MEXICO ENERGY REFORM market research team market research team market research team RT M KANSAS CITY SOUTHERN RAILWAY WHAT IS MEXICO ENERGY REFORM? Since 1938, Mexico’s energy market has been operated as state reserved industry. Until recently, Mexico reaped the benefits of this structure. In 2013, the constitution was amended to open the Mexico energy market to private investors and end the state reserved energy industry. This change was done to drive economic stability by maximizing energy revenues through increased and sustained energy commodities production. 1 As of April 1, 2016, companies (other than Pemex) were allowed to buy gasoline and diesel from overseas markets for the first time since the industry was nationalized in 1938. The intention was to lure investment and push down prices for Mexican consumers. 1
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MEXICO ENERGY REFORM market research teammarket research teammarket research team
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WHAT IS MEXICO ENERGY REFORM? Since 1938, Mexico’s energy market has been operated as state reserved industry. Until recently, Mexico reaped the benefits of this structure. In 2013, the constitution was amended to open the Mexico energy market to private investors and end the state reserved energy industry. This change was done to drive economic stability by maximizing energy revenues through increased and sustained energy commodities production.
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As of April 1, 2016, companies (other than Pemex) were allowed to buy gasoline and diesel from overseas markets for the first time since the industry was nationalized in 1938. The intention was to lure investment and push down prices for Mexican consumers. 1
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WHY WAS ENERGY REFORM NEEDED? There are two major reasons why Energy Reform was needed for Mexico:
SUPPLY AND DEMAND AND EVOLUTION OF ENERGY NEEDS.
1. SUPPLY/DEMAND: Mexico’s energy consumption is increasing and its production is declining.2 As an example, the market for refined products, such as gasoline, diesel and jet fuel in Mexico is expected to continue to rise through 2027 however, Mexico’s production, reflected in the yellow line below, will not be able to meet the demand represented by the red line.
WHY WAS ENERGY REFORM NEEDED? There are two major reasons why Energy Reform was needed for Mexico: SUPPLY AND DEMAND AND EVOLUTION OF ENERGY NEEDS.
1. SUPPLY/DEMAND: Mexico’s energy consumption is increasing and its production is declining.2 As an example, the market for refined products, such as gasoline, diesel and jet fuel in Mexico is expected to continue to rise through 2027 however, Mexico’s production, reflected in the yellow line below, will not be able to meet the demand represented by the red line.
SOURCE: ORO NEGRO External sources are needed to help fill the gap between the demand and supply production for these items.
Additionally, Mexico’s opportunities do not stop at refined products but extends to other petroleum products and gas, as well. Mexico has 9.8 billion barrels of proven oil reserves and 17 trillion cubic feet (Tcf) of proven natural gas. While reserves are critical in times of need, excessive reserves can hinder growth.
With examples of both demand exceeding supply as in the case of refined products and supply exceeding demand as in the case of the oil and natural gas, Mexico had to look for ways to course correct. Two options to alleviate these imbalances were identified: enact reforms to allow private investment in the energy sector to help meet the demand or continue to import petroleum products and natural gas despite its huge energy reserves.3
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2. EVOLUTION OF ENERGY NEEDS: The heavy crude Mexico currently produces hurts the efficiency of its refineries, leaving it with high levels of residual fuel oil that is difficult to place on the international market at a good price. However, modern refineries create petroleum coke or asphalt from fuel oil. Mexican refineries are not engineered to process the heavy fuel oils, so they need light, sweeter crudes to stay efficient. Significant capital investments would be needed to evolve Mexico’s refineries to be able to process heavy crudes efficiently. While it is recognized that the Energy Reform will not change the capability of Mexico’s refineries, it does provide a better, cheaper and more consistent supply of light, sweeter crude to process, resulting in better efficiency and better profit. Therefore, in absence of significant capital investment, Mexico has the ability to stay efficient through imports permitted by the Energy Reform.
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CURRENT SITUATION In October 2015, Pemex received a license from the United States to import U.S. light crude in exchange for exports of Mexico’s heavier crude oil. The terms of the year-long license will allow Pemex’s subsidiary, PMI, to import U.S. light crude to process in its refineries with the limit capped at 75,000 barrels per day (bpd).4
Mexico is among the highest per-capita residential-commercial consumers of liquefied petroleum gas (LPG) in the world with about 8 out of 10 homes using LPG. With the
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This includes US refineries which need more heavy crude that can be found in the Chicontepec basin (contiguous portions of Veracruz, Hidalgo, Tlaxcala, and Puebla). With modern fracking technologies, which will come with the Energy Reform through private investment, Mexico is breathing new life into older mature wells in the Chicontepec basin.
growing population within Mexico jumping from 81 million (1990) to 112 million in 2013, the demand for LPG followed suit.
The Energy Reform will allow private investors to bring more product to the market to fulfill demand by building terminals in the densely populated regions for easy distribution.
LPG MEXICO MARKET
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LOOKING TO THE FUTUREThe EIA (Energy Information Administration) estimates that Mexico’s oil production could stabilize through 2020 and then rise by 2040, assuming success in the implementation of the new reforms.5 Should the Reforms be successful, it is estimated that Mexico’s long-term GDP could increase by 1% to 1.5% as a result of the reform.6 The reform could also increase Mexico’s foreign direct investment inflows by $20bn to $30bn per year.7
However, for the Reform to be a success, infrastructure improvements will be needed.8 The current pipeline is not sufficient and, as such, the Mexican government has plans to increase the country’s pipeline infrastructure by 75 percent by 2018.9 Until this time, pipelines continue to be unbalanced in their usage. Some areas are underutilized where approximately 40% of others run at maximum capacity. The unbalanced usage continues to challenge pipelines as the single source for the future of energy reform and has created gaps.
These gaps will be filled by rail. The railroads within Mexico have access to all six of the Pemex refineries as show in the map below and will be able to help transport the oil to facilitate the expected successes for Energy Reform.10 11 12 13
2 “Pemex Oil Production Decreases for a Decade,” Oro Negro, http://oronegro.mx/2016/01/27/en-pemex-la-produccion-de-crudo-lleva-una-decada-disminuyendo/?lang=en
3 “Why Mexico’s Energy Reforms are an Opportunity for US Investors”, Market Realist, http://marketrealist.com/2014/10/key-analysis-mexico-desperately-needed-energy-reforms/, (Oct. 2014).
4 “Pemex receives U.S. oil swap license, but for less than planned,” Reuters, http://www.reuters.com/article/mexico-pemex-license-idUSL1N12S15520151028, (Oct. 2015).
5 “Energy reform could increase Mexico’s long-term oil production by 75%,” EIA, https://www.eia.gov/todayinenergy/detail.cfm?id=17691,
(Aug. 2014).6 “Opportunities from Mexico’s Energy Reform,” BBVA Research, https://www.bbvaresearch.com/KETD/fbin/mult/140122_
EconomicWatchEEUU_218_tcm348-419472.pdf7 “Opportunities from Mexico’s Energy Reform,” BBVA Research, https://www.bbvaresearch.com/KETD/fbin/mult/140122_
EconomicWatchEEUU_218_tcm348-419472.pdf8 “Mexican energy reform brings big opportunities to Houston’s midstream companies,” Houston Business Journal, http://www.bizjournals.
com/houston/morning_call/2015/08/mexican-energy-reform-brings-big-opportunities-to.html (Aug. 2015).9 “Mexico’s gas pipelines: Signs of progress on the horizon,” The Offshore Group, http://offshoregroup.com/2015/12/02/mexicos-gas-
pipelines-signs-of-progress-on-the-horizon/ (Dec. 2015).10 “Exclusive: Pemex refineries to boost output in 2014, maintenance peaks in October, November,” Reuters, http://www.reuters.com/article/
us-mexico-oil-refineries-idUSBREA3E1FS20140415. (Apr. 2014).11 “Mexico’s Pemex to upgrade Salamanca refinery in 2012,” Reuters, http://www.reuters.com/article/us-mexico-refining-
idUSTRE79S2AV20111029, (Oct. 2011).12 “Pemex Fire at Ciudad Madero Refinery Tank Causes Minor Injuries,” Bloomberg, http://www.bloomberg.com/news/articles/2014-07-23/
pemex-fire-at-ciudad-madero-refinery-tank-causes-minor-injuries, (Jul. 2014).13 “Amplí a Ferrosur su flota; invierte 21.1 millones de dólares,” T21, http://t21.com.mx/ferroviario/2011/01/12/ampli-ferrosur-su-flota-invierte-211-
millones-dolares, (Jan. 2011).
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CONCLUSION Mexico’s Energy Reform is in place and progressing. Open competition exists within the energy market. Infrastructure improvements are required and companies are recognizing the value of this reform and investments. Manufacturing (ie nearshoring – see KCS’ Nearshoring White Paper here) continues to increase resulting in an economic windfall for Mexico and for those who invest in doing business with this market.
