Market Update: There Will Be Work

 

With announcements of foreign investment becoming increasingly rare, it looks like 2018 may be a lost cause for new projects. But what about 2019? Will first movers be rewarded as the potential of the Mexican market is fully realized, or will they be smelling smoke as investors slam on the brakes? Time will tell, but we’ve got some predictions in the meantime. Keep reading!

 

Populism and Piracy

As the candidates continue to ramp up their campaign rhetoric, it’s clear that the clock is ticking on Mexico’s presidential election (T-minus 80 days). In a recent speech, leftist frontrunner Andres Manuel Lopez Obrador offered a solution to one of Mexico’s most enduring annoyances: the dreaded hauchicoleros! In AMLO’s words, give the people work and they won’t need to steal. It makes sense, right? Not so fast …

As I’ve written before, pipeline piracy is a big issue with far-ranging implications—and it’s an issue that has only grown in recent years. Last year saw more than 10,000 illegal taps identified, amounting to a total loss of $1.5 billion. The promise of jobs and income to the citizens of Mexico is appealing and may yield votes come Election Day. But before we start popping the Don Julio 1942, let’s take a small sip of reality.

First off, promising jobs and prosperity on the campaign trail is nothing new. In fact, it’s a tactic as old as the election process itself. After all, no one wins an election on doom and gloom—they win on promises of jobs and wealth, smiles and sunshine.

Second, the bulk of the clandestine activities are not the work of your average citizen. Tapping into a pipeline and siphoning off critical volumes is an undertaking that requires cash, technical know-how, and just maybe a little help from sources inside Pemex. And who has mountains of cash and inside connections? You guessed it. The cartels.

So in the words of AMLO: “Habra Trabajo!” Indeed, there will be work. Work to secure the nation’s infrastructure from corrupt institutions.

 

More Storage? Yes Please!

Pemex recently announced a formal agreement with Olstor Services to construct and operate an oil product storage facility to serve the Bajio region outside of Mexico City. As a private enterprise, partnership with Pemex is currently the best way to justify capital expenditure, and unlike several other announced midstream projects, I expect the Olstor facility will reach completion according to plan.

Outside of Pemex contracts, independent projects have struggled to obtain permits and ensure the return of capital. Deals like the Olstor arrangement could be the only action we see until the election dust settles and the new rules of the game are established.

 

Passing on Premium

Mexican production of premium grade gasoline is almost nonexistent. February saw production of just 2,000 barrels per day—for the entire country. Given that the country’s six refineries have a stated capacity of 1.65 million barrels per day, this represents just one-tenth of one percent of the total production capacity. To be fair, demand is part of the issue. Out of the nearly 800,000 barrels of gasoline sold every day, premium purchases account for just 125,000. But why?

The answer is a combination of things, including low refinery utilization and a conscious choice by Pemex to optimize production in response to waning demand for premium. After all, premium gasoline costs about 1.6 pesos per liter (11 percent) more than regular grade gasoline, and with overall fuel prices increasing 10 percent over the last six months, it appears that more and more Mexicans may be turning to regular grade.

Also responsible for the disappearance of premium production are the ongoing challenges of the Pemex refinery system. Utilization in Mexico continues to run at 50 percent or less. And processing units within refineries need to maintain a minimal level of throughput to remain functional and economic at rates of 85-95 percent. Instead of “choosing” to not make premium gasoline, it is more realistic that Pemex can’t economically make premium and is trying to maximize volumes for gasoline units to keeping gasoline production on competitive terms with imports from the US.

With activity slowing, now may be the best time to jump into the Mexican market. Looking for a partner? Contact our international markets team today!

 

Best,

Chad Smith
Senior Vice President, Terminal Operations