Montserrat Ramiro
Director of Energy Projects

PEMEX’s Role in Competitive Fuel Distribution

Wed, 01/22/2014 - 10:39

The internal mechanics of the Mexican fuel distribution market have long been an unspoken issue surrounding the Energy Reform and the general discussion being held regarding the future of the downstream segment. That silence was partially broken in late August 2013, when the Federal Commission of Economic Competition (CFC) fined PEMEX more than MX$653 million (US$50 million) as a penalty for engaging in what it referred to as “monopolistic practices.” These practices included forcing gas stations to hire certain fuel suppliers staffed by STPRM personnel, a service that cost gas stations anywhere from 50% to 67% more when compared to prices offered by other authorized companies. At the time, analysts such as Montserrat Ramiro, Director of Energy Projects at the Mexican Institute for Competition (IMCO), an independent think tank that conducts analyses and publishes legal and economic proposals on a variety of Mexican industries, confirmed the CFC’s reasoning by asserting that PEMEX fuel transportation practices hugely hindered the market.

The Energy Reform will now alter the playing field quite drastically when it defines how these issues are going to be handled going forward. The CFC’s actions can now be seen as a precursor to the elimination of PEMEX’s monopoly over a myriad of industry practices that include fuel transportation and distribution through the amendments made to Article 27 of the Constitution. Ramiro believes that this opening up to competition is a positive development for PEMEX and for the downstream sector in general. She details PEMEX’s shortcomings as having arisen from a lack of competition in the sector. “If a company does not have anyone to compete with, it has no incentives to become better. And if it does not have enough money to invest, it cannot make all the changes it needs to make in order to improve. Because PEMEX was primarily focusing on E&P projects, since those are the most profitable, it lost sight of other areas it should have been focusing on to truly guarantee the country’s energy security.”

The capacity of PEMEX to compete in a post-Energy Reform fuel distribution market still depends on a series of factors that are yet to be determined, such as the future of fuel subsidies and other price control mechanisms. But Ramiro believes that certain measures can already be taken to make PEMEX’s operations in this sector much more efficient, such as managing the size of its workforce. “One big issue is that PEMEX has many more workers than it really needs, and it cannot reallocate or exchange them between facilities. With margins as small as the ones yielded by downstream operations, no firm in refining or fuel distribution could survive with so many employees.” Juan Pardinas, Director of IMCO, has also described additional issues that PEMEX must seek to alleviate in order to make itself more competitive in the fuel distribution market. “The problem is not just the employees in PEMEX’s downstream areas, but all the inefficiencies across the entire refining chain. In that regard, the partnership agreements that PEMEX will execute with other companies will bring a very interesting cultural change for the state-owned company. If one of the large global oil companies comes to Mexico, it will bring the traditional efficiencies of a private company, and PEMEX will need to adapt to those efficiencies.” However, Ramiro remains skeptical of PEMEX’s capacity to forge the necessary associations in this sector under current conditions. “I do not foresee a huge demand to associate with PEMEX in downstream activities, especially with an unchanged labor structure.”