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Feature: Mexican ethanol blending faces legal hurdles following injunction

Houston — A future that once looked rosy for climbing ethanol blends with gasoline in Mexico could be in jeopardy as legal challenges to a new fuel regulation have found traction in court.

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A Mexican federal judge has issued an injunction against raising the amount of ethanol in gasoline sold in most of the country after a lawsuit was introduced arguing the increase will exacerbate air pollution problems, said Juan Machado, a partner in the law firm SOLCARGO and the attorney leading the case. The lawsuit also argues expert and environmental entities' opinions were not taken into account, Machado said in an interview with S&P Global Platts.

"The increase of ethanol in gasoline will produce a counterproductive effect on air quality by increasing the emissions of volatile organic compounds," said Carlos Del Razo, a plaintiff in the case and an environmental lawyer.

The case was brought by environmental activists, including former Mexican presidential candidate Gabriel Quadri.

In 2016, the Mexican Energy Regulatory Commission (CRE) said it would allow ethanol blending to increase to 5.8% from zero, as part of NOM-016, a broader measure to update its gasoline specifications. Then, in June of this year, the CRE announced it would be allowed at 10%.




NEW RULE PUT ON HOLD


However, last week the federal judge granted the injunction against the regulation that allowed ethanol blending to increase to 10% in all areas except Mexico City, Guadalajara and Monterrey.

"We are concerned about extending vapor pressure waivers because there are many more cities that present problems of tropospheric ozone and poor air quality, even much more serious problems than Mexico City," Del Razo said about the measure.

Increasing the amount of ethanol in gasoline increases the Reid Vapor Pressure of the fuel, meaning it will evaporate more easily. In the US, gasoline with 10% ethanol received a waiver as it would have lower emissions despite the easier evaporation.

Mexico uses MTBE as its primary oxygenate in gasoline, which is why ethanol has not been a consideration.

The injunction says ethanol blending has to remain at 5.8% while the case is decided, which could take more than a year, according to Machado.

"Our intent is not to stop energy reform but to demand that the judge forces the CRE not to ignore the environmental variables that are very important in a country that is heavily polluted," Machado said.

Del Razo said ethanol's effects on the environment could be more negative than in the US as Mexico's gasoline specification is different.

"The CRE claims to use the American model, but that is a half-truth -- in the US they have conventional and reformulated gasoline."

Mexico has its own set of factors in its gasoline that would affect tailpipe emissions if ethanol is added.

Related: Find more content about Mexico's commodity landscape in our news and analysis feature. Additionally, read our special report, Mexico's energy transformation takes hold.


EYES ON IMPORTS AND EXPORTS


One of the goals of NOM-016 was to align Mexico's gasoline specifications with those in the US, easing exports from the US into the country.

Pemex is the only company governed by the injunction, but it is also the main company importing, blending and distributing fuel, Del Razo said.

SOLCARGO could ask the court to extend the injunction to other companies in the future, but at the moment didn't see a need.

The injunction put a damper on US ethanol traders' hopes of developing consistent trade flow with Mexico.

"It seems like it shuts the door for Mexico," one US trader said.

Several of the largest ethanol producers in the US said they were eyeing Mexico as a developing center of trade. "The opportunity is huge," Steve Bleyl, Green Plains' vice president of ethanol marketing, said during a 2016 earnings call.

But with legal challenges and a slow-to-develop infrastructure, the market has not taken off as some hoped. The US has exported 61.9 million liters of fuel-grade ethanol to Mexico through August, according to US Department of Agriculture data. That's on track to be near the 99.5 million liters exported there in 2016.

But the US Grains Council, which has worked with the CRE on crafting NOM-016, was optimistic that the injunction wouldn't stick around.

"It's not definitive, there's an appeals process that's going on right now," said Ryan LeGrand, the Mexico office director of the US Grains Council.

Del Razo and Machado were confident that their argument will prevail and they would win an appeal.

"The judge was not capricious in finding or reaching his decision," Machado said. "He was very meticulous and took into account, among other opinions, the opinion of one of the CRE's own commissioners that was dissented that they had to be more cautious and more prudent in letting this measure pass."

The CRE did not respond to requests for comment.

--Josh Pedrick, joshua.pedrick@spglobal.com

--Silvia Struthers, silvia.struthers@spglobal.com

--Edited by Annie Siebert, ann.siebert@spglobal.com