Mexico Has Not Sanctioned Suppliers Unable to Comply with Inventory Policy – OPIS

Nearly three months after being enacted, Mexico has not sanctioned any fuel supplier unable to fulfill obligations under the country’s Public Policy on Minimum Fuel Inventories (PPMFI), sources told OPIS.

Starting on July 1, the policy requires marketers and distributors to stock five days of sales to end-users. Companies without storage capacity can fulfill the policy via tickets, a financial rights tool that grants them ownership of another marketer’s inventories. Considering Mexico’s storage capacity shortages and that most of the existing terminals are under Pemex’s control, it is unlikely the whole market will comply with the policy, analysts and suppliers have told OPIS. CRE did not respond to comment requests from OPIS about the issue. A fuel marketer told OPIS it has not been able to comply with the PPMFI fully. Still, it has not been notified or sanctioned by Mexico’s Energy Regulatory Commission (CRE) to date.

“We have the sense the regulator isn’t following with the implementation of the policy,” the source added. The marketer said it had reported monthly the fuel stocks it holds via inventory tickets, although they are not enough to comply with the policy fully. “CRE hasn’t given any clear messages or directions regarding the enforcement of the policy,” the source added. The marketer said complying with the policy has resulted in higher fuel costs to its end customers. “It is frustrating to think some of our competitors might be offering lower prices because they aren’t complying with the inventory policy,” the source added. In July, OPIS had previously reported that complying with the policy could result in fuel prices increasing by 0.2 pesos per liter, a figure marketers agreed with. Legal firms Ursus Energy and Lexoil told OPIS none of their marketing and fuel distribution clients had been sanctioned for unfulfilling the PPMFI.

The CRE did not respond to requests for comment from OPIS. Marcial Diaz, Lexoil directing partner, said the regulator had not mapped the steps to take to fulfill the policy or were unwilling to enforce it. Diaz suspects that one of the reasons why the policy has not been implemented could be that Pemex has not signed ticket contracts with all its clients. “About 90% of the marketers and distributors acquire fuel from Pemex,” Diaz said.

In July, Pemex sent Letters of Mutual Intent to all its clients confirming it has enough storage capacity for them to comply with the PPMFI, adding it would sign ticket contracts within 90 days. This 90-day period ends on Sept. 30, and Lexoil has not confirmed Pemex had signed any contracts to date, Diaz said.

Mexico Should Postpone Minimum Fuel Inventory Policy Amid Lack of Enforcement Rules – OPIS

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