Mexican fuel investment persists despite hurdles

Permitting delays have held up planned spending in Mexico's fuel sector but investment will continue in 2021 despite low expectations for a break in the political logjam, market participants say.

Mexico's energy regulatory commission (CRE) issued 57pc fewer retail fuel and storage permits in 2020 compared with the prior year — down to 175 from 407 in 2019, president of fuel retailers' association Onexpo Roberto Diaz de Leon said during the Argus Mexican Fuel Forum today. Another 400 are awaiting decisions, Onexpo estimates.

"Many investments are halted in the energy sector," Diaz de Leon said. "What we have learned is that neither the state nor the private sector can move forward on their own."

This has slowed the pace of overall spending in the Mexican fuel sector, which opened to private-sector and international investment following the 2014 energy reform. While retail brands have proliferated, greenfield stations and new storage development have lagged expectations.

Complaints from investors that the permit delays — including those for fuel imports — are part of a government effort to favor state-owned companies led to a call from US officials earlier this year for fairer treatment.

Despite the issues, the industry remains hopeful that non-Pemex brands and suppliers will continue to develop. Onexpo expects retailers to invest Ps12bn ($596.1mn) in 2021 in existing retail fuel stations, mainly for improvements, training and new technology such as contact-free payment methods. This is down by 40pc from almost Ps20bn invested during 2020, but much of that investment went to upgrading or replacing fuel pumps because of new regulatory requirements, Diaz de Leon said.

Mexico now has 12,769 retail fuel stations with over 170 retail fuel brands including domestic and international firms. This is up by 8.5pc from 11,774 in December 2017, when the first non-Pemex brands started to arrive to the country.

"The evolution of our sector continues," Diaz de Leon said. "It will keep maturing, and current firms will consolidate which implies some brands will disappear, others will merge and new ones will appear."

The Mexican fuel storage business expanded in 2020 as storage filled because of declining demand, but this was only for terminals that were already developed because of the permitting delay. Central Mexican Terminal's (TCM) 400,000 bl fuel storage facility in central Mexico started 2021 with about twice as much fuel capacity as in early 2020, before the Covid-19 pandemic hit, TCM director Celeste Rebora said.

About 40mn bl of additional storage capacity is held up by permitting delays, she estimates. Private-sector investors have brought 10 major fuel storage projects on line since 2016, adding 5.4mn bl to the 26mn bl of existing capacity managed by state-owned Pemex.

Despite political hurdles and the lower demand because of the pandemic, TCM believes fuel storage capacity will increase in Mexico this year.

The government has taken much-needed long-term certainty out of the market with recent changes to the fuel import permitting process, that shortens for how long companies can be assured of holding the permit.

Without an offtaker that has at least a 10-year permit to import fuels, it is hard to find a bank that will pay to finance a storage project because of the lack of certainty, Rebora said.

Moreover, retailers and distributors need certainty from major suppliers, which they cannot get as new fuel import rules eliminated 20-year fuel import permits and introduced only five-year import permits.

"If a new supplier cannot guarantee supply for more than one or the maximum five years, how will retailers or distributors change to a new supplier?" Rebora said.

By Sergio Meana