RIO DE JANEIRO (Reuters) - In September, police investigating a wave of killings in the northern Rio de Janeiro suburbs followed a tip to the isolated scrubland near the massive Duque de Caxias oil refinery.

Brazil's state-run oil company Petrobras fuel tanks are seen in the Guanabara bay in Rio de Janeiro, Brazil March 13, 2017. REUTERS/Pilar Olivares

Police presumed the killings were linked to turf battles between criminal gangs in the run-up to municipal elections the following month.

They found a different explanation buried beneath the grass: a system of tubes to siphon fuel from underground pipelines leading from the refinery, owned by state-run oil company Petrobras PETR4.SA.

Some of the killings, police said, were part of a power struggle between rival gangs earnings millions of dollars a year from stealing crude oil, diesel and gasoline and selling it on a thriving black market.

The discovery highlighted a fast-growing criminal enterprise in Brazil’s oil heartland, between Rio de Janeiro and Sao Paulo. From just one recorded incident in 2014, the number of thefts and attempted thefts from Petrobras rose to 14 in 2015 - before jumping five-fold to 73 last year, the company told Reuters.

The racket is part of a larger crime wave in Brazil, and especially Rio, amid the country’s worst recession on record.

Investigators believe the oil and fuel thefts were masterminded by the city’s powerful militias - often made up of retired or off-duty cops - as they seek to move away from terror and violence to lower-profile crimes following a crackdown by authorities in recent years.

The thieves’ methods range from hijacking tanker trucks to tapping the company’s more than 11,000 kilometers of pipelines - and processing stolen crude at their own secret refineries.

“Not even Petrobras knows exactly how much is being stolen,” said Giniton Lages, the Rio police chief who led the investigation at Duque de Caxias. “It’s a huge business, moving millions of reais.”

INSIDE JOB

While oil theft - often with environmental damage from the accompanying spills - is commonplace in regions like the Niger Delta of Nigeria, it has not traditionally been a problem in Brazil.

The thefts add to the steep challenges facing Petroleo Brasileiro SA, as the Rio-based firm is formally known. Amid weak oil prices, the company is scaling back under new CEO Pedro Parente and trying to emerge from a $100 million pile of debt.

For the past three years, the state-run company has been hit by a sprawling investigation into corruption and political kickbacks in its dealings with construction firms.

Police suspect corruption in the oil thefts as well. The taps and pipes near the Duque de Caxias refinery were so precisely engineered that investigators concluded the thieves must have had help from inside Petrobras.

“They knew what type of fuel was inside each pipe and what was the ideal point to place a tap without the change of pressure in the tube raising the attention of the company’s security system,” Lages said.

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Petrobras, whose production of about 2.8 million barrels a day makes it one of the world’s top 10 oil companies, said it was working with police to identify any employees or ex-employees that may have been involved in the crimes.

“In 2016, there was a startling increase in theft from our pipelines,” said Rodrigo Spagnolo, head of pipeline maintenance at Transpetro, Petrobras’ transport subsidiary.

The company, however, said the robberies had no material impact on its earnings. Petrobras reported revenues of $81 billion last year.

RUTHLESS GANGS

The militias in Rio de Janeiro emerged to combat drug gangs in the city’s violent hillside favelas. But they evolved into criminal organizations preying on those impoverished communities, controlling everything from real estate and electricity to cable TV. Some of the leaders entered local politics.

In the wake of high-profile killings at the end of the last decade - prompting a government crackdown - the militia have maintained a lower profile, said Ignacio Cano, a professor at the state university of Rio de Janeiro and a member of its Laboratory for the Analysis of Violence.

“Stealing fuel was not typically a crime associated with militia, but they must see an opportunity for making millions,” he said. “It’s unusual for them to operate outside the territory they control.”

Most oil and fuel thefts reported by Petrobras in 2016 took place on the populous Sao Paulo-Rio de Janeiro axis, which groups five of the company’s biggest refineries.

In Rio de Janeiro, thefts tripled last year to 33. Five of the incidents caused oil spills, Petrobras said.

Police arrested 13 people for the Duque de Caxias refinery scam, including two military police officers. A judge has issued warrants for 26 others.

The gang, set up in June 2015, stole 14 million liters (3.6 million gallons) of fuel last year, worth an estimated 33 million reais ($11 million), prosecutors said.

Police believe the Rio branch of the gang was headed by Caxias Denilson Silva Pessanha, a former city councillor in Duque de Caxias and the owner of illegal gasoline stations. Such service stations, operating without a license or a distribution contract with a fuel supplier, have become more common in Brazilian cities in recent years.

Pessanha, a fugitive, is wanted for torture and attempted homicide. Reuters attempts to locate an attorney for him were not successful.

Transpetro said it was investing in more security, but Rio de Janeiro police say the company remains an easy target.

“The company’s security officials who we have spoken to admit there is little they can do,” Lages said. “This involves armed gangs, and private security can do little about it because they are afraid.”

A SECRET REFINERY

While Brazil’s high unemployment and deep recession could be driving the thefts, Lages said, another motivation is the low risk of capture and punishment.

Convictions are unlikely to result in imprisonment because Brazil’s jails are chronically overcrowded.

“You might get a bit of community service time, so this is profitable and not much trouble,” Lages said.

Police are trying to classify the robberies as environmental crimes, which can carry up to five years in prison in cases where the pollution threatens humans or animals.

The 13 people arrested in the Duque de Caxias refinery thefts were charged with forming a criminal enterprise, which also carries stiffer penalties.

The scale of the crime has surprised police. At the end of last year, they uncovered a secret refinery in Boituva, Sao Paulo state, one of the installations used to process stolen crude.

Video images show a large complex, with four giant storage tanks surrounded by a complex mesh of pipes, and a vast forecourt filled with unmarked tanker trucks.

“The gang was stealing oil from Petrobras’ pipelines in Rio de Janeiro, filling trucks and taking it to these secret refineries,” said Sao Paulo police chief Emerson Martins.

The fuel would then be sold to illegal service stations and to small-scale vendors in rural towns or city slums, police say.

The criminals sometimes use water trucks to transport the stolen cargo without drawing suspicion. In reaction, Brazil’s Federal Highway Police have increased roadblocks on highways between Rio and Sao Paulo.

“The militia has rushed headfirst into this business,” said Jose Helio Macedo, a spokesman for the police agency. “We are trying to curb it.”