Regional News In Brief

Mexican Election, Ballot, Mexican FlagMexican Elections

Mexico will be holding its general elections on July 1, when Mexicans will elect, on a federal level, a new president to serve a six-year mandate, 128 senators and 500 members of the Chamber of Deputies, with local elections also taking place in Mexico City and in 29 out of Mexico’s 31 states.

The 2018 elections are understood to be one of the most decisive for Mexico, with approximately 88 million Mexican registered voters. A broad perception of the country’s poor economic performance in recent years, combined with persistent levels of poverty, inequality, and, most notably, rising levels of violence and criminality, prompt a general willingness for new policies and governmental change.

Background

Mexico was ruled by the Partido Revolucionario Institucional (“PRI”) from 1929 to 2000, when the opposition party Partido Acción Nacional (“PAN”) gained power. In 2012, the PRI regained its grip with the election of Enrique Peña Nieto (“Peña Nieto”) to the presidency. Mexico’s presidential term limit is one six-year term, which ends this year for the incumbent president.

Peña Nieto’s administration has been hounded with allegations of impropriety, including his implication in corruption scandals along with several other PRI politicians. In 2014, for example, Peña Nieto was accused of having received a house (the now-infamous ‘Casa Blanca’), then-valued at USD 7 million, in exchange for illicitly awarding public contracts to a construction company, Constructora Teya SA de CV. However, despite significant pressure and media coverage on the allegations against him, Peña Nieto managed to avoid legal proceedings in connection with this.

His administration, albeit controversial, demonstrated, in its initial years, nominal efforts in combatting the country’s endemic levels of corruption and organised crime. An early victory was the arrest of the notorious Sinaloa cartel leader, “El Chapo”, in 2014. However, throughout 2014, this perception started to fade away due to a new rise in the levels of violence and crime, gaining further impetus with El Chapo’s escape from prison in 2015. His recapture in 2016, in a joint effort by Mexico and the US, did little to repair the administration’s image as a strong proponent of efforts to combat corruption and organised crime.

Peña Nieto’s market-friendly but unpopular energy sector reform in 2013, concerns with Mexico’s rising levels of inflation, unemployment, corruption, violence and organised crime have led to declining approval rates for Peña Nieto. His administration’s involvement in corruption scandals and allegations of impropriety has also significantly weakened PRI’s reputation as a whole.

 

“The rising levels of violence are likely to be a key factor impacting expected voter turnout in Mexico. Regions where crimes are directly associated with drug cartels have had lower voter turnout in past elections.”

Main issues

As official campaigning kicked off in Mexico on March 31, candidates have structured their campaigns around the following main issues:

Corruption. Candidates have focused a large portion of their speeches against the rampant corruption ingrained in the country’s institutions. Mexico ranks amongst the countries with the highest perceptions of corruption. For instance, on Transparency International’s 2017 Corruption Perceptions Index, Mexico ranks 135 out of 180, with 1 being the least corrupt, and 180 being the most corrupt. The need to fight corruption appears to be a common platform among the 2018 presidential candidates.

Institutional independence. Candidates broadly support a campaign against corruption through the promotion of measures such as the independence of the Public Prosecutor’s Office and the elimination of prosecutorial privileges of senior politicians in Mexico. Institutional independence, which is generally weak in the country, is seen as a fundamental change issue, as politicians and public officials are frequently entangled in allegations of corruption, fraud or money laundering but tend to not be prosecuted, thus contributing to a perception of impunity in the country.

Violence and organised crime. Severe levels of violence are a key factor in this year’s elections. According to Mexico’s Secretariat of National Security, homicide rates in the country went up from 17.1 homicides per 100,000 inhabitants in 2015, to 26.9 homicides per 100,000 inhabitants in April 2018.

The rising levels of violence are likely to be a key factor impacting the levels of voter turnout in Mexico. Regions where crimes are directly associated with drug cartels have had lower voter turnout in past elections, which typically ranged from 50 to 65-percent. Nevertheless, low turnout due to violence is unlikely to jeopardise the chances of any particular candidate.

Economy. Given Mexico’s slow-paced economy, candidates have dedicated a significant, albeit smaller, portion of their agendas to addressing economic strategy, with a specific focus on the North American Free Trade Agreement (“NAFTA”). As recent discussions indicate potential significant changes to the agreement, candidates sought to propose alternatives. Their proposals range from frontrunner Andrés Manuel López Obrador’s (“AMLO”) support of inward and nationalistic economic policies, to runner-up Ricardo Anaya Cortés’s calls for strengthening Mexico’s relationship with the US and encouraging international trade.

However, the extent to which drastic policy changes can be implemented will depend on majority or two-thirds-majority legislative approval. Mexican political commentators have noted that major shifts in current economic policies, such as Peña Nieto’s energy reforms, are unlikely as many would require a two-thirds majority congressional approval.

KEY CANDIDATES AND THEIR ANTI-CORRUPTION MESSAGES

FORMER CANDIDATE

Potential changes to Mexico’s anti-corruption and compliance landscape

Despite the differences between candidates, we assess that stronger efforts to combat corruption, impunity and criminality in the country are a common platform among the main presidential contenders.

Transparency has been a frequent word in Mexico’s 2018 elections, which indicates that politicians and candidates are aware of the need to implement new governmental procedures that would allow improvements in anti-corruption measures and stronger compliance efforts throughout the country. Significant changes in the transparency and functioning of public tenders are to be expected, with the possibility of enactment of publicly-available systems that could allow citizens to monitor public tenders.

These measures, allied with calls to defend the independence of the Prosecutor’s office, the ending of the presidential prosecutorial immunity and further efforts against impunity in the country, indicate that public and prosecutorial scrutiny over opaque dealings in prominent sectors, such as infrastructure, construction, and oil and gas, will be significant. While there is no telling if this trend will spur more stringent government anti-corruption measures or trickle down to the local level, investors should be attentive when selecting local partners or developing projects on the ground. Transactions that involve state-owned entities, impact communities or the environment, and demand close coordination with local governments will be especially prone to media, regulatory, and popular scrutiny in the short to medium term.

Security challenges in Mexico’s Oil and Gas Sector: Fuel theft may dampen enthusiasm of new entrants into the Mexican oil-and-gas market

The Mexican economy is heavily reliant on its lucrative oil and gas sector, with revenue generated by state-owned oil company Petróleos Mexicanos (Pemex) historically accounting for approximately a fifth of total government income. The first quarter of 2018 saw Mexican oil tenders draw in almost USD100 billion in investments, with a number of heavyweight multinationals securing their position in Mexico’s recently reformed oil and gas sector. More than 100 oil development contracts have been awarded in the country since 2013, following energy sector reforms spearheaded by the Enrique Peña Nieto administration, which opened up the industry to foreign investment for the first time in over seven decades.

Nevertheless, Pemex’s oil output has been in decline, and a depreciating peso has put further pressure on the company’s profitability in recent years. By ending the firm’s monopoly on the sector, President Peña Nieto is hoping to revitalise Mexico’s oil and gas industry by boosting foreign direct investment to the country. Although the success of recent oil tenders demonstrates an appetite for the Mexican market on the part of foreign investors, the industry’s increasingly volatile security environment has raised concerns for new entrants.

The primary security concern for the sector centres on Mexico’s endemic levels of fuel theft. In 2017 alone, Pemex reported 9,509 cases of illegal tapping along its network of pipelines, an almost twofold increase from 2015 levels, and an exponential increase from a decade prior, when only 324 cases were reported. According to company records, fuel theft has amounted to estimated annual revenue losses of USD1.6 billion, which also includes the cost of making necessary repairs to tapped pipelines. Fuel theft has historically resulted in significant infrastructural damage in this regard, with tapped pipelines catching fire for several hours at a time, or exploding because of tampering.

Illegal taps along Pemex pipelines

Illegal-taps-along-Pemex-pipelines

Fuel theft mechanics and main actors

Although fuel theft has been a constant characteristic of the Mexican oil sector for decades, it was considered a relatively minor issue until the late 2000s. However, the turn of the decade saw a number of factors significantly boost criminal activity within the sector. Foremost amongst these has been growing interest from organised criminal groups (OCGs) in the fuel theft “trade”, including powerful groups such as the Zetas and Jalisco New Generation cartels. Oil theft has provided a highly lucrative and lower-risk alternative to drug trafficking for a number of OCGs seeking to diversify their revenue sources. Additionally, a heavy-handed government crackdown on organised crime has resulted in the subsequent splintering of a number of OCGs, with fuel theft providing smaller splinter groups with rife opportunities to secure contested financial and territorial resources.

Historically, the general modus operandi of fuel thieves in Mexico – locally known as ‘huachicoleros’ – has been to steal fuel directly from existing pipeline infrastructure using relatively simplistic methods and tools, such as a shovel, a drill, a hose and a fuel drum. Huachicoleros have also been known to steal wholesale from fuel trucks or Pemex storage units. They then sell the fuel with relative impunity to individual users or businesses at about half the price of what is available at local service stations, garnering significant community support in the process.

However, with OCGs now increasingly taking control of the fuel theft criminal enterprise, there has been a tangible escalation in tactics. Local huachicoleros have either been pushed out of their territories or incorporated into more complex criminal networks backed by OCGs. These networks are able to use more advanced machinery and explosives to penetrate oil pipelines, or deploy well-coordinated armed raids to steal from trucks and storage facilities. Furthermore, Pemex employees are increasingly victims of typical OCG intimidation tactics, including threats, extortion and murder. OCG networks are also better positioned to infiltrate and co-opt insiders. Pemex has already dismissed close to 100 employees for complicity in fuel theft, and a number of local politicians and security officials have been found guilty of facilitating, or directly participating in, fuel theft schemes. The scale of coercion and collusion within the oil theft enterprise have made tackling this specific security threat a particularly difficult task for authorities and corporate entities alike.

Piracy

OCGs are not the only criminal elements to expand their operations into the oil sector. Pemex has recently also become a prime target for piracy. According to Mexico’s Navy Secretariat, between December 2016 and January 2018, there were a total of 21 attempts made by oil thieves, often posing as fishermen, to board Pemex offshore oil platforms and ships operating in the Gulf of Mexico. Of these, a reported 11 oil platforms and ten vessels were attacked in the Bay of Campeche. Furthermore, two attacks targeted ships docked in the port of Dos Bocas, in Tabasco, with robberies, or attempted thefts, also taking place on vessels in Ciudad del Carmen, Las Coloradas and Atasta. Other than fuel, pirates have also been known to steal pipework, engines, aluminium, electrical wiring, copper, computers, communication equipment and cash from ships and oil platforms in the region.

Geographic distribution of fuel theft in Mexico

Fuel theft is most prevalent in the centre and centre-east of the country, where the coastal oil and gas production of Veracruz is transported through the high concentration of pipeline infrastructure to, and through, states around Mexico City. Particular hotspots include the town of Salamanca in the state of Guanjuato, as well as the area known as the “Red Triangle” in the state of Puebla, encompassing the Tepeaca, Palmar de Bravo, Quecholac, Acatzingo, Acajete and Tecamachalco municipalities. Around 40 percent of fuel distributed from Mexico City runs through this zone.

Fuel theft hotspots on the Mexican mainland and Gulf of Mexico

fuel-theft-hotspots-on-the-Mexican-mainland-and-Gulf-of-Mexico

Foreign investors place their trust in Mexico’s security response, but is it enough?

Oil theft predominantly impacts the refinery sector in Mexico, which is still wholly controlled by Pemex. However, the latter is increasingly seeking foreign investment to assist with much needed upgrades to its infrastructure. Furthermore, although Pemex has historically covered the costs of fuel theft targeting its pipeline network, some of these costs may be transferred to the private sector in future, as foreign investment accelerates over the coming years. Thus, supplementing local security initiatives with corporate security planning is likely to become a growing necessity for multinationals eyeing the Mexican oil and gas market. The entry of OCGs has seen oil theft in Mexico become an increasingly prevalent, lucrative, and violent component of the country’s black market. Although Mexico has been increasingly willing to deploy military personnel to patrol oil thieving hotspots, the scale and terrain of Mexico’s oil pipeline networks makes this a complex, expensive and frequently inadequate security measure. Furthermore, the deployment of military police has come under criticism following revelations by local media outlets that soldiers were executing suspected oil thieves on site. Meanwhile, OCGs continue to display impunity in the face of mounting security measures. In January 2018, for example, suspected OCG members killed the head of security for one Pemex’s oil refineries in Salamanca.

Companies considering investing in the many opportunities presented by Mexico’s increasingly liberalised oil and gas sector will undoubtedly have to contend with the very real security risks facing both their personnel and infrastructure. Prospective investors should therefore take appropriate steps to ensure a thorough understanding of the threat environment, and – where possible and appropriate – take necessary measures to mitigate these upon market entry.

DOWNLOAD THE BULLETIN HERE