Ixchel Castro
Manager of Oil and Refining Markets for Latin America
Wood Mackenzie
View from the Top

A Pump Needed for Refining

Mon, 10/23/2017 - 13:31

Q: How would you rate the progress of the opening of the refining sector in Mexico?

A: With plenty of progress done in terms of upstream, refining remains the missing piece of what the government promised prior to the reform. This comes as no surprise, as we always knew that revamping the refining sector would be a complicated process that would need the heavy participation of PEMEX to open the sector to new competitors, as well as from regulatory agencies to design the necessary legal framework for companies to successfully operate in Mexico.

Having free access to transportation infrastructure through the open seasons is one of the successes we have observed. The retail sector in Mexico has also confirmed the interest of companies, which are opening gasoline stations under their own brands. This has allowed customers to seek products and services that better address the cost-value concerns of the market. Although these two elements confirmed that the scheduled opening of the market in refining remains a priority, it is still running at a slower-than-expected pace. We need PEMEX to help with construction of infrastructure across the entire value chain, from pipelines and storage capacity to maritime terminals, to facilitate the imports and exports that will be required in the coming years.

In Mexico, we are switching from a market that was designed to run from the Gulf of Mexico to the rest of the country, to a market that will have to adjust and have several points of supply to bring products across borders. This is especially true on the Pacific coast where there is a severe shortage of capacity and most of the demand is supplied by road. A positive point in improving logistics is that the government has been transparent about what pipelines have to be built according to a strategic master plan. Private companies can then compete for them, and there has been a great emphasis on the increase of cross-border capacity and pipelines, as well as a better integration between east and west. Unfortunately, we have not seen that on the refining side. The government is allowing companies to invest in the market where companies think it is necessary, but such investment does not need to be integrated into a master plan supported by the government.

Q: How can the US-Mexico relationship translate into market competition in the refining sector?

A: Mexico's position as a neighbor to the largest refiner in the world could eventually translate into pricing advantages, especially if it is arranged through long-term contracts. Although this is a big win for the country, it can also be detrimental to the local market because it could prevent local projects from being profitable. This fact should not hinder Mexico’s ambitions to increase trade with the US. It makes sense for markets to operate regionally, and fair trade makes both countries stronger. Not only does Mexico get more cost-competitive prices from refineries in the US, but the US refineries also get a bigger and long-term market, as the demand for oil in the US is expected to decline over the coming years.

Q: How has the market opening in retail gasoline provided better value to final consumers?

A: The gasoline market here will grow exponentially. With Mexico importing more gasoline than the rest of the Americas combined over the next two decades, there is obviously a big opportunity in this sector. Having international players in the country will offer consumers the certainty that the product they are buying complies with all international regulations and with the best environmental practices around the world. More competition also means that end users will get better prices, which is something that Mexican consumers are not used to at the moment. Mexican consumers are also starting to understand how different factors affect gasoline prices, especially in Mexico City, due to different transportation costs. For example, with gasoline coming to Mexico City from the north, it makes sense that a gasoline station can offer cheaper prices in Satelite than in San Angel. Understanding this will ultimately change consumption behaviors, driving gasoline consumption according to real needs.