Nearly 25 years after President Bill Clinton signed what would become one of his legacy achievements, the US, Mexico and Canada have gathered around the table once again to discuss the North American Free Trade Agreement. In this issue of Market Update, we’ll look at the future of NAFTA, foreign investment in Mexican retail stores, and Mexico’s piracy prevention efforts.
Politicians from the US, Mexico, and Canada are currently in Washington for their fourth round of negotiations to reform the North American Free Trade Agreement. The continuation of a dialogue that has been underway for months, their discussion holds tremendous implications for energy markets. After all: a full ten percent of the value of annual trade comes from energy, and no one wants to derail the symbiotic relationships that have been constructed under the current agreement.
Insofar as their discussions relate to the flow of fuel to the most attractive economic destinations, an overhaul of NAFTA could reshape distribution channels old and new. And with questions looming about Mexico’s upcoming presidential election, all sides are motivated to solidify a deal that will carry North America into the next decade. Ins and outs aside, the ideal renegotiation would be one that creates stability upon which domestic firms can justify long-term investment decisions.
More retail options coming
Chevron and Total recently announced plans to open retail stations in Mexico. Chevron plans to enter on the west coast with a station in Hermosillo, followed shortly by stations in Sonora, Sinaloa, Baja California and Baja California Sur. The location is a logical fit for the company, whose refining assets are concentrated in the western US.
Abroad, Paris-based Total announced an agreement with Mexico’s Gasored to rebrand a network of approximately 250 retail stations close to Mexico City. Total has operated in Mexico since 1982, serving the lube, chemical and service sectors.
Indeed, the transition from government monopoly to free market is in full swing. Although Pemex still supplies the vast majority of retail product, competition is set to heat up, as BP, Valero, Andeavor, Chevron and Total build out retail networks supplied by their downstream assets.
Theft and corruption in the Mexican fuels market is a well-documented topic. And most in the industry agree that the longstanding tolerance of disappearing product is something that will need to change with the massive wave of incoming foreign capital. From sophisticated cartels and organized crime syndicates to local huachicoleros with milk jugs, the collective financial impact of “leaks” in the system is estimated to total $1.5 billion annually.
The establishment of a competitive landscape will force market participants to safeguard their investment. We’re starting to see this already, with secure product offloading sites for marine and rail imports. Further, Pemex is pursuing measures to reduce pipeline tapping. On the retail side, the CRE recently revoked the permits of several stations that were implicated in discrepancies of volumes purchased vs. volumes sold. These are small first steps but the dollars at stake are serious and the industry will drive solutions to protect margins.
While piracy continues to be an operational headache for domestic firms, the renegotiation of NAFTA presents the most serious obstacle to foreign investment. The outcome of this week’s discussions remains a wildcard, but we believe that the strength of cross border investment will provide some amount of buffer from long-term market disruption.
Interested in breaking into Mexico’s retail fuels market? With established relationships on both sides of the border, our international markets team is here to answer your questions. Give us a call today.
Senior Vice President of Terminal Operations