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TAMPICO, Mexico, June 25 (Reuters) - During Mexico's first oil boom, Tampico was such a magnet for foreign capital that it became the biggest oil-exporting port in the Americas and home to grandiose architecture that inspired comparisons to Venice and New Orleans.
A century on, Tampico is the country's kidnap capital, racked by fear, murder and extortion that threaten to choke off its bid to make a comeback as Mexico, the world's No. 10 crude oil producer, opens up its oil and gas industry.
In December, President Enrique Pena Nieto ended state-run Pemex's 75-year-old oil and gas monopoly in the hope that oil majors will plow tens of billions of dollars into Mexico, revitalizing an economy that has long lagged its regional peers.
Tampico, which hugs a cluster of crocodile-infested lagoons in the northeastern state of Tamaulipas, should be well placed to attract firms like Exxon Mobil Corp and Chevron looking to invest in the oil and gas-rich region.
But as lawmakers finalize terms and conditions for the energy reform, drug gangs have turned Tampico and Tamaulipas into a maelstrom of gunfights and oil theft.
Among the atrocities on the streets of greater Tampico in late May: seven corpses stuffed into the back of a car; a body with all its limbs hacked off; and a man hung upside down from a rope, with his own severed head nearby in a basket of strawberries.
"The problem is so serious that the state and municipal authorities can't cope," said German Pacheco, a federal congressman for Tampico from the opposition conservative National Action Party (PAN).
Murders in Tamaulipas have hit their highest level since Pena Nieto took office 18 months ago, and the president has sought to stem the violence by replacing corrupt local and state police with federal security forces that now patrol the state.
But the problem has deep roots.
Federal prosecutors have investigated allegations that the last three state governors all had links to organized crime. Two were not charged, but one is a fugitive, wanted for trial in the United States. The current governor, Egidio Torre Cantu, was voted in after his brother, the favorite for the job, was murdered by gunmen days before the 2010 state elections.
In 1914, U.S. writer Jack London likened Tampico to Venice and described its oil fields as "unthinkably big and rich." Today, the ornate, colorful blend of art nouveau and neoclassical architecture in the heart of the city bears witness to the early 20th century oil boom.
Although markets around the palm-lined squares of the center still bustle with people during the day, the local economy is reeling. Employers' federation Coparmex estimates that sales at businesses in Tampico's metropolitan area of some 900,000 people fell 20 percent to 25 percent from 2013 during April and May.
As night falls, residents used to living alongside crocodiles scatter to avoid becoming statistics in turf wars across Tamaulipas caused by splits within the Gulf Cartel and its clashes with a rival gang, the Zetas.
The area is still packed with potential. More than half of Mexico's prospective shale oil reserves are in the Tampico-Misantla basin extending south from the port into Veracruz state, said Gustavo Hernandez, head of Pemex's exploration and production arm.
And more than half of Mexico's estimated deepwater oil reserves in the Gulf of Mexico are in its northern section off Tamaulipas, he added. The state is also home to much of Mexico's gas reserves.
One local retailer, speaking softly in his store not far from where John Huston shot scenes for the 1948 Humphrey Bogart film "The Treasure of the Sierra Madre," said energy reform could make a big difference to the economy.
"But who in their right mind is going to invest here with these headlines?" he said, asking to remain anonymous.
Estimating his sales were down by half from 2009, he said some 50 people he knew in the area had been kidnapped in under three years and that a gang had muscled in on his business with clubs and bars, banning competitors on pain of death.
For army troops battling the cartels, death looms larger in Tamaulipas than anywhere else in Mexico, where more than 90,000 people have died in gang-related violence since 2007.
Three in every 10 soldiers killed since Pena Nieto took office have died in Tamaulipas, defense ministry figures show.
Oil theft is also rife in Tamaulipas, as gangs steal tanker trucks and siphon off fuel from pipelines. By mid-May it averaged two illegal oil taps per day, or one-fifth of the national total, Pemex data shows. Locals in Tampico say gangs sell gasoline for half the official price or less.
Tampico also leads Mexico in kidnappings with a rate 20 times the national average, a recent study published by Coparmex and Germany's Konrad Adenauer Foundation showed. Up to 70 percent of businesses in Tamaulipas pay extortion to gangs, said an official from a human rights group who requested anonymity.
The result, said congressman Pacheco, has been an exodus of "easily 80 percent" of Tampico's top entrepreneurs.
Many of the wealthy have even stopped coming back to pay respects to their dead, said Jorge Altamirano, 63, a worker at one of Tampico's main cemeteries.
Five years ago, Altamirano was paid to look after about 40 tombs, earning 100 pesos for each a month in a graveyard sprinkled with sepulchers of the city's old oil barons. Now struggling to feed five others at home, he has only 11 tombs.
"Some were just abandoned," he said. "People don't want to leave their homes."
Oil executives are reluctant to speak openly about the lawlessness in Tamaulipas. Privately, they say it makes it hard to operate and raises security costs, putting business at risk.
While Tampico's first oil boom ended decades ago, the adjoining city of Altamira is a major petrochemical center and Mexico's No. 4 commercial port.
Altamira has high hopes for the reform, and Mayor Armando Lopez named Royal Dutch Shell and Singapore-based Keppel Offshore & Marine among firms he said planned to invest there.
But Altamira is also suffering. Five people were killed in a shootout this month when a gang blocked access routes to the port by setting trucks ablaze.
Investors are paying close attention.
Pacheco of the PAN said the violence came up time and again at a recent energy conference he attended in Houston with executives from companies like Eni, BP and Total.
"Security in Tamaulipas was a general complaint among the world's top international firms," he said. "(The reform) will only offer hope if we end the lawlessness." (Reporting by Dave Graham; Editing by Kieran Murray and Douglas Royalty)