Last week, more than 150 oil and gas professionals from the US and Mexico joined together in San Antonio for the 4th Mexico Gas Summit. This year’s conversation centered on developing the infrastructure necessary to facilitate large-scale imports and I had the honor of serving as a panelist to discuss the present state of the market, as well as the ever-increasing opportunities we’re seeing in south Texas. Looking for a quick recap? You’ve come to the right place.
Good Projects Get The Green Light
Mexico’s domestic refining system is struggling to stay online and continues to underperform its stated capacity. As a result, Pemex has been forced to look outward to supply the country’s growing demand for gasoline and diesel. While Mexico is open for business to foreign investors, the country’s dearth of infrastructure continues to be a major obstacle for suppliers hoping to deliver refined fuel to the Mexican market. So why should it be that many announced infrastructure projects seem to be perpetually sidelined?
Several speakers spoke to the differences between the select few projects that are moving forward and the many more projects that are still sitting on the drawing board. What separates these projects? Let’s take a closer look.
Projects Moving Forward:
Projects Facing Challenges:
The investments that are moving forward have been able to mitigate unnecessary risks while structuring a return that compensates the investor for the risks they cannot avoid. Pemex is the best way to get a contract that supports the long-term nature of a midstream asset. By transferring title at the location the product lands in country (either a marine port or secured rail facility), importers can push most of the quantity and quality risk to Pemex. We expect the market will continue to advance and address the risks that are prohibiting investment in sound projects.
Price is Still the Name of the Game
Despite the intrigue of shiny new retail stations popping up across the country, it’s important to remember that the consumer really cares about just one thing: PRICE. In other words, where can I buy the least expensive fuel for my car, home, or business? After all, energy costs make up a large percentage of average household expenses, and by reducing the share devoted to fuel, Mexican consumers can spend their money elsewhere.
Granted, market prices are still benchmarked by Pemex on a regional basis at Pemex terminals and refining locations. In order to assemble a defensible pricing model, importers must consider the total cost, which is dependent on a variety of factors including logistics, the exchange rate, weekly adjustments to the IEPS tax, credit terms on the purchase and sale of product, the true spec of the marketed product, and the margin required to make investment worthwhile in the first place.
To compete against Pemex an importer needs to control an infrastructure supply chain that will facilitate the ratable delivery of products. For all intents and purposes, a supply chain like that does not currently exist in Mexico, and as a result, Pemex still has a hand in the vast majority of product sales. It’s the classic chicken or the egg conundrum: How can an importer compete against Pemex on price when they are dependent on Pemex to build a delivery system that allows them to compete.
Brownsville – The Clear Choice for Distribution to NE Mexico
I always enjoy getting the opportunity to speak about our terminal in Brownsville and last week I shared a few of the reasons why I feel so strongly that Brownsville’s strategic position makes it a no-brainer for American exporters. In addition to the city’s convenient location just across the border, there are a number of factors that make Brownsville attractive for those looking to deliver fuel into Tamaulipas, Nuevo Leon, and even Coahuila:
- Tanker truck delivery is flexible and economically covers up to 250 kilometers
- Brownsville offers a competitive “last leg” compared to Mexican sources
- Marine inbound deliveries have favorable scale / economics
- Current projects are targeting mega population centers (i.e. Monterrey)
- Mexican domestic supply shortages create demand for US fuel
- Large-scale projects are years away from changing the supply landscape in the northern border region
- Risk profile favors US investment for assets
As Mexico slowly develops, it makes sense that investment will target those larger urban centers that offer huge customer potential and outsized returns. These projects will be large in scale and cost, and will be undertaken by global oil and gas companies. The next wave of projects will be smaller and harder to fulfill. As a result, they will involve greater risk and will take longer to complete. For the northeastern region of Mexico, stateside options like our terminal in Brownsville may offer the best economics for the foreseeable future.
Inspired to jump into the Mexican market? Click here to contact our international markets team.
Senior Vice President of Terminal Services