Octavio Pérez Salazar
Executive President
View from the Top

LPG Eagerly Awaits Liberalized Market

Wed, 01/20/2016 - 15:18

Q: What situations led to the creation of AMEXGAS, and what are the association’s main activities?

A: LPG has a long-standing tradition in Mexico, and LPG distributors came into existence in a complicated environment back in the 1940s, when the main fuels used for domestic consumption were wood, alcohol, and petroleum derivatives. This industry always had a close link to PEMEX, so LPG companies saw the need to group in order to reach agreements with the authorities and the NOC. The Association was formed in 1962, and its main purpose continues to be fostering its relationship with the authorities.

AMEXGAS represents 180 companies before different entities, participating in regulatory committees. We have close ties to ASEA, the Ministry of Energy, PROFECO, and CRE, and we also speak on behalf of our member companies through other associations when it comes to the relationship with PEMEX, although this situation is changing lately. AMEXGAS has a close relationship with AMGN, since both associations participate in COPARMEX’s Energy Commission. The relationship between these two entities has served to change the existing narrative regarding the role of both fuels, which now complement each other rather than compete. LPG is focused on domestic consumption, whereas CNG is use for power generation and industrial purposes. AMEXGAS also provides its affiliates with legal advisory services, information, or assistance in media-related affairs.

Q: How did the Energy Reform impact the LPG segment?

A: The main benefit for the LPG segment will be the price liberation. LPG distribution is an important industry at the global level, but Mexico lags behind due to insufficient resources and a historical lack of interest from the Executive power. In my view, the most harmful obstacle for the development of this industry has been price control and the way this was enforced. Therefore, it was great news to hear that common sense prevailed in the Energy Reform and that there was a planned schedule for the industry’s liberalization, which includes imports, and focused subsidies for people who still use wood for fuel.

The program is comprehensive, and the Association believes that this reform is the government’s first sustainable attempt to open our market. At the moment, imports have already been liberalized, which allows players to access supply sources other than PEMEX, offering gas of a different quality and even offering more competitive prices when possible. The rest of the market will be liberalized on January 1, 2017. In an open market, consumers will have more alternatives and will be able to choose the LPG distributor that offers the best service or the lowest price. Companies will be able to create added value, which is something we could not do before because distributors sold the same product at the same price with reduced profit margins.

Q: How will tariffs work while prices are liberated?

A: When the Energy Reform was drafted, the industry assumed the international market was more expensive than the domestic one because it was subsidised. However, this situation changed three years ago when the surplus production of liquefied gas in the US caused the prices to drop. This part of the world follows the Mont Belview gas index, which is at its lowest point in years. Throughout this year we will a gradual decrease in domestic prices due to imported gas that will provide an alternative to PEMEX’s product, and similar changes in the market conditions will eventually reduce prices. If everything goes as expected, the maximum price we see at the end of this year will only be a reference that will not necessarily be followed and will disappear by 2017. There are no generalized reasons why prices should go up, and the way the liberalization is planned allows for a smooth transition without major complications for consumers and distributors.

Q: What benefits do the new private participation schemes provide LPG distributors?

A: Our relationship with PEMEX, which the law appointed as the only supplier, producer, and importer, is changing. Some parts of the chain have been liberalized for some time now, such as transportation. Considering this, the main change we expect to see is a diversification in the offer, so now, in addition to transporting gas between PEMEX and distributors, companies will also be able to import gas from the US and build pipelines. Now distributors will choose if they want to buy gas from PEMEX, which produces 65% of the LPG that is consumed in Mexico, or from other parties. PEMEX will certainly have a competitive offer in some regions and will continue to be an important player. Distributors will then be responsible for finding a supplier that makes them competitive. The options are being assessed already and the country will soon have a diversified offering. Consumers will also be able to choose between the different kinds of PEMEX gas or HD10, HD5, or imported gas that fulfils any specifications for determined uses, which will be new to the country.

Q: How is AMEXGAS working to push the development of LPG storage projects?

A: AMEXGAS has been pointing out the insufficient storage capacity since its inception, as the country has a storage capacity of two and a half days.. When the market becomes liberalized, businesspeople who want to invest in infrastructure will be able to do so. The incoming changes in Mexico’s LPG industry have awakened the interest of the international market, and I frequently meet with distributors, infrastructure companies, and investment funds that are looking for projects to invest in. Since the financial markets have not been profitable lately, these players want to inject their capital into profitable projects, and the Energy Reform opened many doors for them. Even though storage projects are capital intensive, the market conditions are favorable. Mexico is one of the largest consumers of LPG per capita in the world, and the country’s consumption reaches 8.6 million tonnes annually.

Q: Why should the authorities consider subsidizing the LPG consumer segment?

A: I would rather say the authorities should consider subsidizing a modern fuel. More than 15% of the Mexican population uses wood and other primary fuels that damage people’s health and the environment. A study carried out by the WLPGA indicates that countries spend more in providing healthcare for the ill and reforesting than they would if they subsidized the use of non-primary fuels. In line with this, LPG is the best option since it is not feasible to build a pipeline to take natural gas to towns in the mountains where wood is used. Marginalized segments in urban areas use wood, even though the LPG distribution system can reach every corner of the country. If a place is not properly supplied, it is because the commercialization margins make the distribution impractical. However, this will change with the new scheme and distribution companies will work to take LPG everywhere it is needed. An advantage of LPG is its portability, and a small container holds a great amount of energy if measured in BTU. In this sense, acknowledging the circumstances and the fact that a subsidy is a common international practice, the authorities could assist in this enterprise, which does not necessarily entail economic assistance, as infrastructure is crucial.