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News Article

Regulatory Certainty Needed to Improve Downstream Infrastructure

By María José Goytia | Thu, 09/22/2022 - 19:49

The value chain that the midstream and downstream areas of the oil and gas industry contribute to the Mexican economy is of the utmost importance. Amid post-pandemic and geopolitical challenges, the Mexican industry faces infrastructure and regulatory obstacles that it must overcome to maximize its productivity and take advantage of opportunities arising from the international environment, experts said.

At the macro level, Mexico must adapt to a challenging international context regarding energy security and business development in the oil, fuel and petrochemicals value chains. The geopolitical challenges arising from the post-pandemic economic reactivation, the disruption of supply chains and the Russian invasion of Ukraine, the volatility of the economic and financial frameworks that must adapt to these changes and the pressure to continue driving the global energy transition to net zero are some of the many challenges the country must tackle if it is to take advantage of opportunities.

"Society truly wants to move toward more sustainable energy models. However, the implementation of the energy transition has been hindered by geopolitical events and the socio-cultural realities of each region," said Francisco Hoces, Director of Consultancy, INERCO Group.

The momentum of the energy transition should be seen as a benefit: "We must see the energy transition as an opportunity to modernize the oil and gas sector, to make it more productive and competitive," explained Hoces.

The development of the midstream downstream and petrochemical has several hurdles to overcome. The first of these is the application of government decisions through current regulations. The operation of the fuels and petrochemicals market in Mexico is highly regulated, so regulatory changes negatively impact the industry's business models. "In Mexico, no midstream or downstream activity can be carried out without prior permission from the CRE. Regardless of how many projects there may be, regulation itself sometimes acts as an obstacle to industry growth," explained Iris Pineda, Senior Manager Oil & Gas, EY Mexico.

One of the main bottlenecks faced by the midstream and downstream industries has been the delay in the granting of permits by the regulator, CRE, as the industry regulator is still grappling with the effects of the pandemic. Justified by the closure of operations due to COVID-19, the issuance of permits for the entire energy value chain has been at an impasse. In addition, the government has made several attempts at regulatory changes that have increased the difficulty of completing administrative procedures.

On the other hand, the midstream and downstream industries require investments in infrastructure to improve their operations. Petrochemical feedstock needs storage if it is to be viably transformed into high-value-added products. These industries require regulatory frameworks adapted to the needs of their main players to allow them to be competitive.

"Excessive permit requests and a  lack of capacity to resolve them swiftly are not in tune with the need to implement projects for the industry. Discussing regulation with stakeholders would allow the authority to create more competent regulatory frameworks that would boost the development of the petrochemical sector," said Cleantho Leite, Director of Energy and Business Development, Braskem Idesa.

Eighty-five percent of petroleum products are transported across the country and beyond. This requires Mexico to have a robust distribution and storage infrastructure policy to maintain its energy security. In 2017, Mexico established the obligation of a storage policy meaning that players selling fuel must have a minimum storage inventory of between eight and 11 days’ worth of these products. This prompted investments in infrastructure to provide this storage service. "In 2019, they reduced the minimum capacity in the regulation to five days, which sends a bad signal to the market because it throws off the long-term investments made a couple of years earlier," Pineda explained. "Having enough days of fuel inventory in storage strengthens the country's energy security," Enrique Felix Robelo, VP, Onexpo Nacional, added.

The consolidation of midstream and downstream infrastructure and its further development will depend on reducing the redundancy and administrative silence that has prevailed during the past two years, the experts agree. CRE has warned that there is a significant delay due to the closure of operations due to the pandemic, but its administrative processes do not show a sway in favor of the private sector's requests, either.

In addition to optimizing administrative processes, regulatory certainty is key to boosting business opportunities in the midstream and downstream environments. This regulatory certainty must come above all from the autonomy and transparency of the regulatory bodies.

"The dialogue with SENER must be strengthened, as it is responsible for promoting compliance with public energy policies that impact the midstream and downstream sector," explained Robelo. Through these conversations, it will be possible to strengthen the processes so that companies can carry out procedures efficiently and advance the construction of the distribution and storage infrastructure necessary to strengthen the country's energy security.

The lack of private sector participation in the industry affects market dynamics, at times to the detriment of the end consumer. "The government must become aware of the need for private sector participation and move forward with the release of permits to allow the sector to increase its operational and infrastructure capacity," said Pablo Gualdi, CEO, Atio Group.

However, greater private sector participation does not mean a weakening of PEMEX. In open markets, the private sector needs to complement the public sector to optimize the market’s dynamism. PEMEX needs to have the capacity to invest in storage and distribution infrastructure and explore new opportunities together with the private sector to create alliances that allow the sector to become more competitive and productive. "PEMEX must be a strong industry in and of itself," Robelo stated, adding that "neither the state nor the private companies can do it alone, it requires the participation of both cooperating with a long-term vision. "Regulatory stability and certainty is a necessary constant for the development of the midstream and downstream industry and the attraction of the necessary investments to strengthen its competitiveness," concluded Roberto Díaz de León, Director, Combured.

Photo by:   MBN
María José Goytia María José Goytia Journalist and Industry Analyst