Mexico looks to fuel pump for reform dividend

OREANDA-NEWS. February 26, 2016. Mexico said this week it will allow independent service stations to freely import gasoline and diesel nine months ahead of schedule, hoping to boost infrastructure investment and bring cheaper fuel to consumers earlier than planned.

Under the new rule, the energy ministry will start issuing import permits from 1 April 2016 instead of January 2017.

The move has generated some industry skepticism over the regulator's ability to meet the new 1 April 2016 target. With only a month and a half to go, Mexico's oil regulator CRE, and the energy and finance secretaries have yet to present required regulations for the new market.

Still, the economic and political dividend could be considerable.

On a broad level, the move appears aimed at showing Mexicans the benefits of the sweeping 2014 energy reform that is opening the country?s long-cloistered energy sector to outside investment. The reform, always greeted skeptically by many Mexicans long nurtured on nationalist sentiment, has lost some of its political traction because of the sharp decline in global oil prices, and the blow-back on the country?s oil revenue. At the same time, the reform-minded government of president Enrique Pe?a Nieto has grown increasingly unpopular after several waves of austerity measures.

Earlier this month, the finance secretary unveiled a 132bn peso (\\$7.2bn) spending cut to the 2016 federal budget, of which 100bn were allocated to Pemex. This is the second year in a row that weak oil prices have forced Mexico to revise its budget.

A decrease in pump prices, assumed to take place once local drivers have retail alternatives to Pemex and imports kick off in April, would offer one of the first tangible benefits for Mexicans since the 2013 constitutional amendments that paved the way for the energy reform.

"Market participants will be able to optimize costs related to transportation, management and freight, offering better prices to the consumer," according to a report issued yesterday by deputy energy secretary Lourdes Melgar.

The report, published in Mexico?s Official Gazette, also cites the benefits of Mexico's proximity to the competitive US market.

Lower fuel prices could also help the ruling PRI party in this year?s state and local elections, precursors to the 2018 presidential election.

Under a new price mechanism that took effect last month, the government allows fuel prices to fluctuate within a 3pc band based on 2015 prices for a one-year transitional period, before a full market system is established in 1 January 2018.

Gasoline prices in February were set at 13.16 Mexican pesos (\\$0.72) per liter for 87-octane Magna gasoline, MXN13.95/l for 93-octane Premium gasoline and MXN13.77/l for diesel. The prices are adjusted monthly.

As a net importer of gasoline from the US, Mexico already has import infrastructure, but the government hopes an early opening of the market will bring more capital investment, more quickly, in new and existing transportation, storage and other infrastructure, areas that have been largely neglected by Pemex.

In 2015, Pemex imported 427,100 b/d of gasoline, including MTBE, up by 15.2pc from 370,500 b/d a year ago.

In comparison, the firm produced only 381,400 b/d of gasoline last year, down by 9.5pc from 2014 levels.

Pemex's recently appointed chief executive Jos? Antonio Gonz?lez Anaya addressed one of the key outstanding questions yesterday, concerning the use of infrastructure by private-sector companies. Speaking at the IHS CeraWeek conference in Houston, Anaya said Pemex will allow outside firms to use its pipelines and terminals for "a fair price".

But Pemex may be taking a chance against low-cost competitors. "Simply put, no matter what the price per gallon is, consumers want to find the best price they can," says Jeff Lenard of the US fuel retailing chamber NACS.