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Mexico private fuel imports likely to grow in 2020

Highlights

Mexico private imports at 27.78% of total share

Increased Pemex production not enough to meet demand

Private imports to grow along with storage in 2020

Houston — Growing infrastructure investments and a domestic supply shortfall have led to a significant increase for private fuel imports to Mexico in 2019, a trend that will likely continue into 2020.

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Commodities 2020 | S&P Global Platts

While Pemex, Mexico's state-owned oil company, still dominates the country's market, third-party companies have slowly increased their footprint since the first private imports arrived in 2016.

Refined product imports to Mexico by private companies reached a record high share of 32.69% in July, compared to 15.45% the same month in 2018 and 13.04% in 2017, according to data from the country's energy ministry. The third-party share was 27.78% in September, the latest month for which data was available.

An increase in ULSD imports, which has been the main focus of private fuel importers, has led the way. Non-Pemex ULSD imports peaked in August at 36.8%, compared to 19.73% and 11.32% for the previous two years, the data showed.

The focus on ULSD stems largely from Mexico's inability to produce the fuel. While overall diesel production was 20.54% of total output in September, just 8.35% was ultra low sulfur fuel, which Mexico requires in the main metropolitan areas.

In 2018, Mexico indefinitely delayed a regulation to move the entire country to ULSD, citing insufficient internal production.

DEMAND EXPECTED TO RISE

Pemex sales of diesel averaged 300,225 b/d through September, down 36,141 b/d from the same period last year, according to company data. Gasoline followed a similar pattern, with Pemex sales falling 50,051 b/d to 721,560 b/d. Those lower figures reflect not only Pemex losing market share but also slightly weaker demand overall, according to Lenny Rodriguez, an arbitrage and Latin America analyst at S&P Global Platts Analytics.

"Private participation in the diesel import market has been gradually increasing over the last couple of years," he said. "Additionally, the Mexican economy has slowed down this year, directly impacting demand for diesel."

The difference between what diesel Pemex produces and what it sells - 166,015 b/d in September - will still persist, despite Platts Analytics projecting Mexico refinery production will increase 75,000 b/d year on year in 2020. Mexico has long struggled to fully utilize its refineries, operating at an average 40% of its 1.6 million b/d capacity since 2018.

"So far, the expectations for higher crude runs of Pemex have fallen short even though some maintenance work has been carried out," Rodriguez said. "Additionally, it is difficult to see how the simple refineries will be able to run harder without additional supply of light oil."

That inability to internally produce fuel was a main reason Mexico regulators moved to ensure supply stockpiles were available.

On July 1, 2020, all marketers and distributors of motor fuels will be required to have five days' worth of storage on a national annual average. In December 2017, when the first storage regulations were published, Mexico had a maximum of three days of stored supply, according to the energy ministry.

Storage, and infrastructure overall, has been the main focus for companies looking to expand into the market.

INFRASTRUCTURE EXPANSION ON THE HORIZON

At least 14 million barrels of additional fuel storage is expected to come online throughout 2020, according to Mexico government data and company filings. That storage will be a boon for private companies looking to increase their foothold in the country.

But for now, Pemex remains not only the main importer, but the main supplier to third-party companies.

Shell currently relies on imports via train and trucks for just 25% of demand at its 200 service stations throughout the country, with the rest coming from Pemex. The company expects to expand its network to 1,200 stations in the next five years.

Shell plans to start importing fuel to Mexico via ship by the middle or second half of next year, as soon as two new private terminals come online, the company's downstream director for Mexico, Murray Fonseca, told S&P Global Platts last month.

BP's general director Alvaro Granada said earlier this year the company is importing 20% of its fuel for Mexico, also via train and truck from Texas, as the majority of supply is still purchased from Pemex.

Valero last month signed another long-term agreement with Mexico, adding to the deals it signed in 2017 for three other terminals due online in 2020. The most recent deal was for the use of three new fuel terminals in Guadalajara, Monterrey and Altamira for a total of 2.4 million barrels. In total, Valero is expected to have 5.8 million barrels of storage in underdeveloped Mexican markets by the end of next year.

Commodities 2020 | S&P Global Platts

-- Joshua Brown, joshua.brown1@spglobal.com

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