Mexico fuel supply security key as imports grow: Lajous

The first quarter 2017 drop in US fuel imports into Mexico will be temporary, a former Pemex chief executive and chairman said today, but keeping that supply secure should still concern Mexico's government.

Rising US-Mexico tensions following President Donald Trump's election are "a warning sign to Mexican policy makers" on fuel supply security, Adrian Lajous, a Pemex executive in the 1990s who is now at Columbia University's Center on Global Energy Policy, said at the Argus Crude and Refined Products Exports Conference in Houston.

"An interruption in the US flow of exports to Mexico poses critical supply security concerns," he said. "Alternative strategies to reduce vulnerability need to be considered."

US imports of gasoline to Mexico dropped 20pc in the first quarter of 2017 compared with the last quarter of 2016, according to US Energy Information Administration (EIA) data. But that first quarter figure is also up 19pc from the first quarter of 2016, part of a longer-term increase in imports that Lajous said are structural, will be difficult to reverse for the remainder of the decade "and will most likely grow larger."

Lajous insisted that the most likely scenario is for the flow of US refined products to continue and to grow. More than 68pc of Mexico's gasoline supply and 57pc of its diesel was imported in the second half of last year, most of it from the US Gulf coast market, Lajous said.

But a politically or economically motivated disruption is still possible, and "consequences would be devastating," he said. This is particularly true with the new, more interconnected model implemented after Mexico's 2014 energy reforms that allowed outside investment and began to dismantle Pemex's monopoly.

"People tell me this will never happen … but I lived through the early 2000s, when the flows of natural gas from California were interrupted because of the energy crisis," he said. "Events like this happen from time to time."

The natural gas sector has been a liberalization success story based on the level of investment, but "this has not been matched in the midstream and downstream reform of the refined products sectors," he said.

The refined products market is particularly vulnerable given uneven advances in different areas of Mexico's energy sector under the reform. Investment is still lacking in Pemex's aging refineries, and open seasons for fuel logistics and transport meant to take place ahead of rolling regional retail price liberalization have been delayed. Poor communication with consumers and massive fuel theft are also complicating the planned reforms.

The energy reform also did not fully dismantle Pemex subsidiary Pemex Logistica's control of energy infrastructure, a limitation "which has come back to haunt us," he said.

The specter of the mid-2018 Mexican presidential election also looms, he said. The contest for now appears it will be between a candidate for the same political party which ushered in the energy reform under current President Enrique Pena Nieto, and leftist Andres Manuel Lopez Obrador, who has talked of dismantling the energy reform. At the same time, Lajous said that Lopez Obrador's hands would be largely tied if he wins.

"He would have many more restrictions in the energy sector than in the past," Lajous said. "They are even greater today in the sense that he would find himself with a completely liberalized oil products market. It was difficult liberalizing that. I would say re-monopolizing that is almost impossible."

When asked if the energy market is being overly complacent in its estimation of political risk in Mexico, Lajous said that this is not his primary concern.

"I am worried about Lopez Obrador, but I am more worried about Mr. Trump. My greatest concern is on the US side," Lajous said.