The Year in Review

 

After getting off to a slow start, Mexico’s energy reforms kicked into high gear during 2017. Attracted by the prospect of building a market from the ground up, many of the industry’s biggest players announced plans to enter Mexico’s burgeoning fuels trade. Will they find a new market? Yes. Will they find a blank slate? Not exactly. In this issue of Market Update, we’ll look at Pemex’s continued influence on pricing, and get caught up on non-Pemex imports and the country’s open season auctions.

 

Mexico: A Free Market*

Price liberalization hit its stride in 2017, and Mexico now enjoys market pricing in all 31 states and the Distrito Federal. The country’s historic energy reforms have attracted significant press coverage and interest from across the energy sector, as investment opportunities abound in the country’s newly free market. But are prices truly free? Short answer: Sort of.

As we’ve discussed before, the price at the pump is set by the station owner and theoretically represents the delivered price plus a margin. With that said, almost all of the fuel available to retail station owners in Mexico (including BP, ARCO, Total, etc.) is produced by, imported by, or sold through Pemex and its established infrastructure networks.

While pricing controls on what Pemex can charge at the wholesale level continue to exist, the price at the pump will still be based a formula comprised of a the controlled rack price, plus last mile logistics, plus a margin. The CRE issued an approved methodology for pricing at refineries and storage terminals to promote transparency, but until there are sufficient alternatives for customers to create a market-based rack environment, “free market” prices will still have strings attached.

 

You Can’t Stop This Train.

While the opening of the final zone dominated headlines, the end of November saw another groundbreaking development: ExxonMobil delivered a 53,000-barrel train of premium grade gasoline from the U.S. to the Terminal del Centro de Mexico (TCM) in San Luis Potosi. What’s more? Pemex wasn’t involved in the trade. With no bulk storage options yet available outside of Pemex’s established infrastructure, the liquid was loaded directly from rail cars to tanker trucks. The buyer, Grupo Orsan, has 140 retail stations located across Mexico.

With private infrastructure still in its infancy, multi-party projects seem to be the most effective method by which to serve customers with a retail presence. And the strategy seems to have worked for ExxonMobil—the oil giant recently confirmed that a second load is en route.

 

New Assets. Old Assets.

Earlier this year, Andeavor (formerly Tesoro) made headlines when it was announced that the San Antonio-based firm was the winning bidder in the first open season auction for pipeline and terminal space in Mexico’s northwestern region. Subsequent auctions were delayed, and delayed again, and then delayed some more. At this point, investors and potential bidders are wondering if the existing Pemex infrastructure is even worth the heartburn.

Pemex’s assets are considered old and in poor condition. Outside of the northwestern region, the company’s pipelines and storage space are interconnected with the nation’s refineries, and separating logistics and cost accounting has proved challenging for Pemex to this point.

Perhaps most importantly, however, the volumetric space to be offered is still under negotiation. Not surprisingly, the assets that Pemex wants to make available are not conducive to attracting a competitive auction process. And why should it be any different? Pemex wants to protect its dominant market position. Mexico continues to push the open season process to market, but the progress is slow and the resistance is considerable.

As would be the case in any emerging market, there are many hurdles to be crossed in Mexico, but we believe that the market is headed in the right direction. Interested in getting in on the ground floor? Contact us today!

 

Best,

Chad Smith
Senior Vice President of Terminal Operations