Carlos García
General Manager
Valero Energy Mexico
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View from the Top

Refining Giant Steps Across the Border to Put its Stamp on Mexico

By Peter Appleby | Fri, 03/19/2021 - 13:48

Q: Why did Valero enter Mexico and what are the reasons behind its three new refined product terminals in Guadalajara, Monterrey and Altamira?

A: Valero is primarily a refining company with 15 refineries around the world: one in the UK, one in Canada and the rest in the US. Several of these are on the Gulf Coast and are well-positioned for the export market. Among our business opportunities in Mexico is to supply the country with proprietary barrels. This means, barrels coming out of our own refineries and moving through a logistics system entirely under our control, in order to deliver a high-quality product in a reliable fashion. In this sense, our move into Mexico was a supply-led strategy rather than a brand-led strategy that many downstream companies have when entering the country with the intention to brand as many gas stations under their name as possible that would continue to be reliant on PEMEX supply. Valero’s strategy was different because we control our own supply chain. This may take a little longer but we believe in our approach.

We are now constructing terminals in Guadalajara, Monterrey and Altamira for distribution in northern Mexico. We had been delivering product to Guadalajara and Monterrey via rail and the use of transloading since 2018, similar to how we work at the terminal we own in Chihuahua. Having storage in those local markets is our ultimate aim. We want to contribute to the reliability and security of supply.

Our goal is to construct seven terminals in total in Mexico. The first three terminals that we decided upon was made through a terminal service agreement with IEnova. Those terminals are in Veracruz, Puebla and Valle de Mexico. Following that, we signed an agreement with NuStar on their terminal in Nuevo Laredo, which is well-connected to our refineries in south Texas via a pipeline. This pipeline goes from Nuevo Laredo to the Three Rivers refinery, which is connected to our Corpus Christi refinery. We then executed agreements for Guadalajara and Monterrey with Grupo México, and Altamira, Tamaulipas. It is important to note that these are long-term terminal service agreements. Valero is neither the owner nor operator of these terminals.

The three IEnova terminals will come online by the end of the year, while the Guadalajara, Monterrey and Altamira terminals are likely to be functioning by 2022. We are working through the permitting process. Monterrey and Altamira will begin construction before the end of the year.

Valero is absolutely in Mexico for the long haul. We understand that the country’s market will take time to develop and mature. Due to the refining assets we have and where they are located to supply the Mexican market, the country was seen as a strategic opportunity for the company right from the get-go. We went for the long-term approach because we believed solidifying our logistics footprint to reliably bring product into the Mexican market would provide the best base for growth.

Q: What are the capacities of the terminals and how will these propel your Mexico goals?

A: The three IEnova terminals will store diesel, premium and regular gasoline at four different grades. There will also be jet fuel. This will be the mix of products at all of the terminals with the exception of the NuStar terminal where we do not currently have jet fuel.

In total, these terminals will have just under 6MMboe of storage capacity. This is for Valero only. The capacity is a large position and a major benefit to the country and to Mexican consumers.

The marine terminal in Veracruz has just over 2MMboe of storage capacity. This is partly because there is a minimum inventory requirement, which cannot be altered, as well as our desire for operational flexibility. We want to be able to supply the inland terminals and keep them flush with product so we never run into problems. Veracruz is a deep port and it can receive large tankers, up to 450Mboe each. We can offload to the terminal at about 20Mboe per hour, meaning in less than a day the ship’s entire capacity is offloaded and in the tanks.

Rail transportation will be the main link between these terminals via Ferromex, other than the pipeline between Corpus Christi and Nuevo Laredo. Each terminal has truck racks so customers can buy product at the rack to move by truck. At Veracruz, there is capacity for 40Mboe per day to be moved by truck racks. The truck rack system we are installing there is advanced and will be fully automated.

Our multi-faceted logistics system grants us flexibility and the potential to explore more sites in Mexico. We are not done here. In fact, we are looking at other locations.

Q: Like other companies, Valero has suffered reduced sales. How do you foresee the growth in fuel consumption?

A: We have already seen the market grow. At the height of COVID-19, demand dropped by 45 percent in Mexico. Nevertheless, Valero itself did not see that size of drop in demand. We did see a drop for one month but the very next month we saw an uptake in volume. In July, we surpassed the volumes that we had been moving prior to the pandemic. In this sense, we believe we have already recovered.

This shows two things. The first is the increase in mobility, which can also be seen in the figures from Apple mobility studies. The volume of cars on the road has not recovered to previous levels, but it is growing substantially. We sell through commercial and industrial channels and we have seen certain industries already reactivating. This means we have seen an uptake in demand, and we believe that will continue.

Though a full recovery may not happen until 2022, this does not phase us. We will play along with the market. Valero is here for the long term and we understand that markets go up and down. Jet fuel may lag behind in terms of recovery but I fully expect overall demand to recover. Gasoline has so far outperformed diesel but diesel did not drop as much.

Q: How does Valero intend to grow its retail side?

A: Today, we have 66 retail sites. If everything goes as planned, we expect all our sites to be functioning under the Valero brand by the end of the year. When all these sites are up and running, we will have a presence in 12 Mexican states.

As refiners, we produce over 3MMboe of refined product every day and therefore, we have to move it. The Valero retail brand is extremely important and acts as a channel to move product. Though consumer retail fuel is our largest market, we also move product through commercial and industrial channels and distributors.

Our differentiated product for retail sites is the Supreme 93, a high-octane gasoline with our proprietary additive Propel-Tech. Rather than retail sites, we have a goal in mind for the number of barrels we want to sell in-country, and our retail sites are not our only avenue to move through. That said, we will grow as fast as the market allows. There are certain zones in the country where strong regional brands already exist, and the local people like them. Those brands need a strong and reliable supply of fuel, and Valero can fulfil that need. But there are other regions where there is a need for a brand like Valero to exist.

Q: What are your hopes for Valero in Mexico?

A: Mexico is an extremely important market for Valero and it is the first market the company has entered from scratch. When we moved into Canada, the UK, Ireland and Peru, we did so by purchasing a company that was already up and running. But in Mexico, our strategy was different. We wanted to design something from the beginning that we were proud of and could deploy the best practices we have learned from our 40-plus years in operation. We want to be world class and remain in Mexico for the long term.

 

Valero is a Fortune 50 company and one of the world’s largest refiners, producing over 3MMboe per day. It owns and operates 15 refineries across the globe, employing approximately 10,000 people. 

Peter Appleby Peter Appleby Journalist and Industry Analyst