Mexico's CRE to exclude Central, Bajio from nationwide ban on high-sulfur diesel use

Mexico City — Mexico's Bajio and Central regions will receive six-month exclusions from a nationwide ban on high-sulfur diesel (HSD) that will kick in January 1, the country's top energy regulator announced Friday.

The regions are supplied by the 315,000 b/d Tula and 220,000 b/d Salamanca refineries, which are unable to produce diesel with a sulfur content lower than 15 ppm, the Energy Regulatory Commission (CRE) said in a statement.

Additionally, the areas lack enough ULSD transportation and storage capacity, meaning adequate supplies are impossible to achieve without Tula and Salamanca output, CRE concluded after meeting with business chambers and subsidiaries of Pemex.

The regions are composed of municipalities in Mexico, Aguascalientes, Guanajuato, Hidalgo, Jalisco, Michoacan, Queretaro, San Luis Potosi and Zacatecas states.

However, the postponement does not include urban areas in these states.

"This exclusion will fulfill the objective of guaranteeing the reliable supply of diesel in the region without undermining the environmental norms in fuel emissions," CRE said.

The six-month postponement should be enough time to allow the whole supply chain in both regions to be reliably supplied with ULSD, CRE said, including Pemex's refineries as well as marketers, transportation and storage companies.

This measure does not exclude the already enacted ULSD mandate in the metropolitan regions of Mexico City and Guadalajara as well as major highways located across the two regions.

According to a leaked document shared by a Mexico City-based analyst with S&P Global Platts, the new Mexican administration requested a one-year postponement of the nationwide ban on HSD on December 17 through the energy ministry (SENER).

Neither CRE or SENER confirmed or denied the existence of the leaked document to Platts.

In the first nine months of 2018, Mexico consumed an average of 389,666 b/d of diesel. Of this, 73.4% was imported, primarily from the US, according to SENER data.

Out of Pemex's 103,786 b/d of diesel production, 70,750 b/d is HSD, with 55% of this being produced at Tula and Salamanca, company data show. A DIVIDED REGULATOR

CRE commissioners approved the postponement on Thursday, although it was not passed unanimously, one told Platts Friday.

The commissioner, who spoke to Platts on the condition of anonymity, said some opposed the measure as there is enough logistical infrastructure in place to supply the Central and Bajio regions with ULSD imports as well as to export Pemex's HSD production for marine and other uses.

"The issue at large is the thought that importing fuel in Mexico is bad, and producing it in Mexico is good, regardless of whether it is more expensive and produces more pollution," the commissioner said.

However, SENER cannot unilaterally change energy regulation or force CRE to do so, the commissioner said, adding. "Reality will put them slowly in their place."

Kansas City Southern, Howard Energy Partners, and ExxonMobil have begun operating new unit train terminals in the Central-Bajio region capable of supplying customers. Also, in the coming year, new train facilities backed by Avant Energy, Total and Akron will begin operating in these areas.

"All of these new facilities are going to become very coveted for importing diesel," the commissioner said. "This exclusion will allow Pemex to prepare itself better, something I doubt they will do as they have no budget to build hydrodesulfurization units." LACK OF REGULATORY ENFORCEMENT PREVENTS ARBITRAGE OPPORTUNITIES

Regulations on fuel quality specifications were first introduced in 2006, long before the 2013-4 energy reforms, Gonzalo Monroy, managing director of GMEC, a Mexico City-based energy consultancy told Platts.

"This has been postponed on several occasions as Pemex has been unable to reconfigure its refineries due to budget cuts earlier in the decade," Monroy said, adding: "This postponement reveals a serious problem in regulatory enforcement in Mexico."

Without proper enforcement on ULSD specifications, a clear arbitrage opportunity will not emerge and provide the margins for larger marketers to implement a more aggressive diesel distribution strategy in central Mexico, he added.

Currently, multiple small marketing companies have emerged in Mexico that are directly selling fuel to large end-users, Monroy said. "However, the penetration of new brands on major highways hasn't been that high, leaving this market still dominated by Pemex," he added.

Over 20% of the diesel Mexico imports is currently brought in by private companies, SENER data show. --Daniel Rodriguez, daniel.rodriguez@spglobal.com

--Edited by Keiron Greenhalgh, keiron.greenhalgh@spglobal.com