Mexico’s Fuel Market Is Open, But the Imports Aren’t Flowing

  • Companies await approvals to start using Pemex’s infastructure
  • Distribution bottlenecks, fuel theft among the next challenges

Soaring fuel theft, violent protests over shortages and a lack of independent infrastructure have some investors questioning whether the Mexican gasoline sector is ready for a surge of U.S. imports.

The country enacted legislation in April allowing companies other than state-owned Petroleos Mexicanos to import fuel for the first time since the 1930s, nine months ahead of the January 2017 start date it had originally targeted for reforms. Mexico has since awarded permits to import a combined 135.6 billion liters (853 million barrels) of gasoline and diesel.

No fuel has been brought in using those 12-month permits, however, as the industry grapples with regulatory and logistical obstacles, according to Jose Angel Garcia Elizondo, head of Mexico’s national gasoline retailers association Onexpo.

Pemex Rules

“Everything along the supply chain in Mexico is currently controlled by Pemex and runs on Pemex rules -- whatever those are -- so there is an awful lot of learning that is going to have to go on, and rule setting,” David Hackett, president of Stillwater Associates LLC in Irvine, California, said by phone. “My sense is that the regulation-writing is running behind the current liberalization schedule. It has got to pick up speed.”

Importers will initially have to use Pemex’s own infrastructure to transport fuel to Mexico since it’s the only existing distribution network in the country. Mexico’s energy regulator said in an interview this month it will begin accepting bids as soon as next quarter from suppliers looking to use the Pemex system to import diesel and gasoline.

"The government is demonstrating its commitment to fuel market liberalization by liberalizing imports ahead of schedule, granting import permits and organizing infrastructure open seasons," Andrew Shepard, refining and oil markets analyst at Wood Mackenzie, said in an e-mail.

Still, Mexico is several steps away from imported fuel making its way to service stations, said Andy Lipow, president of Lipow Oil Associates LLC, in a phone interview from Houston.

“We’re looking for further liberalization so you can not only import gasoline and diesel, but also distribute it throughout the country,” he said.

Infrastructure Deficiencies

At 10,000 kilometers (6,214 miles), Pemex’s national pipeline system is just a fraction the size of the 431,997-mile pipe network in Texas. As a result, more cargoes tend to be carried by truck, which is slower and costlier, said Onexpo’s Garcia.

Storage capacity at ports is also strained as Pemex imports more gasoline to compensate for declining domestic output. According to data from Mexico’s energy ministry, crude processing in May was 24 percent lower than it was a decade ago, while imports by the state producer accounted for more than half of total gasoline sales in the country.

“We lack infrastructure to transport and store fuel and we lack efficiency in Mexican refineries,” Garcia said in an interview in Mexico City. “That creates bottlenecks along the entire supply chain that has contributed to the problems we are seeing in some parts of Mexico.”

Earlier this month, fuel shortages at some gas stations in the northern Mexican state of Chihuahua provoked clashes between protesters and police. Gasoline deliveries in the south were also delayed as unionized teachers blockaded the entrance of Pemex’s refinery in Salina Cruz, Oaxaca -- Mexico’s largest -- to protest education policy.

While the problems in Chihuahua and Oaxaca are “isolated events," deficiencies in the market have exacerbated the situation, Garcia said.

Once foreign fuel makes its way into Latin America’s second largest consumer market, distributors will encounter another challenge: the government continues to set pump prices itself.

The government will review its fuel price policy -- whereby fuel is capped at a maximum price set by the Finance Ministry -- in the 2017 budget package in September, Mexico Deputy Finance Minister Fernando Aportela said in an interview with El Financiero Bloomberg TV on June 24.

Theft Concerns

Also concerning for investors in Mexico’s nascent fuel import market is theft, which costs Pemex about $1 billion each year, according to the company. In the first five months of the year, Pemex registered a 9 percent increase in illegal taps to reach 2,340, equivalent to an average of about 15 taps a day.

“The security problem and being able to eliminate theft of petroleum products is a huge issue for new entrants in the market,” said Lipow. “Companies are evaluating whether they want to be in Mexico and be at risk of losing product on the pipelines.”

Stillwater’s Hackett noted that private players could invest in technology that would track product losses, minimizing the risk of fuel theft. “That’s a law enforcement issue, and frankly, with the proper technology on the pipelines, you know something like that is happening and you can stop it pretty quickly,” he said. “Technology and law enforcement will solve that problem.”

Mike Howard, Howard Energy Partners’ chief executive officer, said in an interview that the San Antonio, Texas-based company will invest in security and technology as it looks to build a 287-mile cross-border refined product pipeline network from Corpus Christi, Texas, to northern Mexico.

Even so, the security issue remains a concern, he said. “If we just can’t get comfortable with that in Mexico, the product just won’t get built.”