January 20, 2019 / 7:59 PM / 6 months ago

EXPLAINER-Mexico's fuel woes rooted in chronic theft, troubled refineries

    By David Alire Garcia and Marianna Parraga
    MEXICO CITY, Jan 20 (Reuters) - Nearly a month after
Mexico's new president launched an ambitious plan to stamp out
growing fuel theft, the strategy meant to crush corruption and
organized crime is under heightened scrutiny. 
    On Friday, at least 79 people died from a powerful explosion
at a gasoline pipeline in central Mexico that had been punctured
by fuel thieves. Relatives of some of the victims said fuel
shortages stemming from the government's crackdown led people to
risk their lives filling plastic containers from the leak.
             
    President Andres Manuel Lopez Obrador, who took office in
December, said the tragedy has not weakened his faith in the
plan. Since late December, he has closed six major pipelines
where criminal gangs and other thieves have siphoned off stolen
fuel worth billions of dollars. 
    Lopez Obrador is moving distribution to trucks, but that
switch has caused delivery delays and long lines at gas
stations, threatening to crimp the economy and hurt his
popularity if shortages persist.
    The veteran leftist won a landslide election victory on
promises to root out endemic corruption, strengthen ailing
national oil company Pemex and ensure stable fuel prices.    
    
    WHY IS THERE SO MUCH FUEL THEFT IN MEXICO?
    Mexico's fast-growing motor fuel market is a juicy target
for thieves. It is the world's sixth biggest, according to
energy ministry data, featuring a total daily demand of nearly
1.18 million barrels of gasoline and diesel.
    The Mexican government's lack of attention has allowed
organized groups to open clandestine taps along Pemex's main
pipelines. Internal complicity at Pemex refineries and terminals
have also opened the door for theft of entire trucks loaded with
fuel. 
    Fuel stolen from Pemex's infrastructure mostly ends in the
hands of the same retailers that legally sell Pemex gasoline and
diesel.
    
    HOW DID FUEL THEFT START AND WHO IS RESPONSIBLE? 
    Fuel theft has been a problem in Mexico for decades but it
has been growing in recent years. The crackdown on the drug war
has caused gangs to turn to other forms of theft, and the
nation's network of pipelines proved to be ripe targets. 
    Theft escalated in recent years following reforms to the
country's oil sector by previous President Enrique Pena Nieto,
who liberalized the industry for foreign investment. In turn,
retail prices rose, giving cartels an opportunity to undercut
those prices through black-market sales of gasoline.
    Thieves tap into pipelines and are currently siphoning off
the equivalent of around one-fifth of total national gasoline
consumption, about 150,000 barrels per day (bpd) according to
Reuters calculations based on official data. They then re-sell
mostly to complicit gas stations. 
    Pemex documented more than 12,500 illegal taps to its fuel
pipeline network during the first 10 months of 2018, more than
in the previous year. The widespread theft costs Pemex more than
$3 billion annually, according to official numbers.
    Lopez Obrador has said upwards of 80 percent of the theft is
organized by Pemex employees, though he has not provided
evidence. He has also pointed to reports that the union has been
restricting access to parts of the company's operations.    
    Central and western states including Queretaro, Guanajuato,
Hidalgo, Michoacan and Jalisco are most afflicted by the
pipeline theft, as well as Pemex's Salamanca refinery, which has
been especially plagued by organized crime and violent
disruptions.             
            
    WHY ISN'T MEXICO PRODUCING ENOUGH GASOLINE?
    For years, Pemex's six domestic oil refineries have operated
well below their capacity, due to a mix of underinvestment,
deferred maintenance and frequent accidents, including deadly
explosions that have provoked costly stoppages.
    Las year, the refineries operated at about a third of their
1.63-million-barrel-per day crude processing capacity, compared
with 2013, when they processed nearly 1.4 million barrels of
crude a day. 
    
    HOW DOES MEXICO MEET ITS FUEL NEEDS? 
    Mexico has grown increasingly dependent on fuel imports in
recent years, with imported gasoline, distillates and liquefied
petroleum gas growing last year to about two-thirds of total
demand. In 2016, imports and domestic production each accounted
for roughly half. 
    Mexico has 16 marine terminals capable of receiving imported
fuel, plus 74 storage facilities and over 8,800 kilometers of
pipelines. The imports flow mainly through the Pajaritos, Tuxpan
and Veracruz terminals on the country's Gulf coast, which have
recently turned into bottlenecks for the imports.              
    Mexico is a critical export market for U.S. refiners and
trading firms, and is the biggest buyer of U.S. gasoline and
diesel. In October, the United States exported 621,000 bpd of
gasoline to Mexico, accounting for roughly 60 percent of the
1.03 million bpd exported that month, according to the U.S.
Energy Information Administration (EIA). 
    While the volumes are much lower than supplies transported
by sea, rail shipments of fuels across the U.S.-Mexico land
border have also grown substantially as U.S. firms have
capitalized on Mexico's growing demand, hitting record highs
several times since early 2017, according to data from the
Association of American Railroads, the largest U.S. rail trade
group.
    
    WHAT IS THE GOVERNMENT DOING?
    The new government began the closure of major fuel pipelines
on December 27. Production at Pemex's Gulf coast Madero and
Minatitlan refineries has also been partially or completely
halted, which contributes to the need for imported fuels as a
replacement.              
    Lopez Obrador hopes some 5,000 tanker trucks can distribute
supplies to over 11,000 gas stations scattered across the
country. While the vast majority of the stations are Pemex
franchises, a growing number belong to new private entrants,
including giant Exxon Mobil Corp         and trading firm
Glencore Plc         , which in some cases import their own
fuel. 
    The cost of transporting gasoline and diesel by tanker
trucks is nearly 14 times more expensive than via pipelines,
according to a study by Mexico's Federal Commission for Economic
Competition, or Cofece.
    Both Pemex and Lopez Obrador have sought to assure an
increasingly restless public that there is plenty of gasoline
and that refineries and other key installations are being
supervised by 4,000 soldiers. He has also pleaded with citizens
to be patient while the new distribution system is normalized.
    Lopez Obrador's team has yet to explain how it will finance
the much more expensive distribution costs it is now incurring.

    
 (Reporting by David Alire Garcia and Marianna Parraga;
Additional reporting by Adriana Barrera and Daina Beth Solomon
in Mexico City and Jarrett Renshaw and Stephanie Kelly in New
York
Editing by Chizu Nomiyama and Lisa Shumaker)
  
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