MEXICO'S DRUG CARTELS SIPHON LIQUID GOLD

Bold Theft of $1 Billion in Oil, Resold in U.S., Has Dealt a Major
Blow to the Treasury

MALTRATA, MEXICO -- Drug traffickers employing high-tech drills,
miles of rubber hose and a fleet of stolen tanker trucks have
siphoned more than $1 billion worth of oil from Mexico's pipelines
over the past two years, in a vast and audacious conspiracy that is
bleeding the national treasury, according to U.S. and Mexican law
enforcement officials and the state-run oil company.

Using sophisticated smuggling networks, the traffickers have
transported a portion of the pilfered petroleum across the border to
sell to U.S. companies, some of which knew that it was stolen,
according to court documents and interviews with American officials
involved in an expanding investigation of oil services firms in Texas.

The widespread theft of Mexico's most vital national resource by
criminal organizations represents a costly new front in President
Felipe Calderon's war against the drug cartels, and it shows how the
traffickers are rapidly evolving from traditional narcotics smuggling
to activities as diverse as oil theft, transport and sales.

Oil theft has been a persistent problem for the state-run Petroleos
Mexicanos, or Pemex, but the robbery increased sharply after Calderon
launched his war against the cartels shortly after taking office in
December 2006. The drug war has claimed more than 16,000 lives and
has led the cartels, which rely on drug trafficking for most of their
revenue, to branch out into other illegal activities.

Authorities said they have traced much of the oil rustling to the
Zetas, a criminal organization founded by former military commandos.
Although the Zetas initially served as a protection arm of the
powerful Gulf cartel, they now call their own shots and dominate
criminal enterprise in the oil-rich states of Veracruz and Tamaulipas.

"The Zetas are a parallel government," said Eduardo Mendoza Arellano,
a federal lawmaker who heads a national committee on energy. "They
practically own vast stretches of the pipelines, from the highway to
the very door of the oil companies."

The Zetas earn millions of dollars by "taxing" the oil pipelines --
organizing the theft themselves or taking a cut from anyone who does
the stealing, according to Mexican authorities. The U.S. Treasury
Department this summer designated two Zeta commanders as narcotics
"kingpins," which allows authorities to seize assets.

The Zetas often work with former Pemex employees, according to Ramon
Pequeno Garcia, chief of anti-drug operations at Mexico's Public
Security Ministry. The former employees "are highly skilled people
who have the technical knowledge to extract oil from the pipelines.
They are now under the control of the Zetas," Pequeno said.

Across the Border

This year, executives of four Texas companies pleaded guilty to
felony charges of conspiring to receive and sell millions of dollars
worth of stolen petroleum condensate. U.S. law enforcement officials
said in interviews that they have no evidence showing that the men
were connected to drug traffickers.

During his September arraignment in Houston, Arnoldo Maldonado,
president of Y Gas & Oil, pleaded guilty to receiving about $327,000
to coordinate at least three deliveries of tankers filled with stolen
condensate to another Texas company, Continental Fuels, according to
a court transcript of the hearing.

Asked by U.S. District Judge Ewing Werlein Jr. how the condensate had
been stolen from Pemex, Maldonado replied: "I have no idea on that, sir."

Donald Schroeder, a former president of Houston-based Trammo
Petroleum, pleaded guilty in May to buying $2 million worth of stolen
Mexican condensate, according to a transcript of the hearing.
Schroeder re-sold the condensate to another company, BASF, for a
$150,000 profit, prosecutors told the court.

A spokesman for BASF, which has not been implicated in the case, said
the company was unaware that the material was stolen and is
cooperating with the investigation.

In August, U.S. authorities presented the Mexican government with an
oversize check for $2.4 million as a repayment.
A sophisticated operation

Pemex reported losing $715 million worth of oil to theft last year.
The company said it discovered 396 clandestine taps. This year, Pemex
projects it will lose at least $350 million to oil pilfering. Nearly
half of the thefts occur in the rugged hills around Veracruz, a
largely rural state situated in a region with 2,136 miles of pipeline
running from the Gulf of Mexico to refineries in other parts of the country.

To steal the oil, Mexican authorities said, thieves sometimes use
safe houses from where they build extensive tunnel networks leading
to the pipelines. They fabricate powerful drills that enable them to
puncture the highly pressurized steel pipes and extract the oil
without causing spills or suspicious drops in pressure. Pemex
officials said they have found clandestine taps with as many as five spigots.

In Maltrata, in central Veracruz, Pemex officials showed a reporter a
four-foot-deep, six-foot-wide trench ringed by yellow police tape
that they said had been dug by thieves to reach an underground
pipeline in a clearing near a federal highway last month.

After perforating the exposed two-foot pipeline using a hand-tooled
drill and connecting valves to regulate the pressure, the officials
said, the traffickers ran a 300-yard hose through the brush to a
tanker and filled it with about 200 barrels of crude oil.

"They are very sophisticated -- in some cases, it's three kilometers
from the pipeline to the tanker where they deposit the oil," said
Mauro Caceres, who oversees the pipeline network in the region. "It
is just constant. They take, and they take, and they take, and they take."

Pemex lost 140,141 barrels of oil to theft last month in the Veracruz
region alone, the company reported. At $75 a barrel, the current
market price for Mexican oil, the loss comes to $10 million. The
company reports that oil rustlers are stealing from the pipelines in
all 31 Mexican states.

Defending the Pipelines

"When they steal this oil, it's not just a regular crime," said
Mendoza, the federal deputy. "It becomes a crime against society,
because the people who steal this oil the next day are using it to
kidnap us. Tomorrow, with that oil money, they are shipping drugs."

The theft is both a symbolic and financial blow to the Mexican
government. Taxes paid by Pemex account for 40 percent of the federal
budget. Pemex still owns and operates almost every gas station in
Mexico. Juan Jose Suarez, Pemex's chief executive officer, said in an
interview at the company's headquarters in Mexico City that the oil
theft is a crime against all Mexican citizens: "This is not taking
from Pemex; it's taking from the owners of Pemex. This is the net
worth of everybody."

Mexico has launched an all-out campaign to defend the pipelines,
drawing in the army, the attorney general's office, the Interior
Ministry and the customs service. During the past two years, the
government has conducted helicopter overflights, installed electronic
detection devices inside the pipelines and beefed up Pemex's private
security force.

Suarez estimates that Pemex will spend hundreds of millions of
dollars over the next three years defending its pipelines. With the
company's maintenance staff overwhelmed, Pemex assembled 20-man teams
this year to repair breaches caused by theft.

"The teams are working day and night," Caceres said.

Pemex sent out a call for help to the federal government in 2007. In
June that year, Mexican customs officials informed U.S. Immigration
and Customs Enforcement (ICE) that they had discovered dozens of
Mexican companies that appeared to be conspiring with U.S. firms to
export stolen petroleum products across the border.

Working closely with the Mexican customs service, ICE investigators
said, they soon uncovered a network of Mexican and American companies
that shipped stolen oil to the United States in tankers, stored it in
aboveground containers in Texas and then shipped it in barges to end
users in the United States.

With oil prices then at record highs, the scheme allowed U.S.
companies to buy petroleum products at below-market value. The scam
involved hundreds of people, according to Jerry Robinette, special
agent in charge of the ICE office of investigations in San Antonio,
which is overseeing the probe.

"The folks that made the most amount of money are the people who are
going to harm us the most, and that was the organized crime in
Mexico," Robinette said.