Opinion
pemex tank farm Pemex holds all the cards when it comes to storage facilities.

Lack of third-party petroleum infrastructure is an issue for Mexico

Mexico energy bulletin

In conjunction with the deregulation of the fuel markets, the Secretariat of Energy (Sener) created the public policy on minimum stocks of oil products in August 2017.

The policy obliges importers of refined products to maintain minimum inventories of gasoline, diesel and jet fuel in all regions of the country in order to reduce the risk of lack of supply and not to depend wholly on Pemex’s infrastructure.

However, following a dramatic realization that markets have not developed as anticipated, Sener issued a change to the policy on December 6. The amendment was issued to accommodate the current nature of the fuels market and the lack of infrastructure in the private sector.

Only five storage terminals are in operation across the whole country, mainly due to a lack of clarity in real market pricing and clients willing to exit Pemex contracts and lock in private contracts for the long term.

This has been a real issue since Mexico lacks any tangible third-party infrastructure, meaning the population is at the beck and call of Pemex assets only. Importers have struggled to attain long term contracts with end users since Mexicans recognize that it is hard to fulfill their demand without storage tanks, transloading facilities and consolidated logistics in the form of trucking.

In essence, we are experiencing a standoff situation where importers are hesitant to invest in infrastructure and clients locally do not want to sign long term contracts with suppliers due to a lack of infrastructure and their concerns over being left shortly of supply.

CFE power generation plants

The Federal Electricity Commission (CFE) has announced it will develop seven power generation plants next year that will collectively provide additional capacity of 3,762 megawatts (MW) to the national electric system.

CEO Manuel Bartlett joined President López Obrador at his morning press conference Monday, confirming that the development of the seven plants will require a joint investment estimated at 58.64 million pesos (US $3 million).

He added that six of them will use natural gas and fuel, while the seventh — CI Baja California Sur VI — will begin operating solely with fuel oil, although second stage plans will have it using natural gas.

The seven centers will be located in San Luis Río Colorado, Sonora; Baja California (two projects); San Luis Potosí, San Luis Potosí; Salamanca, Guanajuato; Dos Bocas, Veracruz; and Mérida, Yucatán.

It is intriguing to see a government push for the use of fuel oil at these plants, supporting Pemex refinery production where bottom of the barrel fuel oil is produced in higher quantities than gasoline and middle distillates such as diesel.

The timing of this announcement sits uncoincidentally close to the introduction of IMO 2020 where the International Maritime Organization, headquartered in London, will implement a low sulphur regulation that comes into effect on January 1. The policy requires all shipping companies to reduce their sulphur emissions by 85%.

Consequently, higher demand for low sulphur distillate fuels will push refineries worldwide to use middle distillates such as diesel-based MGO (marine gasoil describes marine fuels that consist exclusively of distillates and is similar to diesel fuel, but has a higher density), diesel (especially ultra-low sulphur diesel) and jet fuel to blend down high sulphur fuel oil and produce the compliant fuel.

Pemex does not have the capacity to produce more of the middle distillates necessary meaning the company is now “long” fuel oil, allowing us to understand better why Bartlett will continue to use fuel oil in plants: to support another state entity, Pemex, by buying its refined fuel production.

Private win for renewable energy certificates

Mexico, the world’s 12th-largest emitter of greenhouse gases, has been seen a forward thinker on climate policy and sustainability in the past decade. There had been a real shift and sustained focus on developing wind and solar assets in the country before the advent of the Morena party this time last year.

However, in late October, all those previous efforts were called into question when the Secretariat of Energy and the López Obrador cabinet decided to ruffle the feathers of pro-renewable lobbyists and companies.

Morena announced it was going to adapt the market rules for clean energy certificates, known as CELs. The rationale for creating the credits was to give producers incentive to adopt more renewable energy assets and help Mexico achieve its national climate goals. Those goals include increasing clean energy’s share of the national energy market from 25% in 2018 to 35% in 2024 and 50% by 2050.

The certificates would only be available for projects that commenced operations after 2014. But the new rules make older producers, including non-operating hydroelectric dams, eligible to receive the incentives too. Beyond the obvious market interference, the changes further compromised Mexico’s clean energy goals by effectively allowing the Federal Electricity Commission to utilize older energy production.

It did not take long for the largest wind and solar companies that had won projects in Mexico to revolt against the change. Consequently, a federal judge in Mexico City overturned the rule change within days. Critics feared that if older government-supported assets were subject to accessing loans, newer projects would have a lower asset value and undermine investment in clean energy.

On Tuesday of this week, the federal judiciary decided to keep the original market rules in place, indicating that the original design of the CELs will remain unchanged until the final resolution of the amparo lawsuits. An amparo lawsuit can be translated loosely as a guarantee of protection of an individual’s constitutional rights: this protection is provided for under Mexico’s constitutional law and the Amparo Law.

The Energy Secretariat’s move to grant old, state-run clean energy producers the right to sell CELs, originally designed for renewable power plants, was met with heavy criticism by Mexican wind and solar associations. The temporary win for supporters of renewables and foreign direct investment will praise this ruling, proving that the judicial system in Mexico works in benefit of laws constituted for the benefit of the nation.

It remains to be seen whether the suspension can be overturned but this news will be welcomed by foreign investors concerned about the rule of law in Mexico as well as aiding Mexico in achieving its targets in the Paris Agreement on climate change.

The writer is the founder of Indimex Group, a Mexico City company focused on the procurement, marketing, trading and optimizing of refined petroleum products as well as investing in and operating physical assets for the movement of fuels in Mexico and the United States. His bulletin about developments in the Mexican energy industry appears weekly on Mexico News Daily.

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