Crackdown on private refined imports in Mexico expected to continue: observers

Mexico City — Mexican authorities are expected to continue their crackdown on private refined products imports in order to give state Pemex more market share, according to market experts and observers.

"The government goals are very clear: they want all the hydrocarbons in the country to be supplied by Pemex, either through its own production or through its imports," independent consultant Susana Cazorla said July 7.

Cazorla was speaking at a virtual seminar on the current strategy of President Andres Manuel Lopez at which panelists agreed the government is unlikely to back down from its strategy despite the inability of the country's production to meet demand and the inefficiencies linked to limiting competition.

"Authorities are looking for any excuse to close down storage facilities operated by private companies," Carlos Vallejo, a partner at Mexico-based consultancy Lexoil separately toldS&P Global Platts on July 7. "The aim is to make a counter-reform to minimize competition to Pemex."

Joint operations

Beginning in late June, Mexico's Environment, Safety and Energy Agency, or ASEA, and the Energy Regulatory Commission, or CRE, have conducted joint random verification visits to terminals where transloading activities are conducted, Vallejo said.

One of the facilities that has been suspended is owned by IEnova, the local unit of California-based Sempra Energy, located in the state of Puebla, said three people with knowledge of the situation.

US refiner Valero, one of the largest importers in the country, currently operates at IEnova's Puebla terminal, transloading fuel from another terminal in Veracruz, also built by IEnova, using trucks to service local clients, Carlos Garcia, the company's Mexico head of operations told Platts in March. Valero is waiting for IEnova to complete a 640,000/b expansion at the terminal to receive fuels from Veracruz by rail.

At least three more terminal in the states of Nuevo Leon and Queretaro were shut down, two people said. A third person familiar added that the joint operations have also been implemented at the border and customs agencies where trains operate.

US-based Kansas City Southern is the only railway company that imports liquid fuels into the country.

It is not clear how long the suspensions will last, but lawyers told Platts the industry is likely to seek legal defense, as has done in previous moves by the current administration.

IEnova, Valero and Kansas City Southern did not respond to requests for comment. CRE and ASEA representatives could not be reached for comment.

The ASEA-CRE inspections of terminals and other facilities often include personnel from the Communications and Transport Secretariat and the tax authority SAT, said one Mexico-based lawyer familiar with some of the cases.

Vallejo said the joint operations are an escalation to the strategy of the government to curb contraband and illegal imports which has been implemented since the beginning of the current administration. The government has changed the laws of the hydrocarbons industry and restricted the operations of importers through modifications to the permits issued by the tax authority. Early in May, the Mexican authorities announced the cancelation of over 90% of the permits to import liquid fuels into the country that had not been used.

Gasoline production in Mexico, which was close to 500,000 b/d in 2010, declined steadily until the current administration took office in late 2018. Since 2019, it has remained fairly constant at around 200,000 b/d since, data from the Energy Secretariat shows.

Pemex's total refining installed capacity is 1.5 million b/d, but poor maintenance has caused its six refineries in the country to operate at only a fraction of their capacity. In 2020, total crude processed at the national system averaged 591,000 b/d, compared with 1.2 million b/d in 2010, data from the National Hydrocarbons Commission shows. In 2021, processing has increased slightly, to 682,000 b/d in May, the data shows.

Imports, in contrast, have increased steadily as demand grows, and private importers have increased their share of the market as companies built their own infrastructure, the data shows.

Not totally wrong

Despite the operations and their impact, some observers argue the government's actions are not completely wrong or ill-intentioned. During the July 7 virtual seminar, panelists agreed that reducing the dependency on imported fuels is a strategy that is recommended even for developed countries.

"The current policy of the government is not wrong, but it is highly ideological," said Marcelo Gonzalez, a lawyer specialized in the energy sector, during the virtual seminar. "The government should be more pragmatic and modernize the sector."

Montufar Helu, founder and CEO of Petrointelligence, a Mexico-based provider of local retail fuel prices, told Platts the government is also trying to tackle a real problem with its strategy.

"There is concern among members of the industry that some of the terminals in the country may not be complying 100% with the fiscal regulations," said Helu, referring to what illegal imports of fuel and other contraband.

Vallejo agreed that there are market participants who may have abused of the lax regulation that existed in the past and said we are likely to see more government intervention in the sector in the coming months.