Global Economics

Second Pemex Attack Rocks Mexico


Two months later, more pipeline explosions disrupt the state-owned oil monopoly. No one was injured, but businesses from VW to Kellogg were hurt

Mexico has long been immune to the armed strife that has plagued Colombia and other parts of Latin America. This stability has meant a lot to the U.S., which looks to Mexico as a source of manufactured goods and oil.

But the Sept. 10 incident in the state of Veracruz underscores potential fragility in Mexico. For the second time in two months, vandals attacked oil and gas pipelines belonging to Mexico's state-owned oil monopoly, Petroleos Mexicanos, crippling industry throughout the country.

Early in the morning, the company, known as Pemex, detected a change in pressure on one line in the Gulf Coast state of Veracruz. Soon afterward, explosions went off at six different sites affecting 12 pipelines, mostly in Veracruz and the state of Tlaxcala. Some 15,000 people from nearby towns were forced to evacuate, though no injuries or deaths were reported.

Mexico is the world's sixth-largest oil producer and one of the most important suppliers of petroleum to the U.S. Pemex also is a key source of revenue for the Mexican government, and its unusual fiscal structure requires that it fork over most of its profits, leaving few resources for new investments and maintenance.

Part of a Campaign?

Oil prices leapt to $78 a barrel in futures trading Sept. 10 after the explosions occurred. More than 1,100 companies in seven Mexican states were affected by the interruption in natural gas supply, including multinational automobile manufacturers like Volkswagen (VOWG.DE) and Nissan (NSANY), according to the Mexican Natural Gas Assn.

The attacks were reminiscent of pipeline detonations in early July, when a guerilla group called the Revolutionary Popular Army, or EPR, took responsibility for four similar explosions in the states of Querétaro and Guanajuato in Mexico's central region.

The group proclaimed it was launching "a harassment campaign against the interests of the oligarchy and the government," and demanded that two of its leaders missing in the southern state of Oaxaca be freed. While authorities have not yet confirmed that the EPR was responsible for the Sept. 10 attack, police found a message and the EPR's initials painted in red on a pipeline.

Vulnerable to Organized Crime

While the July attacks forced several manufacturing plants to halt operations for a few days, the economic losses from this week's attacks are expected to be double those of July. Many of the same companies in the country's central manufacturing belt were affected, including Honda (HMC), Kellogg's (K), and Hershey (HSY).

Experts say the incidents show the vulnerability of Pemex and the government in the face of increasingly powerful organized crime groups. Those groups include not only drug traffickers, but also contraband dealers and violent political groups. "Obviously these groups have the capacity to do damage to vulnerable points in the system," said Erubiel Tirado, an expert on national security issues at Iberoamerican University in Mexico City. "Mexico hasn't done much strategic planning and now our vulnerability is increasing with an ever more risky situation."

Mexico President Felipe Calderón ordered soldiers and federal police to boost security along oil pipelines and at other "strategic installations" after the July attacks, and promised to find and prosecute the perpetrators of this week's episode.

Going for the Government

But Agustin Humman, vice-president of the Mexican Natural Gas Assn., says Pemex has left several visible, above-ground stations unguarded. "These stations are not protected at all, and of course the most vulnerable spots along the pipelines are where they run above ground," said Humman.

According to Tirado, Pemex is a natural target for guerilla groups because its status as a state-owned company means that damage incurred will hurt the government badly. "It's not a coincidence that a group wanting to do harm to the government would attack in the oil-rich region of Veracruz," said Tirado.

Pemex Director General Jesús Reyes Heroles recognized that the attacks were a "strong blow" to the company, and worse than the previous attacks in July. Monday would be remembered as a "bad day," he said, and the repairs to the pipelines would cost the company several million dollars. The repairs would not happen overnight and it could take until Monday for the natural gas supply to be fully reinstated, he added.

Less Money for Maintenance

The attacks have come at a particularly inconvenient time for Pemex, which has been suffering from financial strain and increasing pressure to step up exploration and production as its most important field, Cantarell, goes into decline.

Over the past decade, Pemex has slashed its maintenance spending nationwide. In 1997, Pemex had a budget of $2.7 billion for maintenance. Today the budget is $1 billion, according to a July report by the Mexican Senate. The state of Veracruz is home to 25% of the nation's total pipeline network, about 8,700 miles of pipeline.

With the strain on Pemex' budget, experts question whether the country will make the necessary investments in security to avoid future attacks. Some experts, such as Elena Azaola, of the Center of Investigations and Social Anthropological Studies, believe the incidents were isolated. "But Pemex still needs to improve its security intelligence in a big way," she said.

Barclay is a reporter for BusinessWeek.

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