Drug Cartels Will Challenge Energy Investors (WSJ.com)

As Mexico Opens Sectors to Outsiders Gangs Present Hurdle

PIEDRAS NEGRAS, Mexico—The driver for Geokinetics Inc., a Houston-based company surveying for oil and gas in northern Mexico, stopped his pickup truck at the entrance to the firm’s base camp on a recent afternoon and asked the guard in a low voice: “Hey, buddy. How is your friend?”

“Fine,” the guard said. “He is still back there.”

Nearby, a young man wearing a baseball cap and toting an AK-47 assault rifle squatted among the cactus shaded by low mesquite trees. His job, Geokinetics workers say, is to be a lookout for the local criminal gang known as the Zetas, reporting the movements of company employees and patrolling soldiers to his bosses.

As Mexico opens its energy sector to private investors after 76 years of government monopoly, one of the biggest hurdles for foreign companies coming here isn’t geology, regulation or finding skilled workers. It’s the vicious drug cartels that virtually control the parts of northern Mexico where experts say there are big deposits of shale oil and gas.

“I’m afraid oil companies coming to Mexico will have to worry about insecurity as much as about drilling,” said Carlos Elizondo, an energy expert recently appointed to the board of former state monopoly Petroleos Mexicanos, or Pemex.

Chris Faulkner, the founder of Dallas-based Breitling Energy, which produces shale gas in South Texas and elsewhere, adds that

“there are a lot of challenges with companies coming to Mexico because of security concerns.”

Geokinetics workers say they have come across human remains while doing exploratory work in the brush near the company’s base camp. Last year, two company engineers were kidnapped before being rescued by federal police and Mexican marines.

In 2012, an entire eight-man crew from a private Mexican oil-service firm went missing while working on well heads down river from Nuevo Laredo, according to media reports at the time. Neither the company nor Mexico’s government ever commented on the disappearance.

A young female engineer working for another service company in the Chicontepec oil basin in the coastal state of Veracruz was raped several months ago by a gang, according to two service contractors with direct knowledge of the incident who asked not to be named.

And, in the six years between January 2008 and March 2014, 12 Pemex workers were kidnapped, according to a document from the attorney general’s office obtained through Mexico’s transparency institute.

A Pemex spokesman said he didn’t have definitive figures on kidnappings.

“There is not a client whose first or second question is not about the security issue,” Luis Fernando Gomar, a Strasburger & Price lawyer in Mexico City who specializes in oil and gas issues, told a recent conference on Mexico’s energy opening. “You have to determine the level of risk. It’s one of the most important issues out there.”

Mexico’s security failures come on top of challenging economic times in the oil and gas industry, with cartel violence certainly a deal breaker for many of the smaller firms that have helped fuel the shale-rock energy boom in the U.S., said Michelle Foss, an energy economist at the University of Texas.

“If you are reassessing your portfolio and think the lower-48 states is safe territory, why would you take a risk and go to Mexico?” she asked.

Since late 2006, some 100,000 Mexicans have been killed in drug-related homicides and an additional 22,000 have gone missing. While drug-related homicides appear to have declined in the past two years, other crimes such as extortion and kidnapping have risen.

Pemex itself is often the target of extortion or theft by organized crime. By illegally tapping into pipelines, thieves stole 9.3 million barrels of oil and gasoline in 2013, roughly 1% of Pemex’s total annual output and a 13% increase from the previous year, according to public Pemex records. The loss was close to $1 billion, the company said.

Not all oil firms coming to Mexico will encounter cartel members. Much of the oil bounty is offshore in the Gulf of Mexico’s deep waters. And most big international oil companies say they want to focus exclusively offshore to avoid messy problems like organized crime, land-use issues, and corruption at the municipal and state levels.

For those venturing onshore, parts of southern Mexico like Campeche and Tabasco states are relatively safe.

This year the government of President Enrique Peña Nieto dispatched 2,000 army troops and 700 federal police to the border state of Tamaulipas to support the more than 10,000 troops already deployed there and in neighboring states. A newly created unit of the federal police will be in charge of helping private oil firms operate in the region, government officials said.

Service companies like Geokinetics, which already works here under contract to Pemex, have developed tactics ranging from coded language to the hiring of intelligence and security firms to cope with criminal gangs. “Any company that wants to come here has to be prepared to operate in a highly aggressive environment,” said Ignacio Orozco, the head of Geokinetics in Mexico. “An essential first step is to hire a security firm that helps you make contacts with the community and solve critical situations.”

Grupo Cios, an intelligence and security firm led by Francisco Ramírez, a former Colombian police lieutenant, supplies Geokinetics with daily information about which zones are safe to enter and when it’s better to remain indoors. The firm employs locals to keep an eye on the Zetas movement. “This help is critical for their daily operations,” Lt. Ramírez said.

The pick-up trucks that workers use to move around are equipped with GPS navigation systems connected with a security center in Mexico City. If a truck exceeds a certain speed or exits from a predetermined route, alarms go off and the vehicle’s engine stalls.

When the two Geokinetics workers were kidnapped, Grupo Cios quickly touched base with its government contacts. Within hours, the workers were found in a safe house and rescued, Mr. Ramírez said.

Francisco Caballero, the head of Geokinetics’s base camp, said that heavily armed criminal gangs have occasionally entered the camp to steal gasoline, tires and 4×4 trucks. “My advice to oil and gas companies would be: Keep a low profile, don’t stick your nose into these people’s business, [and] keep your ears open and your mouth shut,” Mr. Caballero said.

Mr. Ramírez, the head of the security firm, said criminal gangs like the Zetas have relatively little interest in making life impossible for the companies, in part because an influx of oil companies could open a new source of income for them.

“They are parasites,” he said. “The gangs also know the companies create much of the wealth and the jobs in the communities that the gangs then extort.”

Geokinetics has budgeted some $2.5 million, or about 5% of its contract with Pemex, to security. Other businessmen in the oil industry who operate in the region said that security-related costs generally account for around 3%-5% of revenue.

But Mr. Orozco, the head of Geokinetics in Mexico, said profit margins are around 20%, in line with those of some oil-service contractors operating in Texas. A positive factor for the companies is the low cost of Mexican labor: A local worker is paid around $300 a month, while a U.S. worker would cost the company between $1,500 and $2,000 dollars.

“Once you know how to operate here, it’s profitable,” Mr. Orozco said.

Article Author: Juan Montes and Dudley Althaus

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