#49. Rodrigo Favela on the Future of Fuels, Vehicles, Energy Reform and PEMEX
Fueling the Future of Transport Podcast
On this episode of the Fueling the Future podcast, I spoke with Rodrigo Favela, a partner in HCX of Mexico. HCX recently completed a study about the Mexican fuel market for the Fuels Institute, Mexico’s Energy Reform: Impact of Mexico’s Deregulation and Liberalization of the Fuels Market. We talked about the study’s findings and the future of vehicles and fuels in Mexico. On January 1, 2017, Mexico began to implement its Energy Reform program, allowing private companies to invest and own infrastructure and fueling stations in Mexico for the first time since the inception of state-owned and operated petroleum company, Pemex. By the end of that first year, fuel prices were fully subject to free market dynamics versus being controlled by the government. The deregulation and liberalization of Mexico’s fuel market also ushered in a new regulatory framework designed to guarantee free market conditions and foster private investments by outside companies. Despite the hope for private investment into fuel distribution infrastructure and retail sites, growth has been slow and states are still heavily dependent on PEMEX owned infrastructure to supply and sell fuel. The report identified a number of barriers to market diversification including high entry costs, a complex and lengthy permitting process, limited transparency in price information, lack of security and difficulty competing with subsidized PEMEX. Currently, Mexico has the capacity to store enough fuel to satisfy about 3.6 days of demand, but new proposed projects are expected to increase this capacity by 50% with an ultimate goal to reach 10-13 days of capacity by 2025. Existing bottlenecks and inefficiencies, however, have resulted in pipelines operating at only 43% of capacity. Significant investment in fuel distribution infrastructure is needed to reliably satisfy demand. And while retailers face good margins in Mexico, existing barriers to new competitors are resulting in rebranding of existing stations versus opening of new retail sites. This has not resulted in improved competition nor has it led to lower prices for consumers. Even with the efforts of the current administration to raise the production and storage capacity, Mexico will remain dependent on imports as the major source of fuel supply for the next ten to fifteen years. Just as Mexico has become highly dependent on the American market for supply, U.S. Gulf Coast refiners are just as dependent on Mexico for demand. This symbiotic relationship is likely to remain strong within the next decade. Also influencing the fuels market is the composition of the vehicle fleet. The Mexican vehicle market is dominated by gasoline and diesel-powered vehicles, which account for more than 96% of total fuel demand in the country. The fleet is expanding at a rate of 6.2% per year, with compact and subcompacts dominating the market with a 60% share. The car parc is older than that found in the United States, with vehicles averaging 17 years old – this aged fleet has direct implications on efforts to reduce emissions. The U.S. is the third most common importer of vehicles to Mexico and car manufacturing will continue to be an important factor for the development of fuel markets in Mexico. Following are a few excerpts from our discussion, which you can download or listen to at the link below or listen to in ITunes. On the Future of PEMEX: “Even though the new government has very adamant in terms of trying to foster or make PEMEX stronger, we have seen that this hasn’t actually happened. PEMEX is still not producing enough fuel internally. The amount of imported fuels by private companies continues to grow, and the amount of retail at gas stations with other brand names apart from PEMEX, continues to grow in the country as well. In any sense, this is irreversible — this trend will continue.” On Why Liberalization Will Continue: “We have gone too far into liberalization at this point. There are too many interests already investing to import fuels. People are getting used to having more competition. And people are seeing that. Mexico has a problem with black market fuels. This has grown in the last 10 to 15 years to alarming proportions linked also to drug cartels and other problems. When the new government came in, what it did was try to stop the black market because most of it was stolen from the pipeline. We have very specialized, technical specialized black market operators. They steal from the pipeline directly and they resell into gas stations. So the president stopped the pipeline. Large parts of the country were out of fuel for maybe one month, and interestingly enough, the only fuel stations that had fuel to sell were those that didn’t import through PEMEX. They were the private importers who had fuel because they supply through other means besides the pipeline. In the end, what happened is that this gave another push toward liberalization because people were seeing that it was not a good idea to be so dependent on PEMEX.” On Why Mexico Is Not Exempt from Global Fuel Trends: “Well, Mexico is not exempt from the trends. Biofuel, hybrids and electric cars, and the natural gas vehicles fleet, have been growing. It’s a very small proportion, but it’s growing very fast. And we’re going to continue this trend. Even after the pandemic, we are going to continue to see these type of fuels or energy sources grow because of market conditions. People will prefer hybrid vehicles, for example, as they have gone down in prices. People are preferring hybrid vehicles because they don’t want to get into this political discussion about the sovereignty of fuels into Mexico. They just want to drive a car. And people prefer, if they have the money, they to buy a hybrid car so they don’t have to go to the gas station every week. They go every month or every two months. So that’s the types of decisions facing Mexicans. The other thing is we have seen the growth of natural gas vehicle fleets. Natural gas in Mexico is at a very low price. It’s the same as in the U.S. and has been growing in a very fast pace. The number of commercial car fleets using natural gas has picked up, and will continue to grow as well. And with biofuels, it has always been the same question. We have a strong sugar cane lobby in Mexico. In some regions, especially on the Gulf of Mexico, we are seeing the growth of the use of bio-ethanol. I think that will continue to be done.” The post #49. Rodrigo Favela on the Future of Fuels, Vehicles, Energy Reform and PEMEX appeared first on Transport Energy Strategies.
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