Pemex quietly vexed over slow fuel market opening

OREANDA-NEWS. October 31, 2016. Downstream officials at Mexico state-owned Pemex appear to privately share the view of fuel distributors that a full opening of the country's retail fuel market would be preferable to the gradual and regional opening proposed by the finance ministry.

In a recent low-profile industry meeting, Pemex downstream director Carlos Murrieta Cummings sided with fuel distributors on the disadvantages of the gradual approach, which he indicated could change supply and demand dynamics and force Pemex to go through a complex reorganization of its logistics, according to a senior industry executive who attended the meeting.

"There were talks about the problems this could cause and the need for restructuring [Pemex's] logistics in order to meet demand in all areas," the executive told Argus.

Another industry executive who attended the meeting confirmed the Pemex official stance.

Murrieta could not be reached for comment, and Pemex said it supports the government policy.

"As one more market actor, Pemex will abide by the strategic parameters that the sector?s authorities define," a company spokesman said in response to a question from Argus. "In recent months, we have collaborated with the authorities to develop a robust model for the opening of the gasoline market."

Fuel distributors such as Hidrosina, one of Mexico's largest fuel retail station groups, have been outspoken on the issue. "The gradual opening makes no sense, we'll have cheaper products being moved to more expensive areas," Hidrosina operations director Victor Ruiz told Argus.

The opening of the fuel retail market and the liberalization of fuel prices in Mexico are the result of a 2014 comprehensive energy reform that revoked Pemex's monopoly.

In its 2017 budget proposal, the finance ministry unexpectedly proposed that market-driven prices would be introduced gradually, over a two-year transitional period, potentially ensuring a steadier flow of fuel tax revenue.

According to the proposal, approved this week by the Senate, Mexico's energy regulator CRE and competition watchdog COFECE are tasked with setting an agenda and determining which regions would be subject to market pricing.

The ministry also retains some control over prices until the end of 2018, both in regions that have not yet been liberalized and those that have, in the event of price spikes – a measure that was not part of the energy reform.

The budget bill that President Enrique Pea Nieto is expected to sign into law on 2 November maintains both the sector's gradual opening as well as a fuel tax, known as IEPS, that suppliers pan for undermining the economics of fuel imports.

The government expects 284bn pesos (\$15.3bn) in revenue next year from the IEPS.

Companies that obtained fuel import permits following the reform have complained that the fuel tax is too high to make imports financially viable. Distributor associations warn of gasoline price spikes if Mexico does not lower the tax next year.

The controversy is festering at a time when Pemex refineries are operating at new lows, driving up its imports of refined products, mainly gasoline from the neighboring US.

Pemex produced a record-low 264,800 b/d of gasoline in September, a 25.7pc decline from a year earlier. Diesel production fell to 176,900 b/d, or 32.7pc below September 2015 levels.

Pemex's domestic refineries processed 766,308 b/d in September, down by 27.5pc year on year.

To compensate, Pemex increased gasoline imports year-on-year by 23.5pc to 533,600 b/d, while diesel imports shot up 45.5pc in the same period.