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Mexico's fuel market to become even more competitive in 2020: executives

New York — Mexico's already liberalizing fuel market will become far more competitive in 2020 as several private midstream projects start operations, multiple oil company executives say.

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Infrastructure shortages has allowed state Pemex to control more than 90% of Mexico's gasoline imports in March, according to government data, despite the country being opened to private fuel imports in 2016.

ExxonMobil was the first private company to bring gasoline into Mexico, in December 2017, on unit trains. Glencore, Windstar and Marathon Petroleum followed suit in 2018. Throughout 2019 and into 2020, new terminals will allow ExxonMobil, Repsol, BP, Total, Shell, Valero, Marathon and Windstar to expand across Mexico.

Marathon will double its fuel exports to 30,000 b/d once two new terminals in Northwestern Mexico come online next year.

"Our logistics system is not enough for our growth rate," Leonardo Giron, Marathon's fuel marketing director for Mexico.

Giron, like the other executives interviewed, spoke last week at the Onexpo convention in Veracruz, the largest retail fuel industry gathering in Mexico.

Click here for full-size image

Next year will test the pillars of Mexico's market liberalization: private participation under unrestricted fuel imports and free fuel prices, Murray Fonseca, Shell downstream director said.

"For me during 2020, the industry is fully testing these premises, especially storage, logistics, and free pricing," Fonseca said.

Shell, BP, Marathon and Repsol executives told S&P Global Platts their investments will help President Andres Manuel Lopez Obrador achieve his goal of securing Mexico's energy supplies.

"We are here to work along Pemex to help solve Mexico's needs," said Oliver Fernandez, Repsol's Mexico fuel retail director.

Oil companies are building a long-term presence in Mexico, the world's fifth-largest fuel consumer and the last great market to undergo liberalization, executives said.

MIDSTREAM GAPS

Pemex's logistics budget for 2019 is $28 million, insufficient to grow Mexico's storage capacity beyond the current 48-72 hours of demand. Private companies, meanwhile, plan to invest $4.6 billion across 70 storage projects, with a combined 45.5 million barrels of storage capacity, according to government data.

"We are now closing the infrastructure holes Mexico has had since the 1980s (the last time Pemex built multiple new terminals)," Juancho Eekhout, development VP with IEnova, Mexico's largest midstream developer. The number of projects under planning could allow Mexico to double its fuel storage capacity by 2022, Eekhout said.

At the convention, developers said Lopez Obrador's administration is being unclear about its agenda regarding the refined products sector.

"Will the government continue the market opening or support Pemex to be the dominant player to ensure the country's energy security," said Juan Antonio Garcia, director of pipeline developer Itzoil. Garcia's company is developing the Tajin project, Mexico's only proposed refined products pipeline system with regulatory approval to date. Tajin will connect the Port of Tuxpan on the Gulf Coast and Central Mexico, moving over 165,000 b/d of fuel in 2020, offtaker ExxonMobil has said. Garcia declined to give an update on Tajin.

"The government is not sending clear signals," said Yelmay Leon, who directs Windstar's plans to begin operating new unit train terminals at the Northwestern and Northern cities of Hermosillo and Chihuahua in 2020.

The use of rail to move US fuel into Mexico is growing. ExxonMobil was the first to set an independent logistic supply system based on rail. By the end of March, it was Mexico's largest private fuel importer, bringing 64,000-71,500 b/d.

Windstar, Marathon, BP, Shell, Total, Repsol and Valero among others have announced rail will be key in their future logistic fuel system. However, a lack of storage capacity curbs train imports as companies have to do direct cargo transfers from trains into trucks, rail company Kansas City Southern has said. Executives at Onexpo, however, said they did not think Mexico's rail system had become overburdened by unit trains of fuel and that capacity remained.

In the future, rail will set the marginal fuel price as more unit train terminals converge around the Bajio region in Central-Western Mexico, said Alvaro Granada, BP Mexico's downstream director.

"It will be interesting to follow [the emergence of a railed fuel reference price] because of its logistic richness and opportunities to bring product," Granada said.

FUTURE OF EXISTING REFINERIES

The biggest uncertainty for private companies seeking to import fuel in Mexico, executives said, are Pemex's older and underproducing refineries, not the company's 340,000 b/d Dos Bocas plant on which construction started earlier this month. Lopez Obrador has said the refinery would be operational by 2022.

Pemex will build Dos Bocas while rehabilitating its existing six refineries, which operate substandarly after years of lackluster maintenance since the oil price downturn in 2014. Doing this will allow Mexico to become fuel self-sufficient, according to a Lopez Obrador's landmark campaign promise.

At end-May, Pemex processed 569,000 b/d, a 33% total utilization rate at its refineries. As a result, imports supplied 70% of Mexico's 1.19 million b/d gasoline and diesel demand that month, according to government data.

"What is unclear is not whether the new refinery is built but whether the old ones will be able to boost their production," Leon said.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com

S&P Global Platts Calgary Oil & Energy Forum | June 18, 2019

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