Fuel Distribution for More Competitive Energy Generation

Q: How has Indimex developed its business during the pandemic?

A: Indimex has emerged as a slightly different business, pivoting into liquid gas, which is an area that we looked at previously but did not invest much of our time in. Due to requirements around ESG and market opportunities over the next few years, we felt this was an area with a great deal of demand and in which we could grow. We also continue to trade gasoline and distillates. The jet fuel market remains impenetrable and fuel oil is not a space that we adhere to anymore because the purchase of Deer Park by PEMEX renders it pointless, as Mexico is going to have additional fuel oil to use internally for electricity generation.

Q: What challenges did Indimex overcome during the pandemic?

A: Some of the main refined product challenges are based around the availability to deliver fuel into Mexico at various transloading terminals. The government has taken the bull by the horns, having implemented a strategy that introduced a new permit for transloading terminals to execute on. I am specifically talking about the Kansas City Southern line, which holds the corridor for industrial activity in Mexico. Today, there are only a few terminals we can deliver to. We are restricted and we have experienced bottlenecks. Additionally, the government has eliminated 90 percent of import permits, providing us with greater challenges when we compete with the state. The essence of the 2014 Energy Reform was to deregulate energy markets and provide optionality, better services and infrastructure, in addition to promoting competitive pricing. This is a much harder goal to achieve when we are being handcuffed in different operating areas.

Q: What have been the outcomes of these challenges for the business?

A: These challenges have presented Indimex with the opportunity to look at developing delivery of alternative fuels in Mexico, such as liquified gas by truck. Also, our clients have a much stronger strategy in trucking, such as acquiring new assets to deliver fuel by truck, which gives us less exposure from a cash flow standpoint since we can get the fuel to our clients faster than relying on rail lines that are experiencing bottlenecks. If you consider that the largest truck that you could move in Mexico is half the size of a railcar, the volumes that can be moved by truck are very competitive in the short and medium term.

Q: What is your opinion on the viability of LNG export plants that Mexico is developing?

A: Strategically, it makes sense but Mexico imports over 70 percent of its natural gas from the US. Understanding how these terminals are going to have access to a product to later export it within Mexico’s current infrastructure for LNG will be interesting to see. Another factor is how much more infrastructure the government is willing to support around LNG as these terminals are being built as export terminals, which implies that the molecule is already in the country. However, the generation of LNG is still limited in Mexico and the gas network is still being developed. From a geographical standpoint, I understand how this could be beneficial but there are still holes that will inhibit that kind of transaction from going smoothly.

Q: What are the chances of Indimex working with the government?

A: Like many other companies, Indimex has made an effort to present a plan of action for working with the government that, from our perspective, could benefit the Mexican people. Due to the pandemic and the current philosophy of the Mexican government, access has been limited. The pandemic has been used as a scapegoat. Two years ago, it was a fair approach. Today, it is debatable as an excuse and it is clear that when the government wants to get things done, it gets things done. 

Q: How do you assess the energy self-sufficiency policy and where does it leave imports from the US?

A: Mexico has six refineries that are running at an average of 40 percent capacity. They have been tweaked to produce less fuel oil, even though they still produce a great deal. This molecule is being used within Mexico for electricity generation. Many of the sustainability and environmental contracts that the country has signed on a global basis are being left behind, with the Paris Climate Agreement being the most contentious.  In essence, the government is making an effort to create self-sufficiency between PEMEX, which produces the fuel oil, and CFE, which consumes it. It is much easier to balance your books when you know you have a natural short position between two state companies. Does that make sense for the environment? Is it the cheapest source of generation? No, but from an energy sovereignty perspective, you can understand what they are trying to do.

There is a certain irony in the recognition that because PEMEX does not produce enough refined products to serve Mexico’s demand, and given the context of energy and national security, it would go and buy a terminal in Texas. PEMEX has no experience managing an asset outside of Mexico and does not have the best record managing Mexican terminals either. The idea that PEMEX is going to the US and will run a similar operation in a foreign country presents a set of challenges and issues, and it does not necessarily play into this idea of national sovereignty, since the original argument was the willingness to stop importing and produce it internally. However, the government recognized that that goal is unachievable and now it will do what importers have been doing for the past four years, which dilutes the original argument. 

Q: How would you assess the current electricity reform?

A: MORENA has a particular angle regarding its views on renewable energy, which is based upon the early developers who arrived in Mexico with contracts that perhaps did benefit them. There needs to be reciprocal value for the government and there is an argument that can be made that those early developers and those early assets did benefit somewhat developers; nevertheless, they were also bringing new technology into the country. In every market, once you start having more competition, you also start having competitive pricing. The concept that renewable energy is more expensive than burning fuel oil in combined cycle plants is virtually nonsensical. Considering that PEMEX is the most indebted national company in the world and CFE is also one of the most indebted national gas and infrastructure companies worldwide, the question remains, how is it going to be more viable to burn a more expensive form of molecule in a hydrocarbon and sell it to the Mexican public? The government argues that it is not going to charge consumers for that but money is not free, so the funds are coming from somewhere else, either from other taxes or by taking money out of other sectors, like health or education. The Mexican government is focusing more on socialist ideals rather than laissez-faire neoliberal economics. The electricity reform makes sense from the point of view of the government’s idea of energy sovereignty but it does not make sense for consumers or the environment.

Indimex Group trades and markets crude and refined petroleum products from the US into Mexico. The company, which has a presence on both sides of the border, distributes its products via an extended and efficient logistics network.