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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Soaring Prices Have Led To An Uptick In Oil Theft In Colombia

A notable increase in lawlessness, corruption and violence, fueled by record cocaine production and heightened poverty, has marred the four-year term of outgoing Colombian President Ivan Duque. Not only have massacres, violent crime, poverty and cocaine production surged during Duque’s term but the incidence of petroleum theft in Colombia is spiraling higher. Washington’s habitual ramping-up of efforts to combat cocaine trafficking, which has long been a key source of income for Latin America’s criminal syndicates, is forcing the region’s illegal armed groups to find less risky revenue-generating illicit activities. That coupled with soaring oil prices and growing demand for gasoline is driving a sharp increase in oil theft across Latin America which is further incentivized by poverty across the region spiraling upward since the COVID-19 pandemic. Mexico has long been a hotspot for petroleum theft, with criminal syndicates associated with powerful drug trafficking cartels targeting state-controlled Pemex’s petroleum pipelines to steal crude oil and derivative products. By the end of 2018, when President Andrés Manuel López Obrador took office, it is estimated that (Spanish) 80,000 barrels or more of petroleum and derivative products were being stolen in Mexico. After a major crackdown, commenced in the wake of a series of deadly explosions related to fuel theft, which had fallen to five thousand barrels per day. The incidence of hydrocarbon theft from Pemex pipelines plunged by a notable 41.5% between 2019 and the end of 2021, although there has been a sharp resurgence in the illicit activity since 2020. Data shows that for the first quarter of 2022 there was a 30% year-over-year increase in illegal taps of Pemex pipelines in 13 states such as Jalisco, Sonora, and Durango, which have long been petroleum theft trouble spots. 

It is not only Mexico that is a hotspot for this illicit activity, hydrocarbon theft is soaring in conflict-torn Colombia. That can be attributed to a series of events, among them Colombia’s proximity to Venezuela, a near-failed state suffering from chronic fuel shortages, and soaring cocaine production. Venezuela’s dilapidated refinery infrastructure, which operates intermittently, means the OPEC member, which ironically possesses the world’s largest oil reserves totaling 303.6 billion barrels, is suffering acute gasoline and diesel shortages. The shortages are magnified by Caracas pushing to export as much of PDVSA’s crude oil production as possible to gain urgently needed hard currency to prevent the collapse of a bankrupt state. Venezuela’s persistent fuel shortages are further amplified by the strict sanctions introduced by the Trump Administration in 2019 which cut the authoritarian Maduro regime off from international energy and financial markets. That caused crucial condensate imports to plunge because the U.S. until those sanctions were implemented, was the primary source of naphtha for the near-failed state. 

Condensate is a crucial diluent that must be mixed with the bitumen like extra-heavy crude oil extracted from the Orinoco Belt so that it flows allowing it to be processed and exported. This was a major blow for Venezuela because the Orinoco is responsible for around 41% of the country’s oil production. That forced Venezuela’s national oil company PDVSA to use scarce light oil production as a diluent, further magnifying fuel shortages because Venezuela’s refineries are only configured to process light crude oil grades. Those circumstances make it highly lucrative for illegal armed groups to tap Colombian oil pipelines then stealing petroleum which is then processed in rudimentary clandestine jungle refineries into a low-grade greenish gasoline called pategrillo. That primitive gasoline is smuggled into Venezuela (Spanish) via clandestine jungle paths crisscrossing the border, known as trochas, where it is sold at a substantial premium. Demand for pategrillo in Venezuela remains firm because of ongoing chronic fuel shortages. This is a reversal of a long-established trend that began with Chavez’s presidency where cheap Venezuelan gasoline was smuggled into Colombia for use in the manufacturing of cocaine.

Record coca cropping and cocaine production in Colombia is driving ever greater demand for cheap gasoline in the Andean country. According to the UN Office On Drugs And Crime Colombia’s 2020 (Spanish) fresh coca leaf yield rose 10% year over year to a record 6.4 metric tons and potential cocaine output grew 8% to a new high of 1,228 metric tons. Gasoline is a key chemical which is used in large volumes to process coca leaves. It is estimated that it takes 75 gallons of gasoline to produce one kilogram of cocaine. For that reason alone, soaring oil prices and hence skyrocketing gasoline prices are key drivers of the ever-growing volume of illegal taps being placed on Colombia’s petroleum pipelines. Data from CENIT, a subsidiary of state-controlled Ecopetrol responsible for Colombia’s oil pipelines, shows that petroleum theft during 2021 (Spanish) was at least a fifth higher than a year earlier and over 80% higher than in 2016. It is estimated that during 2021 alone 3,299 barrels of crude oil daily were stolen compared to an average of 2,744 a year earlier and 1,806 barrels per day during 2019.

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The main target for Colombian criminal bands is the 480-mile long 210,000 barrel per day Caño Limón-Coveñas pipeline which connects the Caño Limón oilfield in the department of Arauca to the Caribbean port city of Coveñas. The pipeline, a long-time target for bombings by leftist guerillas, runs through remote lawless parts of northern Colombia near the Venezuelan border, making it an ideal target for illegal valves. While there is a range of illegal armed groups tapping the pipeline, it is Colombia’s last remaining leftist guerilla group the National Liberation Army (ELN – Spanish initials) which has emerged as a chief culprit. In December 2021 Colombian authorities destroyed two clandestine ELN refineries in the department of Norte de Santander which borders Venezuela and is a hotspot for illicit activity. According to Reuters the covert facilities generated illicit earnings of $7,500 per month from producing pategrillo for the leftist guerillas who have shunned peace talks with Colombia’s national government since 2018.

Norte de Santander encompasses the lawless Catatumbo territory, through which the Caño Limón-Coveñas pipeline and Catatumbo river flow, which is Colombia’s second most prolific coca cropping region and a flashpoint for violence. It is here where many of the illegal valves plaguing the pipeline are placed, not only allowing the theft of petroleum theft but also causing considerable environmental damage. Crude oil spills from the taps into the surrounding terrain and water bodies that flow into the Catatumbo River which eventually empties into Venezuela’s Lake Maracaibo adding to the environmental catastrophe enveloping South America’s largest lake.

Skyrocketing oil prices, Venezuela’s chronic fuel shortages and surging cocaine production, because of the vast quantities of gasoline required to process coca leaves, will propel oil theft ever higher in Colombia. The Colombian government’s crackdown on cocaine trafficking is also adding momentum because it forces illegal armed groups operating in the Andean country to find other income-generating illicit activities with less severe penalties. These developments are weighing heavily on Colombia’s oil industry, which since senator Gustavo Petro won the June 2022 presidential election run-off, is facing an especially uncertain future. The president-elect has promised to end contracting for hydrocarbon exploration and ban hydraulic fracturing in Colombia, which includes ending the Kale and Platero fracking projects in the Middle Magdalena Valley Basin. As a result, there is considerable uncertainty hanging over Colombia’s oil industry which is deterring much-needed foreign energy investment.

By Matthew Smith for Oilprice.com

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