MEXICO CITY—Mexico should consider postponing a Public Policy on Minimum Fuel Inventory Levels (PPMFI) as uncertainty grasps the industry as the authorities have not released enforcement rules, analysts told OPIS. Mexico’s Energy Secretariat (SENER) communication team told OPIS it is not considering postponing the PPMFI despite the suspension of its activities until May amid the coronavirus disease 2019 (COVID-19) sanitary emergency the country is undergoing.
The government should postpone enacting the PPMFI amid the lack of clarity on its implementation, Rosanety Barrios, a Mexico City-based independent energy analyst, told OPIS. The policy is set to be enforced on July 1, requiring fuel markets to store five days of fuel sales. However, it is yet to be known what penalties market players face for not fulfilling the requirements, Barrios said. The policy allows marketers without access to storage capacity to acquire inventory tickets to fulfill it.
However, how the ticket system will work is unknown, which includes how tickets will be emitted, traced, and validated, Barrios said. Marcial Diaz, director of Mexico City-based energy consultancy Lexoil, told OPIS validating tickets could be a challenge for the Mexican government, especially considering the investments SENER may need in staff to enforce the policy. Marketers could confirm an inventory ticket is valid by reviewing that the listed company has a valid CRE storage permit. However, there is no way to verify at the time a player is not emitting more tickets than the capacity it currently holds. For example, a company could have a storage permit for 1 million bbls in a new project. However, it only has 300,000 bbl built at the time. “Who is going to monitor so no storage operator oversells tickets? Or that no fraudulent tickets are emitted?” Marcial said.
Without clear enforcement rules and adequate traceability and validation, the result could be a ticket system vulnerable to corruption and fraud, Chevron and Marathon Petroleum said last year during a public consultation on the PPMFI. During the public consultation, other stakeholders said that competition could be affected by a lack of clear guidelines on the mechanism, such as non-discriminatory access to tickets and their transparent emission.
The administration has not released information on how the policy will be enforced, and there may be challenges to publish it and hold public consultations on the impact during the COVID-19 Pandemic, Barrios said. “Seems like SENER and Mexico’s Energy Regulatory Commission are pushing the ball to each other, and no one wants to make the enforcement rules,” she added. The PPMFI was introduced under President Enrique Peña Nieto in 2018. However, it never had the time to publish the enforcement rules. Initially, the policy sought to increase Mexico’s fuel inventory levels to 13 days of demand from two days in 2013. However, the administration of President Andres Manuel Lopez Obrador cut the PPMFI requirements in December 2018 from 13 days to five days by 2024. The government also replaced regional storage requirements with nationwide storage requirements, disregarding where the stored inventories and the end-users are located. In the end, Diaz believes the fate of the PPMFI may be the same as Mexico’s Fuel Specification Norm (NOM-016). “
The policy will continue being watered down, ending as a light, low-fat, lactose-free version.” Concerns PPMFI Could Limit Competition The industry is waiting for Mexico to emit the penalties for those companies that can’t follow the PPMFI. “If you can’t fulfill the inventory requirements, could your permit be revoked? No one knows,” Diaz said. Since mid-2019, the SENER government has been subjecting the approval of fuel import permits to the existence of a storage contract. “Those players who seek to renew their imports without access to storage tickets might be left out of the market,” Diaz said.
Marketers may aggressively seek tickets, and Pemex is most likely the company in aa position to serve that demand. Pemex not granting tickets to third parties to block market competition is irrational, note Barrios. Pemex, in its last business plan, disclosed its operative fuel storage capacity as 15.5 million bbl. In comparison, OPIS estimates a limited number of private companies hold less than 2 million bbl of storage capacity at the time across Mexico. These include Glencore, Vitol, ExxonMobil, Marathon Petroleum, Shell, and Koch Industries. “Considering Pemex is drowning, inventory tickets are a good opportunity to generate revenue,” Barrios said. “But if there is nothing that forces Pemex to grant tickets, this policy will generate more judicial uncertainty than energy security.”
Lexoil clients are following very closely if Pemex will grant storage permits. “To date, Pemex has made many promises it will emit tickets, but no one has seen a signed contract for one. Much less, no one knows what their price should be or if Pemex has enough storage capacity available for all its clients,” Diaz added. “Mexico is a country being brutally questioned in terms of juridical terms. Using the (PPMFI) as a tool to block Pemex’s competitors would tear the country’s image,” said Barrios, adding it is unlikely such a scenario could happen. Such a speculative scenario is rooted in the preference the Lopez Obrador’s administration has on supporting state-owned enterprises over private companies, Barrios said. However, the lack of information on the policy’s enforcement fuel speculation, she added. Paulina Gallardo, an IHS Markit downstream analyst covering Latam, told OPIS that SENER and CRE should reconsider the current PPMFI mandate.
“Pemex has yet to guarantee any storage tickets and private infrastructure is, at least currently, not readily available. This creates a situation which benefits Pemex over private companies, especially smaller local players,” said Gallardo. The current economic situation, which could worsen, may lead to increased and unnecessary additional costs to many of these private companies hurting and already struggling industry, she added. If the Mexican government postpones the implementation of the PPMFI by another year, that would allow the industry to react to the PPMFI’s implementation guidelines and rules, new terminals to come online, and Pemex to sign ticket contracts before its implementation, Diaz said. Barrios said the intended goal of the PPMFI was to strengthen Mexico’s energy security. However, amid falling demand and overflows of fuel inventories worldwide amid the COVID-19 Pandemic, it is doubtful Mexico faces supply disruptions soon.
These unique circumstances could ease the postponement of the policy, she added.
–Reporting by Daniel Rodriguez, drodriguez@opisnet.com; Editing by Eric Wieser, eric.wieser@ihsmarkit.com