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Mexico's Drug Cartels Scare Oil and Gas Investors

Oil and gas drillers in Texas have to contend with environmental opposition and soaring costs. A few miles south in Ciudad Mier, a town in Mexico’s Tamaulipas state, Angel Torrez and co-workers duck gunfire from drug traffickers. When gunmen pulled up to the Hotel Asya in a makeshift tank in April and sprayed it with bullets, Torrez dropped to the floor. After the attack, the 21-year-old machine operator for oil and gas company Weatherford International (WFT) and his crew of about 30 left town under police escort. In Tamaulipas, oil workers have been caught in the crossfire of cartels feuding for control of the U.S. drug market, according to Alejandro Hope, a former government intelligence officer and now a security analyst at the Mexican Competitiveness Institute.

“Unless the security situation along the northeastern border improves significantly, smaller companies will probably take their time before jumping in”—Dwight Dyer

Lawmakers in Mexico City are preparing rules that will allow foreign companies to drill in the country for the first time since 1938. But the violence may keep wildcatters away from the area, which is rich in oil and gas deposits. “Shale will not take off in Mexico like it did in Texas in the near future,” says Dwight Dyer, a Mexico City-based senior analyst for consulting firm Control Risks. “Unless the security situation along the northeastern border improves significantly, smaller companies will probably take their time before jumping in.”

The Eagle Ford shale formation underlying much of southern Texas extends into northern Mexico’s Tamaulipas, Nuevo León, and Coahuila states. While conventional fields of oil and gas that don’t require hydraulic fracturing have been exploited in Mexico for decades, only 18 shale wells have been drilled south of the border. All have been managed by the state oil company Petróleos Mexicanos, or Pemex. North of the border, scores of fast-moving drillers including Pioneer Natural Resources (PXD), Chesapeake Energy (CHK), and Chestnut Exploration & Production have taken advantage of the shale boom. Spending on U.S. exploration and production is poised to rise 8.5 percent this year, to $156 billion, according to a December report from Barclays (BCS). Tamaulipas would be a natural place for smaller U.S. oil companies to explore were it not for the violence. While Chestnut would be interested in Mexico at some stage, it won’t be among the first to enter, says Chairman Mark Plummer.

Many of the Pemex wells in the Burgos Basin, a conventional gas field that stretches northeast in Tamaulipas, are on unpaved roads off a highway running parallel to the Rio Grande less than a mile from the border. Highway 2 is notorious for attacks and roadblocks set up by traffickers, as rival gangs seek to secure drug routes to the U.S. Sorghum farmers in 18-wheelers share the two-lane blacktop with men in souped-up pickups acting as drug scouts on the lookout for police.


The number of shale wells drilled in Mexico

In May the government beefed up the army presence in Tamaulipas, with soldiers escorting Burgos workers such as Torrez to and from their wells. As it turns out, no Weatherford oil workers were injured in the April attack as a black Chevy Silverado fitted with steel sheets pumped the dome-roofed Hotel Asya with about 20 rifle blasts. A Weatherford spokesperson who asked not be named says the assault was unrelated to the workers’ presence. Less than a week after the shooting, police tracked down those suspected of the gunfire and riddled their vehicle with more than 200 rounds, according to the army lieutenant now in charge of Ciudad Mier. At least four men were killed as they tried to flee the makeshift tank, says the officer, who did not want to be named because he was not authorized to speak.

The gang activity “does raise the cost of doing business,” says Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington. “For the bigger companies that’s not a big deal, but for the smaller companies it’s something they have to factor in.”

The bottom line: Mexico is scrambling to tighten security as it prepares to open up its energy sector.

Cattan is a reporter for Bloomberg News in Mexico City.
Williams is a reporter for Bloomberg News in Costa Rica.

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