Market Update: Reform Madness

 

A recent poll revealed that the majority of Mexican consumers still do not have a grasp on the conditions that made energy reform necessary. Regardless, Mexican drivers seem to have taken to market competition well—and that’s a good thing for Marathon. Keep reading to find out why.

 

Fuel Quality

US consumers have many choices when it comes to buying fuel. While convenience, price, and brand loyalty may play a role in the purchasing decision, Americans generally believe that gas is gas is gas. South of the border, however, consumers see things much differently.  

Historically, Mexican drivers have had one choice: Pemex. Today, retail brands are popping up across the country and challenging the notion of parity in transportation fuels. While Pemex is still the predominant supplier to retail stations, consumer behavior has exhibited an inclination to purchase from non-Pemex brands such as BP, Chevron, Arco, etc.

Unlike the commodity mindset held by most Americans, Mexicans have switched their allegiance against Pemex over some fundamental concerns that most US consumers never consider. The first complaint relates to the practice of buying “short liters.” The idea is simple: charge consumers for a full liter, but deliver slightly less. This tactic is referred to as quantity shorts.

A second, less talked about concern, is product quality. “Is this premium gasoline truly above 92 octane?” “Is this diesel diluted with other less valuable components?” “Am I really getting what I pay for?” These are all valid questions. After all, better margins can be made when you charge purity product prices but deliver subpar spec product. And who should be the wiser? For the most part, Pemex leads the charge on quality testing—yep, the police are policing themselves. What could go wrong?

As we’ve read in many of the large retail rollout announcements, entering brands are highlighting quality and quantity assurances—and Mexican consumers are biting. Even at premium prices, drivers are waiting in line to hand over their pesos for the promise that they’ll be getting their money’s worth.

 

Big Deal Presenting Big Mexican Operation

Earlier this month it was announced that Marathon has an agreement to purchase Andeavor, the recently rebranded Tesoro Petroleum. The move makes sense, and it has big implications for Mexico. Both Andeavor and Marathon have been significant players in the country. Together, they’ll have the opportunity to become the largest, most comprehensive supplier of transportation fuels to Mexico.

You might remember, Andeavor was the winning bidder of the first open season auction on Pemex infrastructure at the beginning of 2017. The footprint of that tankage and pipeline access is complementary to the west coast refining assets the company already owned, making it a logical transaction for two reasons: 1) Andeavor gains a foothold in Mexico to develop the Arco retail brand, and 2) Removing supply from of the US west coast market strengthens margins for the remaining fuel market.

Marathon has operated under a different, but no less strategic approach. Rather than pursuing inland infrastructure and retail outlets, the company has restricted their Mexican exposure to delivering gasoline and distillates to east coast marine terminals. With significant gulf coast capacity and a broader export market, the combined entity will have product available for delivery on both coasts, as well as refining capacity ample to provide a significant percentage of the daily import barrels required in Mexico. Whether management chooses to pursue a bigger foothold in developing infrastructure or remain a bulk marine supply source, Marathon will be a major player in the future of Mexico’s fuel market.

 

The Reform, For or Against?

The polls are in, and the results are … confusing? As Mexico speeds toward the election of a new president, the government has reported the findings of a recent poll on energy reform. The poll, which sought to clarify public perception, offers some insight into the coming election, as reform continues to be a major point of debate for candidates. So, without further ado, the results:

  • Do you support continuation of the energy reform? (48 percent – yes, 37 percent – no)
  • Do you believe the reform is producing results? (61 percent – no, 27 percent – yes)
  • Is energy reform necessary? (47 percent – no, 41 percent – yes)
  • Has Pemex acted for the benefit of the country? (61 percent – no, 30 percent – yes)
  • Most citizens were not aware of the crisis in oil production: 63 percent believed that oil production was flat or increasing
  • The majority of respondents believe the reform was passed to attract foreign capital and technology
  • If the reform resulted in lower gasoline prices, 71 percent believe it would be justified.
  • While 70 percent said Mexico should source gas/natural gas at the best price, 65 percent view the US unfavorably
  • 64 percent indicated that this President should rule on the reform

These revelations are a testament to misinformation and the Mexican people’s general lack of clarity about finances, budgets, taxes and the deep connections between Pemex production, refining, marketing, and the national government. As an outsider, the rationale for reform is clear. Mexico has vast natural resources but decades of waste, underinvestment and profit pillaging has led to a dire need for capital, modern technology, skilled workers, improved security, and infrastructure. Not to mention a stable system by which to govern, tax and regulate the players.

As we all know, the energy sector is a long-cycle economy. Projects take years to develop before they generate cash returns, and the investment needed to maintain assets is large and ongoing. The reform is currently entering a phase where decisions made on day one will start to pay off. The recovery needs time, and the reform requires it. Clearly, the citizens are not getting the straight story from their politicians with respect to how they got here or how bad conditions have become. The reform may not be perfect, but it is the best roadmap and lifeline for Mexico.

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

Best,

Chad Smith
Senior Vice President of Terminal Services