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Viewpoint: US west coast eyes Mexico opportunities

26 Dec 2017 12:00 GMT
Viewpoint: US west coast eyes Mexico opportunities

San Francisco, 26 December (Argus) — Mexico's recently liberalized fuel market will likely have the most significant impact on supply-demand fundamentals on the US west coast in the next five years.

Many west coast market participants take a bullish outlook on exporting gasoline to Mexico. Increased product flow to Mexico will tighten the US market and remove some of the excess supply, particularly in the Pacific northwest and San Francisco Bay area.

Gasoline exports from the US to Mexico rose for much of 2017. Year over year, comparing January with September values, US gasoline exports to Mexico have risen by nearly 25pc in 2017, according to data from the Energy Information Administration (EIA).

Although there is widespread interest in the US west coast in exploring the opportunity to enter the Mexican fuel market, it does not come without challenges. West coast sellers are concerned about the steep cost and ability to move fuel to Mexico, as regional trucking capacity is already stretched.

Fuel theft, as well as associated security costs, are making companies cautious about investing in Mexican infrastructure. Despite various attempts over the years, state-run Pemex and the country's security forces have failed to significantly reduce fuel theft — a phenomenon that cost an estimated $1 bn/year by 2016. Illegal tapping, also known as "milking", has existed for decades in Mexico but has become a bigger problem as the country liberalizes price.

Midstream concerns also exist on the US side as aging infrastructure on the US west coast could limit supply volumes. But barges may help address transportation issues, and companies may opt to hire Mexican-based companies that are more adept to business practices in Mexico to truck products across the border.

Kinder Morgan in early December added two Mexico gasoline grades — 10 RVP and 11.5 RVP — to its US Pacific coast operations in anticipation of future export demand. Kinder Morgan said it has not yet announced plans for a petroleum pipeline project into Mexico and declined to comment on volumes and timing of the anticipated demand, but the move sparked significant interest among west coast traders.

Many companies are also eyeing the moves of US independent refiner Andeavor in Mexico. Andeavor has bought into distribution assets in western Mexico as it expands its downstream presence in the country. The company secured 315,000 bl of storage space and 9,535 b/d of pipeline capacity in Sonora and Baja California in state-owned oil firm Pemex's first tender for such assets in May. It plans to supply roughly 40,000 b/d of gasoline and diesel in the two states.

Although the rise of electric vehicle use in California may dampen gasoline demand regionally in the coming years, Mexico's demand for the traditional fuel is expected to more than offset the potential drop.