Mexican President Andres Manuel López Obrador recently completed his first 100 days in office – a critical time in which many world leaders seek to put in place the policies that will define the rest of their presidency. With lofty ambitions from reducing crime to changing the presidential term, President López Obrador also made significant pledges during his campaign to shake up the Mexican energy market, even as it continued to transition closer to true free market status.
President López Obrador initially pledged to reverse the energy market liberalization that concluded in November of 2017. During his first few months in office, however, President López Obrador has shifted his focus, instead honing in on energy independence for Mexico, while boosting state-owned oil company Pemex, cracking down on fuel theft, updating infrastructure, and stabilizing fuel prices.
While much time remains in his presidential term, President López Obrador has already set the stage for the energy initiatives that will define him for years to come. Here is the current status of several of his campaign pledges:
Pledge 1: Boost State-Owned Pemex
Despite expressing initial desire to overturn the constitutional legislation that reformed the Mexican energy market, President López Obrador has changed his rhetoric, choosing instead to focus on pulling state-owned Petroleos Mexicanos (Pemex) out of two decade’s worth of economic struggle.
Monthly changes in crude oil and diesel production have increased in scope, especially since liberalization took place in November of 2017.
Declining output, however, and huge debt figures have proven large obstacles to overcome. Currently, Pemex holds nearly $108 billion in debt – largely due to declining production levels over the past decade — shrouding the once-revered company in a national debate.
Since liberalization took place at the end of 2017, Pemex production of both crude oil and diesel has continued to decline due to a lack of dedicated funds for maintaining infrastructure. The above chart represents this dynamic, demonstrating the increasing monthly change in crude oil and diesel production that has occurred since January of 2017, eleven months before the energy reform took place.
To combat this debt and accompanying output decline, President López Obrador announced in February that he would be increasing tax relief and investment in Pemex, creating a package worth nearly $1.3 billion in tax breaks for the company over the next six years.
While this may allow them to direct more funds toward capital and operational expenditures reducing the burden on Pemex as its debts come due at the end of May, and, a greater burden on President López Obrador’s government may be felt instead, as fiscal pressure would be removed from the former and placed on the latter. This has raised uncertainty surrounding the capability of Mexico’s government to deliver on other promises, such as adding new refining capacity throughout the country.
Pledge 2: Upgrade and Add Energy Infrastructure
At the end of 2018, President López Obrador laid plans to begin constructing Dos Bocas, a 340,000-barrel per day (bpd) oil refinery in Tabasco. Once completed, this USD $8 billion project would create the largest refinery in Mexico, including 93 storage tanks and 17 processing plants, as well as accessibility to maritime, rail and truckload transport, according to Energy Minister Rocio Nahle.
President López Obrador hopes to have the refinery built and processing crude within three years, however it is possible that such an aggressive plan may require additional time, money, or both. He has also indicated that, once completed, this refinery may be the first of several new energy infrastructure projects for the country. Though plans are already underway to begin construction by the end of this year, only time will tell if this is logistically and financially possible.
Existing, proposed, and evaluated energy infrastructure projects in Mexico, highlighting the planned refinery operation in Tabasco.
In addition to adding new operations, another main infrastructure goal of the López Obrador administration has been to refurbish and increase production at all six of the nation’s existing refineries. Currently, US refineries typically operate between 80 and 90 percent. In contrast, Mexico’s existing refineries run at only about 30 percent of their 1.6-bpd capacity. Once refurbished, both President López Obrador and Pemex would like to see this number increase to 70 percent, which would theoretically facilitate a lower reliance on foreign energy in itself.
One such upgrade includes building more complex refining units to more effectively process Mexico’s high-sulfur heavy crude inputs. With IMO 2020 sulfur regulations looming on the horizon, heavy crude oil in Mexico intended for use in maritime transport will have to move from a sulfur composition of 3.5% S to 0.5% s. To overcome the challenges that accompany this transition, the Mexican government is planning to include these upgrades at all Pemex-owned refineries to boost output of compliant middle distillates, such as diesel.
Pledge 3: Stop Fuel Theft
Costing Pemex nearly $3.5 million per year, combatting fuel theft has also been a key part of President López Obrador’s energy policy, especially after recent theft and disastrous pipeline explosions threaten human life and pose refined product supply issues nationwide.
To address this and attempt to decrease the rate of other forms of crime throughout the country, one initiative President López Obrador recently cited as a success within his first 100 days was the creation of a specialized National Security force. It also included shutting down pipelines, forcing distribution to shift to tanker truck. Consequently, supply shortages at service stations throughout western and central Mexico caused price premiums for diesel, most notably in population centers.
According to a recent public address made by President López Obrador, this strategy has seen success, reducing the volume of fuel stolen monthly from 81,000 barrels at the end of 2018 to 15,000 barrels in March. This presents a more optimistic outlook for domestic and foreign oil product investors alike, as lower fuel theft means higher retention of revenue for involved stakeholders.
Though fuel theft in Mexico has been a significant source of international focus in recent months, the resulting crackdown seems to have experienced relative success for now.
Pledge 4: Freeze Fuel Prices
Finally, another pledge made by President López Obrador during his campaign was to effectively “freeze” fuel prices, preventing them from overtaking Mexico’s officially targeted 3.4 percent rate of inflation. Although fuel prices in a post-liberalized Mexico are now set by market dynamics and not the state, the government can still reduce excise tax on fuel products and thereby alter station-level prices.
Monthly diesel price change (percent) compared against targeted and actual annual rates of inflation.
The chart above compares monthly diesel price changes to Mexico’s targeted and actual inflation rates, February being the only month since President López Obrador’s inauguration that retail prices have risen above these metrics. Whether it’s due to strategic adjustments to pricing on the part of Mexico’s government, or a more market-driven price dynamic, recent fuel pricing indicates that this pledge may continue to be realistic.
With over five years remaining in his presidency – though this may change based on recent legislation— President López Obrador has and will continue to affect Mexican energy dynamics.
Breakthrough’s Mexican fuel management strategy allows shippers to better understand how Mexico’s ever-changing energy policies and market dynamics will impact the cost of fuel used to move goods to market.
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