Pipelines and Partnerships

 

Previous issues of Market Update have explored some of the more colorful obstacles facing foreign investors in Mexico. From drug cartels armed with heavy artillery to huachicoleros packing drills and milk jugs, it feels like we’ve covered just about everything. Well, almost everything. Keep reading to find out how issues of right of way are presenting some new challenges in building out Mexico’s private infrastructure. Plus, get the latest from the gulf and take a peek inside an expansion effort that gets our full endorsement.

 

A Pipeline With a Gap Isn’t Really a Pipeline, Is It?

When Sempra subsidiary IEnova broke ground on a $400 million natural gas pipeline connecting Arizona to Mexico’s pacific coast, they probably didn’t expect to find themselves in the middle of an inter-tribe squabble. But here they are.

Sixty-eight indigenous groups control swaths of Mexico. In these areas, private companies must obtain tribal permission before undertaking any building or development. Unfortunately for IEnova, their natural gas pipeline crossed a parcel of land near the Loma de Bacum sect of Yaquis Indians. While some groups of Yaquis approved the project, the Loma de Bacum did not. So they took matters into their own hands, using a backhoe to forcibly remove sections of the pipeline.

At least four other pipeline projects have encountered similar issues. So what comes next? Will investors choose a different, more expensive route, or can a financial agreement be made between the tribes and energy executives? With potentially billions of dollars lined up, the stakes are considerable, and right now, leverage sits with the tribes that control access to lucrative routes.

 

On the Water is the Place To Be

With prices for ULSD down across the Gulf Coast, the export market is looking more attractive every day. Prices along the USGC plunged from over $2 per gallon to under $1.90 per gallon, driven by weaker forward pricing. These represent the lowest realized prices of the last seven weeks.

Demand for access to international export markets, specifically Latin America and Mexico, and stronger pricing, have resulted in high vessel demand. Accordingly, rates have recovered off of their multi-month lows: USGC to the east coast of Mexico climbed 30 percent to $5.13 per tonne, while rates from the US west coast to the west coast of Mexico are sitting at roughly $5 per tonne.

At the same time, Mexico has reacted to the softening of pricing by announcing the smallest deduction from the IEPS tax thus far in 2018. The deductions decreased by 10-14 percent for ULSD and premium gasoline for the current week. As always, the equation for destination pricing is complex and includes a bit of lag time for adjustments to variables along the supply chain.

 

That’s the Idea!

On the heels of our discussion about improvements to rail infrastructure in northern Mexico comes the announcement of a joint venture between Kansas City Southern de Mexico (KCSM) and Avant Energy, with backing by private equity giant Riverstone. The $200 million project will create more than 1.2 million barrels of tankage at the Port of Altamira in southern Tamaulipas, and will be connected by rail to an inland terminal located in the Bajio region, central Mexico north of Mexico City.

The Bajio terminal will offer approximately 450,000 barrels of tankage, with unit train offloading capacity on the KCSM. The strategically located inland terminal will provide access to several large fuel markets including Mexico City, Guadalajara and Leon.

This is what infrastructure investment should look like in today’s complex Mexican market. The economic pie must be shared, but risk is distributed and speed improved when specialized teams of strategic partners bring their respective expertise to the midstream supply chain. The end result? Time to market (and breakeven) is reduced.

Inspired to jump into the Mexican market? Click here to contact our international markets team.

 

Best,

Chad Smith
Senior Vice President of Terminal Services