No One Said It Was Gonna Be Easy


As the Mexican fuels market continues to mature, domestic firms are running into roadblocks as they seek to develop the infrastructure necessary to ensure a stable supply chain. Systemic concerns combined with the typical headaches associated with international expansion continue to pester first movers, but positive signs exist. In this issue of market update we’ll look at the concerns that are keeping investment at bay, as well as the fast and furious distillate market, and the exciting developments that keep us bullish on the border.


Contracts? We Need Those Stinking Contracts!

To date, the key sticking point in building out Mexico’s private infrastructure is the inability of parties to secure typical contracts desired by financial providers to support construction of the new terminals, tanks, pipelines and associated assets needed to import and distribute fuels. The connection between U.S. supply and Mexican demand is plainly apparent, and volumetric data has qualified the market’s viability – so why is it so hard to secure a contract? Well, let’s just say it’s complicated. We can break it down to three areas of concern:

National-Level Concerns: The upcoming Mexican presidential election, the renegotiation of NAFTA, the ominous IEPS tax—all will have an impact on the ability of domestic firms to enter the Mexican market. And let’s not forget PEMEX’s ongoing efforts to protect its market share. In addition to owning the vast majority of Mexico’s existing infrastructure, PEMEX is a valid credit counterparty for new business and offers vendors extremely favorable payment terms.

New Market Concerns: First movers take on the burden of an unknown credit environment, and bear the brunt of supply chain hiccups. Add that to the general inexperience domestic firms have in buying, selling, financing, hedging and managing refined products in Mexico, and it’s not hard to see why creditors are giving pause.

Economic Concerns: In the U.S., midstreamers correct supply, production and inventory imbalances with new assets backed by firm, multi-year contracts. Pipes get 5-10 year take or pay agreements, and new tanks get 2-5 year durations. These are understood and commonly accepted business transactions that provide economic returns to investors … but will this standard practice translate to Mexico?

So how will parties bridge the contracts dilemma? The short answer is TIME. Over time, risks will balance with returns and these barriers to investment will disappear. As each concern is addressed, hesitation will gradually fade away and we should see Mexico become a vibrant, working market.


The Highs and Lows of Distillates

Distillates are in the fast lane and they aren’t looking to pump the brakes as we rush toward the end of the year. Inventories in the United States fell over the summer for the first time since data collection began in 1982, and inventories are seasonally low as we enter the winter heating season, a development that can be attributed to the impact of Hurricane Harvey, surging export volumes and refiners attempts to neutralize RIN obligations. Harvey took more than 1 million bpd of distillate production offline as refineries temporarily shut down, and nearly six weeks passed before processing capacity bounced back to pre-hurricane levels.

Meanwhile, distillate exports maintained on record pace, averaging well over 1 million bpd, and reaching as high as 1.7 million bpd in October. Mexico has been the majority recipient of these volumes, and with ongoing problems/turnarounds at Salina Cruz, Cadereyta and the Lazaro Cardenas units in Mexico, surging product exports are likely to continue.

All this to say: Low inventory balances combined with WTI crude flirting at $57 per barrel have resulted in relatively high distillate prices. USGC spot diesel prices sat around $1.50 per gallon for much of the year but beginning late summer with the convergence of Harvey, high export volumes and rising crude prices, the diesel market got hot with prices nearing $1.80 per gallon. Pricing hasn’t appeared to impact consumption in Mexico yet, but stay tuned.


Exciting results

But rest assured, it isn’t all challenges, delays and frustrations in Mexico. Positive news isn’t hard to find, a fact that’s evidenced by the major dollars that are already out there chasing the Mexico opportunity. Just recently, PEMEX announced the second largest onshore oil find in the last 15 years, with an estimated 1.5 billion barrels of recoverable oil in the state of Veracruz. Drilling activity and production have seen steep declines over the past 10 years and a find of this magnitude is a big win for PEMEX.

London-based BP announced that they recently opened their 50th retail station in Mexico, an impressive feat given that the oil giant only began rolling out sites in the last seven months. BP has been an aggressive participant across the value chain in Mexico, and their commitment can be seen across the country: The firm now has stations in six states and plans to expand to 1500 over the next five years.

U.S. firm Andeavor (formerly Tesoro) is also making progress with their west coast strategy. Just last month, the refiner landed product in Rosarito for distribution via the space secured on PEMEX pipelines and storage terminals. The firm recently opened its first ARCO-branded station in Tijuana, with plans to open an additional 200-400 stations in the future.

Despite the current challenges, our outlook on Mexico is as positive as it’s ever been. We believe that time will sort our many of the present concerns and that Mexico is well on its way to becoming an efficient working market. Interested in getting in on the ground floor? Contact our international markets team today!


All the best,

Chad Smith
Senior Vice President of Terminal Operations