The private fuels market has been hit with three important pieces of news this week, a year after President López Obrador took office. It seems that the Morena party has waited until the very end of the year to issue these adaptations to laws implemented under the energy reform, days before Mexico and its citizens close down for business in 2019.
Firstly, the Energy Regulatory Commission (CRE) approved Monday an adjustment to an agreement implemented in 2018 that forced Pemex to follow a set methodology to determine the prices at which it sold fuel to its clients.
The energy regulator approved this move with no formal discussion or explanation, completely changing the course of the objectives of the previous government. The rule was only meant to be temporary until companies other than Pemex supplied at least 30% of the Mexican fuel market to give the private marketers incentive and opportunity to integrate within the deregulated fuels market.
It should be noted that there was logic to this ruling since Pemex had the advantage of possessing all the infrastructure to move fuels in Mexico prior to the energy reform, meaning it was well positioned to undercut the market, wholly undermining the efforts of the private sector.
As a result, Pemex can now sell, through its subsidiary Pemex Transformación Industrial, gasoline and diesel at any price it wishes.
The federal Economic Competition Commission (Cofece) warned that if inefficiencies in the wholesale and retail markets for gasoline and diesel were to appear as a result of this opportunity for Pemex to price as it wishes, it will have to intervene.
The second piece of news that affected the fuels market was a federal court’s elimination of the obligation imposed by the Energy Regulatory Commission (CRE) on Pemex to transfer capacity in its pipelines and storage terminals to private companies that want to sell their own gasoline or diesel.
The legislation established a procedure whereby any company that wanted to supply at least 10,000 barrels per day to end consumers that were no longer customers of Pemex, could require Pemex Logística to lend its capacity in terminals and pipelines. It also prohibited Pemex Logística from charging private parties for the use of its infrastructure more than it currently charges Pemex TRI.
However, once again this news may seem far worse than the reality. Pemex has performed a number of auctions since the energy reform and all have failed miserably. In the auctions that were deemed “attractive,” the majority of the capacity has been reserved for Pemex TRI. In only two areas of the country was a private company assigned capacity: the American refiner Andeavor being awarded capacity in the regions of Sonora and Baja California.
Mexico has just three days of reserve capacity with the infrastructure it has built, in bleak comparison to 30 days in other OECD countries. Mexico is deeply underdeveloped and is desperate for foreign direct investment in order to ameliorate its lagging conditions. With the government spending US $8 billion on a refinery, the question still remains as to how it plans to move its refined products from Tabasco to areas of high demand.
The third and final piece of news vis-a-vis Pemex was issued again by the CRE on Wednesday. Mexico’s energy regulator was again at the center of attention, voting to defer for five more years a rule requiring Pemex to produce, distribute and sell ultra-low-sulfur diesel (ULSD) outside of the three metropolitan areas.
By a unanimous vote, the commission postponed previously issued legislation, a postponement that follows an earlier deferral late last year amid an ongoing legal battle over the matter. According to the new resolution, Pemex can continue marketing ULSD only in Mexico City, Guadalajara and Monterrey — Mexico’s three largest cities, and on the northern border with the United States until the end of 2024.
The government argues that technical and operational conditions for distributing ULSD nationwide will only come to fruition in late 2024, according to a document sent last week to the regulator by energy undersecretary Miguel Maciel.
However, more important to note is that across the rest of Mexico all marketers will be able to sell cleaner diesel with 0.5% sulfur content or less.
Pemex’s six refineries produce mostly fuel oil and high sulfur diesel, and not enough clean diesel to satisfy the demand the new rule would have posed. The energy reform was in part introduced to reduce emissions and replicated regulations in neighboring countries. According to the original ruling, Pemex was meant to switch to ULSD nationwide at the end of 2018.
While this news may seem damaging to private importers, since Pemex will be at ease to market its own production for a few years to come, the national oil company may be the entity that suffers the most here. In many corners of Mexico, private companies are selling higher quality diesel with 0.5% sulphur content or lower, and Mexican companies that have invested heavily in new assets such as trucks and high-quality engines will be advocates of the cleaner fuel.
In fact, it is damaging to new equipment to use lower quality fuels and most forward-thinking Mexican companies will be livid over this delay. Nonetheless, this gap in the market will undoubtedly be filled by private companies, leaving Pemex with less market share, making this change counterproductive and adding to the whole host of problems Pemex currently encounters.
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.