On 14th June, the British Chamber of Commerce hosted a breakfast conference to assess the impact of the energy reform on the marketing and distribution of oil and gas. Rafael Daryanani from DIDSA moderated.
To provide some context, the conference began with a presentation from Shell Downstream Director Andrés Cavallari. Andrés started by emphasising the significance of the deregulation initiated by the Energy Reform. For over 70 years, Mexico has had no other offer than PEMEX for its huge consumer base. Due to this monopoly, the sophisticated Mexican consumer has had a very limited offer that has not included the latest technologies. Distribution has also been highly imbalanced; for example in the North West of the country there is no local production of fossil fuels and so they have to be imported while in the South there is more demand than supply.
The opportunity for private business is huge: Mexico is the fifth largest gasoline consumer in the world and demand is growing at 3-4% pa – an increase expected to continue for the next 15 years. The average age in Mexico is around 29 years old – a demographic with high demands in terms of quality. The Mexican consumer is also price sensitive and environmentally aware so companies entering the market will have to offer a range of sophisticated products distributed via a strong internal logistics network to be successful. In short, “Mexico needs more and better”.
At present, the regulatory framework is still being developed based on the laws that make up the energy reform. For the market to achieve full efficiency and be competitive, it is essential that this framework encourage investment by being simple to follow with clear rules for all participants. Investors need legal certainty to make decisions. The PEMEX Open Season (when PEMEX will make their ducts and terminals available to investors) will be announced soon and clear conditions will be crucial to establish fair competition. There is also uncertainty for the 11,000 petrol stations who currently have supply contracts with PEMEX and uncertainty over how prices will be determined for those who currently buy first hand from the state company.
Numerous regulators can cause unnecessary conflict, e.g. recent (though now resolved) disputes over imports between the Mexican tax office and the Mexican regulatory commission. Framework also needs to consider the environment to promote greener technologies in line with Mexican government policy.
By January 2018, price parameters have to be released and Mexico will need clear controls and good regulation established before this date.
Andrés also suggested that the Mexican excise tax on production and services (IEPS for its acronym in Spanish) on petrol may be overly high, as historically this tax has been used to absorb changes in the oil price yet this year, as the price has stabilised, IEPS has not fallen. Finally Andrés made mention of fossil fuel theft which is excessive and needs to be addressed urgently.
The Perspective from the Petrol Stations
Following this presentation, Carlos Arroja from GasoRed spoke. GasoRed is a rapidly growing network of service stations with the objective of forming a common front and a highly competitive business approach in this new market. The group formed in 2004 when the current deregulation in the sector was first expected. GasoRed now have 27 different investors with approximately 250 petrol stations who are nervous about the reforms. There are worries over profitability – while business will be big in the beginning, as more companies join the market, margins will decrease. Carlos used the example of Italy, where approximately half of the country’s 38,000 petrol stations closed due to a lack of profits (in Mexico, there are currently just 11,000 stations). There are also concerns over supply, distribution and storage that, under the current monopoly, has always been guaranteed by PEMEX.
To be successful in this new competitive market, companies will have to diversify their sources of income – as they do in the United States. OXXO Gas – associated with the popular Mexican convenience store – is likely to excel in this. There have even been suggestions that OXXO Gas might sell petrol at cost.
Considering the previous presenter’s comments on IEPS, Carlos Arroja was not hopeful. He explained that Mexico’s fuel tax is less than half that of the UK and so the likelihood of a reduction in IEPS is low. He suggested that Mexicans may feel they pay high taxes due to the distorted comparison they make with their neighbours to the north: the USA has some of the lowest rates in the world.
Potential for Natural Gas
Ricardo Ortiz from Diavaz then added to the discussion with a focus on the possibilities for natural gas in Mexico as a result of the deregulation expected from the energy reform. PEMEX will have to release 70% of its market share to private companies allowing these companies to import gas from the USA through gas ducts and, where there are no ducts, through compression.
Natural gas is a lot cleaner and more efficient than fossil fuels and prices are stable. It is possible to convert cars to become natural gas vehicles and in Argentina, there are approximately 2.5m natural gas vehicles and 1.7m in Brazil. In Mexico, natural gas is almost only used for some public transport vehicles. According to Ricardo, the investment made converting cars can be recovered within one year. With the deregulation of the Mexican downstream market, petrol stations could offer natural gas amongst their product range. In a country where all vehicles are currently subject to a “no drive day” once – and sometimes twice – a week, natural gas could represent a much-needed solution to tackling contamination levels.
The challenge for retailing natural gas will be the “how” to implement this change – cars will need to be converted and this will require carmakers to collaborate with converters to offer this technology to the Mexican driver. Natural gas would also need to be available throughout the country in enough stations to give the customer confidence that they can fill up when they need to. Government support will be crucial. Currently there are no clear rules for when petrol station companies request to change the terms of their land use to allow them to supply natural gas. Reiterating Andrés’s message, Ricardo explained that current policy (Norma 10 & Norma 011) also needs updating to recognise the latest technological advances. Finally the customer needs to be educated on the benefits of natural gas to help them make informed decisions.
A Bright Future
To conclude, Rafael invited participants to share their parting ideas. Most agreed that price – and therefore taxes – will be an important variable in a country where purchasing power is lower than other countries – such as the USA. However, there is also opportunity for stations to win clients by diversifying their offer and prices according to location, for e.g. we can expect fuel to be cheaper in Ecatepec than in Lomas.
All agreed deregulation will improve the lives of the consumer who must now educate themselves to demand the best products at the right price. Finally, the government needs to send clear signals and establish clear rules to help the private sector offer a competitive product to the Mexican driver.