August 8, 2022 [bnamericas] – Investment in Mexico’s fuel storage infrastructure has hit the brakes thanks to a key regulatory change.
Fuel market expert Alejandro Montufar Helu Jiménez tells BNamericas that big projects like Valero’s US$1bn rollout of fuel market infrastructure are done for now.
“I don’t think there’s going to be more beyond Valero,” said Montufar in an interview.
The US refiner’s ambitious project, made public in 2021, sought to double its Mexican fuel storage capacity to 5.8Bb (billion barrels) to feed its own network of service stations.
It also made room to potentially sublet unused storage, a practice known locally as selling storage ‘tickets’ to other private players needing to prove the minimum fuel storage capacity requirement set by the State.
That project entailed partners like Ferromex developing a rail network for delivery, Grupo México building an inland hub in Monterrey and Mexplus building a terminal in Altamira, Tamaulipas state, among smaller projects planned in Aguascalientes, Saltillo and Guadalajara.
A February 2020 study by IHS Markit subsidiary OPIS oil price information service reported at least 10 private hydrocarbons storage projects in addition to Valero’s were in the pipeline, with five such projects tracked by the BNamericas project database with capex over US$100mn.
But, said Montufar, that project had been building for years under the pretense of a 10-day storage requirement on fuel distributors with Valero.
And with the level now set at five days, the company may even face a storage overage once works are complete.
“There was a boom in investment that the government was driving,” he added.
Until structural reforms in 2013-14, the state-owned Pemex brand held a monopoly. But with the first private service stations in 75 years opening in June 2016, the market exploded with some analysts by early 2020 seeing privates overcoming Pemex in market share.
That countered the aim of President Andrés Manuel López Obrador (AMLO) that Pemex and state-owned power company CFE be restored as the predominant market players, and with COVID-19 providing rationale, federal energy regulator CRE soon began a slowdown in private permit approvals.
And while CRE since June has begun to clear out the logjam of delayed private fuel market approvals, the industry is already complaining of blanket permit denials.
The shift under the AMLO administration reduced the requirement for fuel distributors to demonstrate 10 days of storage capacity to five, arguing the need “to attend to current circumstances” without detailing what these were.
Montufar said the energy ministry’s 2019 decision to reduce the number of days of reserve capacity came despite “negative industry feedback that this would harm investment.”
“Many projects arose from the obligation of larger storage capacity,” said Montufar, but as a new study from his fuel market research firm Petrointelligence shows, “We have more than enough capacity to comply with the obligation.”
The following graphics, created for BNamericas by Petrointelligence chief economic analyst Roberto Galindo, demonstrate how both private players and the national oil company Pemex’s network have more than enough storage for five days, and how a 10-day requirement could have been driving investment.
While storage capacity of Pemex and private players combined is enough to meet the requirement, Pemex is prevented from selling ‘tickets’ of its own.
Hence, private players are wholly dependent on private infrastructure.
This, Montufar said, was the driving factor in the 2020-21 boom in storage projects, as available private storage capacity was already butting up against the 10-day requirement with fuel demand set to rise for years to come.
Private firms quickly adapted, he added, with companies like Mobil becoming active players in selling ‘tickets’, but the need for such activity now looks to fall as storage projects already in progress reach completion.
Looking ahead, it’s anyone’s guess if or when Mexico resets the requirement higher, but the benefits of doing so would go beyond investment.
“Taking into account best international practices, it should be higher,” Montufar said. “Increasing it to 10 days would be beneficial for Mexico’s energy security.”
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