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Mexican Shale Industry Hoist on NAFTA-Induced Gang Violence Petard

There’s perilous little recognition in the US of how much of the rise in gang violence and drug wars is the direct result of NAFTA.

They were careless people, Tom and Daisy – they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together and let other people clean up the mess they had made.
– F. Scott Fitzgerald, The Great Gatsby

There’s perilous little recognition in the US of how much of the rise in gang violence and drug wars, as well as much harsher economic conditions for ordinary people, is the direct result of Nafta. While the toll has fallen hardest on Mexicans, American businesses may see collateral damage in the form of not getting much access to Mexico’s shale gas.

In case you think it’s an exaggeration to blame Mexico’s spectacular increase in gang violence on Nafta, Jeff Faux explained the connection in a 2014 Huffington Post article, NAFTA and the Narcos. Key sections:

Mexico has long been a supplier of marijuana to the U.S. market. But in the days before NAFTA, the Mexican government had an informal deal with the illegal drug monopoly: “Sell what you want to the Americans. But keep our country clean of drugs and violence.” The system was cynical, but it worked, producing export earnings for the Mexican economy and maintaining public safety.

With NAFTA, the volume of trade across the border swelled, and pressure from business to move goods quickly made it impossible for U.S. Customs officials to make thorough inspections for contraband. As a result, it became much easier and cheaper to move cocaine from Columbia, that had previously been delivered by sea, overland through Mexico.

Given their strategic location, the Mexican drug lords gradually took control of the major South American routes into the U.S. market…This kind of money drew new competitors into the business, a process encouraged by Mexican political leaders whose connections to the narco-traffickers were ignored by the administrations of George Bush I and Bill Clinton in their eagerness to deliver NAFTA to their corporate backers.

As the competition intensified, rival cartels hired ex-policemen and ex-soldiers — many trained to kill by the U.S. military — to do their dirty work…Violence spread and became more brutal, involving torture, mass execution and the public display of horribly mutilated bodies.

Meanwhile, the sanctions against selling illegal drugs within Mexico crumbled. The rapidly growing volume of cocaine traffic from South America through Mexico made it harder to launder drug money as it changed hands across borders. Columbian suppliers began paying their Mexican trans-shippers in kind — i.e. in cocaine. The Mexicans in turn used the cocaine to pay their own employees, who, in order to get cash, sold it on the street. And like any expanding industry, the Mexican cartels gradually diversified their product line — in this case, to include heroin and methamphetamines, which are also used to make payroll.

In the mid-2000s the hired assassins began to organize their own gangs. Where the older cartels were primarily interested in the business of selling drugs, these new criminal organizations spread out into robbery, kidnapping, extortion, and intimidation by murder. Victims were no longer rival gang members or bystanders injured by accident. They were farmers, businesspeople, and their customers and employees.

The article below from OilPrice describes how this gang violence is impeding shale gas development in Mexico, since gangs control much of the region where the reserves lie. One might argue that the Mexicans got lucky, that this obstacle to developing shale gas is a thin silver lining in the cloud of having the country so much in thrall to druglords. The situation is so vicious and chaotic that one does not get the sense that energy interests would entertain trying to find a way to do business with the drug thugs. There’s too much physical and economic risk. After all, possession is 90% of the law.

Mexico has roughly 545 trillion cubic feet of recoverable shale gas and 13 billion barrels of shale oil.

The obstacles to kick-starting Mexico’s shale industry have dampened the once lively enthusiasm surrounding Mexico’s historic energy reform. Recent legislation ended the development monopoly of Petroleos Mexicanos (Pemex), which would in theory allow private parties to enter.

One holdup has been the difficulty of reaching consensus on the legal framework for development and passing the related legislation.

Political disputes over what could be
President Enirque Pena Nieto wants to increase production to 3 million barrels of oil per day by 2018, up 25% from the current 2.4 million barrels per day level,
but experts are skeptical.

The OilPrice article focuses on the practical impediments:

In order to access the potentially abundant oil and gas from Mexican shale, the government will need to rely upon the private sector. Under the energy reform, Pemex is given first refusal over any projects – meaning that it can keep the assets it really wants, but allows the rest to go to bidding for private companies. Pemex will likely stick with its wells that are already producing, and leave drilling new shale wells to incoming private companies.

However, many areas in the Burgos Basin – which lies just south of the rich Eagle Ford formation in Texas – are suffering from intense gang violence. Bloomberg News reported on the conditions in Tamaulipas, a state in eastern Mexico, which at times resembles a “war zone.” A power vacuum left over by the arrest of the leaders of the Zetas and Gulf Cartels last year has the eastern coast dealing with heightened violence – shootings along highways and burned down buildings are commonplace as rival drug gangs jockey for territory.

Further north, shootings and kidnappings plague Highway 2, which runs parallel to the border with the United States.

The violence poses an immediate threat to the oil companies working there. The Mexican Army is now escorting workers of Weatherford International, an oilfield services firm, to and from their drill sites after a drug gang shot up a hotel where the workers were staying.

Aside from gang violence, theft of oil and gas by drug cartels poses another threat to companies. In 2013, Mexican gangs stole around $790 million worth of fuel, which is siphoned off from pipelines and smuggled.

Perhaps more importantly, the violence will undermine Mexico’s attempts to boost oil production over the longer term. The Mexican government doesn’t believe that Pemex will be able to increase production. The state-owned company’s goal is to merely keep production steady as wells age and decline. Instead, the government will be relying upon the private sector. Over the next four years, the government expects 500,000 barrels per day to come from non-Pemex sources.

But that goal will prove elusive if independent oil and gas companies are scared off by gang violence.

“It does raise the cost of doing business when you have to face the threats of kidnapping and extortion,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, told Bloomberg.

If Mexico is to achieve its goal of reviving oil production, which has declined by more than one-third over the last decade, it will not only need to get the legal framework right, but the government will also need to ensure drug violence drops to a level that doesn’t scare off private oil and gas companies.

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