Will There Be Blood?
Mexico's move to open its energy sector to foreign companies faces threats from the ruthless drug cartels already ravaging the country.
On one particular pipeline being built in Mexico's desert, work stopped at 5 p.m. No exceptions.
"After 5:30, when the cartels start moving drugs, they have to leave the site. And the cartel made it very clear that if they saw them after 5:30, they would be butchered. So they enter into an 'agreement,'" says Miriam Grunstein, a professor at the Universidad Autonoma de Nuevo Leon and attorney who advised the unnamed pipeline construction company that entered into the understanding.
"It's very spooky, but that's how it works," she says.
Pick your euphemism, but oil and gas companies are certainly no strangers to working in "volatile," "dynamic" or "uncertain" settings, whether they be in Angola, Colombia, Indonesia, Nigeria or Papua New Guinea, not to mention Iraq after the U.S. invasion. Now Mexico may soon join that list: Last year, his country faced with a potential credit downgrade and hungry for cash, President Enrique Pena Nieto announced Mexico would begin allowing foreign companies to drill for oil and gas alongside the state-owned company, Petroleos Mexicanos, or Pemex, which has controlled exploration and production since 1938.
But Mexico's plan for new profits comes with plenty of risk, as hopes for foreign investment in the country's ailing oil and gas sector hinge largely on the government's ability to contain powerful and often ruthless criminal organizations like Los Zetas and the Sinaloa Cartel, or at the very least to compel them not to attack foreign oil and gas sites.
Experts say that's a faint hope, and one that grew even dimmer recently following a massive security failure. With a single motorcycle ride through a mile-long tunnel that led from a prison cell to freedom earlier this month, one of the world's most notorious drug kingpins undercut what little confidence remained in Mexico's ability to shield even its most valued assets from criminals.
"Look what happened with El Chapo," says Jorge Pinon, a Mexico energy expert at the University of Texas-Austin, referring to Joaquin Guzman, the head of the Sinaloa Cartel who escaped from a maximum-security prison July 11. "Mexico's political system, economy, growth – everything is at risk today because of what's happening, and they haven't been able to control it."
Cartels already control and charge "tolls" to cross most if not all the bridges in northern Mexico, which is home to huge shale deposits of oil and gas. Experts also say the gangs extort industrial facilities for rent or protection, and steal oil from pipelines – costing Pemex more than $1 billion in 2014 alone, according to the company's estimates. The heists can prove disastrous: One theft-related pipeline explosion in 2010 killed nearly 30 people, including around a dozen children.
Workers in the oil and gas sector are hardly immune, as two engineers from a Houston-based surveying company were kidnapped in 2013, freed only after being rescued by Mexican police and marines, according to The Wall Street Journal. Eight workers for a private Mexican energy company also reportedly disappeared in 2012.
"In countries like Colombia, even if FARC would come and blow up a pumping station, you knew who they were, and sometimes they would give you a heads-up so you were able to remove your personnel," Pinon says. "In Mexico, these are not necessarily political organizations, these are criminal organizations: They're very violent – it's much harder to establish some sort of gentlemen's rules."
Antonio Garza, former U.S. ambassador to Mexico under President George W. Bush, says the Mexican government has a "gambler's shot" at best to provide adequate security, yet the need for some semblance of control is dire. Though Mexico sits atop large oil and natural gas reserves, it's been hamstrung by aging infrastructure, outdated technology, encrusted bureaucracy and entrenched corruption.
Foreign "majors" – companies like BP, ExxonMobil, Shell, Statoil and Total – have both the capital and know-how to potentially break through those binds.
"The credit rating of Mexico depends on a reliable flow of oil exports," says analyst George Baker, who edits and publishes the Houston-based industry newsletter "Mexico Energy Intelligence." "The cost of money – not only for Pemex and the government, but everybody in Mexico that has to rely on Mexico's risk and rating – is put in jeopardy by falling oil production."
An auction held July 15 for 14 parcels in shallow waters off Mexico's shores resulted in the sale of just two plots – partly due to security concerns, but more the result of low oil prices and other financial issues, like Mexico's "take" of profits. Such snags are expected to be resolved ahead of the next round of bids this fall, Baker and other experts say, with an auction for deep-water parcels expected to prove more productive.
But then there's the onshore auction, expected in late 2016, for lucrative swaths of shale near the Texas border, the kind of oil and gas reservoirs that demand the expertise of U.S. fracking firms already exploiting the same formation on the Texas side of the border. Despite the American advantage, many parcels will likely go unsold, experts say.
"The security situation is so volatile, they're not going to see any investment," says David Goldwyn, president of Goldwyn Global Strategies and a senior fellow at the Atlantic Council's Adrienne Arsht Latin America Center.
"You are going to see very few international oil companies bidding for this concession because of the issue of security," says Pinon, of UT-Austin. "They're not going to send their employees – especially their foreign-born employees – in this area in northern Mexico."
Already, sustained low oil and gas prices have discouraged much shale development, in which the break-even point can be higher compared with conventional drilling. But unconventional oil and gas sites that employ practices like hydraulic fracturing are also often more dispersed than a centralized drilling facility – making it far harder to protect workers from extortion, kidnapping and other attacks.
The Mexican federal police have reportedly established a special unit to help protect foreign energy firms, but experts are not optimistic: When El Chapo roared out of prison, so too went any faith in the government's ability to change the situation.
"In the wake of what happened … they've got to push all their chips to the rule of law," Garza says. "Whatever capital they have left, we've got to place it here."
http://www.usnews.com/news/articles/201 ... rgy-sector
If big energy can't win here then the cartels really have triumphed. A cartel/govt./ energy partnership may be the future. Pipelines and refineries are really vulnerable targets- as are their employees.
Corruption is a very powerful cultural force in Mexico that is slowing development.
