Mexico Cooking Fuel War Is Newest Sign of Pemex Competition Woes

  • State company’s LPG imports plunge in first year of new system
  • Reform also may bring competition to gasoline, diesel markets

Mexico’s state-run energy company, suffering from budget cuts and ballooning debt, now may be losing its grip on a fuel widely used by the nation’s residents to cook their food and heat their water.

A government overhaul of Mexico’s energy sector in January for the first time gave companies other than Petroleos Mexicanos the ability to import liquefied petroleum gases such as propane and butane. That means dozens of distributors who had spent years building transport networks for Pemex can now carry their own imported propane, largely cutting the state-owned energy company out of the supply chain.

In the first six months of 2016, as LPG imports surged 43 percent to 25 million barrels, Pemex’s imports plunged, falling 28 percent to 12.6 million barrels. While the company has cut its prices and boosted how much propane it produces on its own to remain competitive, analysts say it faces tough times holding off independents already embedded into local neighborhoods.

“They will have a hard time evolving to be a very efficient trader,” Oscar Lopez-Velarde, Mexico oil and gas tax leader at Ernst & Young LLP, said in a telephone interview. “I don’t see them as a player in the long term.”

Octavio Perez, president of the Mexican Association of Liquefied Gas Distributors, predicted Pemex’s role as an importer will vanish. “In LPG, the energy reform has already had a major impact,” he said by telephone from Mexico City.

The change comes at a time when LPG demand in Mexico is likely to grow 7 percent this year to 300,000 barrels a day, according to Andrew Echlin, oil-products analyst for Energy Aspects Ltd., a research firm.

Pemex, meanwhile, is in no position to take advantage after reporting cash-flow shortfalls for three straight years, with the gap almost doubling this year to a record $22 billion, according to data and estimates compiled by Bloomberg. The company’s total debt has ballooned to almost $100 billion, and it has weathered cuts of 162 billion pesos ($8.8 billion) from its budget in the past two years.

The shortfalls, which mean the company is spending more than it earns from operations, will further complicate efforts by Chief Executive Officer Jose Antonio Gonzalez to seek joint ventures, stabilize production and improve ailing refineries.

Worse, Pemex may see its experience with propane repeated in refined products, according to Echlin. “LPG was one of the first products to liberalize,” he said. “So it wouldn’t be surprising to see the same thing happen to Pemex in gasoline and diesel markets.”

Companies have been permitted to import gasoline and diesel since April, yet Mexico lacks the infrastructure to substantially expand the market, and investors are awaiting the elimination of government-set pump prices in the next year and a half.

In April, Pemex began offering discounts to LPG distributors as a way to retain sales, according to a company representative. The person, who asked not to be identified because Pemex doesn’t allow press officials to be named, also said the company is using its own production to replace imports because new players in the market have already absorbed some of the demand.

Now Mexico gets almost all its LPGs from the U.S., where propane is trading near multiyear lows. Spot propane at the Gulf Coast storage hub in Mont Belvieu, Texas, was 46.75 cents per gallon on Wednesday, down from this year’s peak of 56.13 a gallon on May 16, according to DTN Energy data compiled by Bloomberg. In the past three years, prices have more than halved.

The result: Mexican consumers are benefiting.

Last week, the government reduced LPG prices by an average 10 percent to reflect the lower international price. While natural gas from the U.S. may displace LPGs in more developed areas later this year, “there are large rural segments without access to gas that will benefit from cheap LPG,” Echlin said.

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