grupo Reforma highlighted the oil town of Reforma, Chiapas, where at least 30 Pemex employees—ranging from executives to laborers—have been kidnapped over the past year.

Mexico Weekly has also reported on other forms of violence that have flared in prime Pemex production zones, such as the Burgos Basin, site of Mexico's biggest natural gas field in Tamaulipas. Last spring, gunmen seized the Gigante Uno gas plant and kidnapped five Pemex workers. Increasingly unsafe conditions are severely hindering Pemex’s ability to produce natural gas in the Burgos Basin.

The Burgos Basin stretches across the northern border state of Tamaulipas, where the Gigante Uno plant is located, and spills into the states of Nuevo León and Coahuila. All three states are experiencing extremely high levels of drug-related violence, especially along these states’ border with Texas. The stretch from Nuevo Laredo to Matamoros is in the midst of a bloody conflict between the Gulf cartel and Los Zetas, former paramilitaries and enforcers for the Gulf cartel who are now one of the more vicious DTOs in their own right. Los Zetas are viewed as largely responsible for the kidnapping of Pemex employees in that region.

“Once Pemex … comes under regular attack from the cartels, rather than just random, disorganized thugs, then you have far more serious national security problems  much worse in the government's eyes than a bunch of homicides in the slums of Ciudad Juárez

One case of fuel theft from Pemex that’s winding its way through the justice system provides a unique insight into that part of the problem the company is confronting.

According to MarketWatch, federal documents released in August 2010 revealed a Texas chemical plant, owned by German chemical company BASF Corp., bought $2 million worth of petroleum products that had been stolen from Pemex and smuggled across the US border. The documents also showed the stolen condensate passed through several companies' hands before arriving on a barge at the BASF facility in Port Arthur, Texas.

The actual transport of stolen oil from Mexican pipelines into US corporate hands is complicated at best. Donald Schroeder, former president of Trammo Corp., testified that in January 2009, two companies, Murphy Energy Corp. and Continental Fuels, contacted him. Both wanted to sell him stolen condensate. Apparently he agreed to buy it, and the transfers began. “Unnamed import companies” would sell the condensate to intermediary companies like Continental (which has since shuttered its headquarters in Houston). Those import companies would smuggle the condensate across the border and store it in Continental facilities. No details were available on how those trucks managed to successfully cross the US Mexico border. These piecemeal transfers would continue until there was enough oil in the storage facility to fill a barge and ship to BASF.

Jim McAlister, an Assistant US Attorney, said he has no reason to believe that BASF has any involvement in the alleged wrongdoing. The President and founder of Murphy Energy Corp., Matt Murphy, said the company did not know that the condensate was stolen. Josh Crescenzi, the vice president of Continental Fuels, has not been indicted in the case, nor has anyone else from Continental.

This particular case has been a success, resulting in the handover of $2.4 million by US customs authorities to the Mexican government. But the extent of corruption in Mexico—within Pemex, in particular—and the ease with which oil can be stolen from pipelines makes the mitigation of oil looting an almost insurmountable challenge. Adding to the problem is the fact that Mexican cartels are involved. According to Reuters, the Mexican government believes the cartels use stolen jet fuel in their aircraft to cover up any evidence of illicit flights. In August 2009, Mexico’s federal police commissioner Rodrigo Esparza said Los Zetas used false import documents to smuggle at least $46 million worth of oil in tankers to unnamed US refineries. President Felipe Calderón has said that DTOs in northern Mexico are responsible for most oil theft.

On some levels Pemex is not just a victim of oil-thieving DTOs; sometimes, it’s directly involved. In February 2010, Mexican military units seized more than four tons of marijuana at Pemex installations in Reynosa, Tamaulipas. The discovery was made after Pemex security alerted officials that armed men were removing Pemex employees from a fuel supply station. In response, a Mexican Naval helicopter was dispatched to the scene but retreated after receiving heavy weapons fire from the ground. When military units arrived on the ground, they found the marijuana loaded on trucks abandoned at the site.

These alarming facts have led to perhaps the most ominous question of all: Is the company being infiltrated by the perpetrators of the nation’s drug business? In light of the increasing number of incidents President Calderón has acknowledged, there may well be internal operatives at Pemex aiding and abetting the DTOs.

Mexico’s energy security is essential for its financial and overall well-being and especially for Pemex. It is also critical for North American energy security as the United State imports 1.1 million barrels of oil a day. In the wake of the Deepwater Horizon incident,American oil produciers deal with offshore drilling restrictions and slow downs in the formerly prolific Gulf of Mexico. Fortunately the increased production from Canada’s oil sands will bolster the US market. This was made abundantly clear during an early February visit by Canadian Prime Minister Stephen Harper to the White House. More than 80 environmental groups used the occasion to send a letter of protest to President Obama. These concerns make it even more evident that the U.S. needs to open the Alaska oil fields and the East Coast Continental shelf for drilling now.

The war on drugs has now directly intersected with the energy security of two nations and if Pemex is going to continue to operate as a corrupt drug cartel money washing machine and the Middle East turns any more bazaar  then the U.S. Government will have no choice but to drill for oil or invade Mexico and take care of the cartels with the U.S. military.