Mexico: The Uncertain Future Of Downstream In Mexico—A Call For An Ad Hoc Regulator

Last Updated: 2 February 2017
Article by Ignacio Vera Estrada

Most Popular Article in Mexico, February 2017

Co-authored by: Emilio Estrada V., Hydrocarbons Consultant

Originally published in PETRÓLEO Y ENERGÍA magazine (December/January edition)


Introduction

Notwithstanding international and domestic adversities (ups and downs of prices for crude oil, peso-dollar parity, a not so-friendly neighbor president), the energy reform, perhaps the most daring of those undertaken by President Peña, offers yet a lot to reap from. So far, we have harvested a dubious reduction in the price of liquefied petroleum gas. The global eyes of the world's Energy sector look expectantly towards our country.

The other vein of the reform, the electric industry one, seems to have experienced better luck; at least up to now.  That is not precisely because of the questionable reduction in domestic service rates—the preserve of the formerly State-run Federal Electricity Commission ("CFE"). Rather, such high morals are due to the success of the first two long-term electric auctions—held in last March and September—, in which power generators tried to outbid each other in selling the most affordable, renewable-sourced, energy to the Wholesale Power Market, thus accelerating the development of renewable technologies, and giving a mouthful of hopes to honor our bold national environment-oriented commitments (just around the corner: due on 2024), the generation of clean energy vis-á-vis the abatement of the polluting carbon footprint.

Be that as it may, perhaps the highest expectations are in the deregulation of the exploration and production of hydrocarbons ("E&P"). Such legislative paradigm shift has surely laid the foundations for a competitive and efficient industry, with the national oil company, Pemex, ridded to a large extent of a lumbering bureaucratic regime, which strangled it for decades. Indeed now, not only Pemex but also CFE boast the appropriate regulatory framework to become the State-owned subsidiaries that their new constitutional legal nature establishes: State-owned productive companies.

Within the hydrocarbons sector there is an important segment that seems to require punctual attention of the legislative, or perhaps that of the Coordination Council of the Energy Sector. The level of benefits that Mexicans expect from the energy sector as a whole could be leveled out resultingly, i.e. the refining, distribution and retailing of fuel (and the various commercial activities that enrich its supply)namely, Downstream.

Summary of the current situation

The situation is rather complicated.

Current fuel shortage in a number of States makes it all the more pressing.

Pemex refineries operate at a production level well below its break-even point; its primary distribution logistic system is insufficient, saturated and suffers serious lack of maintenance. With regards to certain operational and safety issues, some criminal groups have managed to institutionalize its modus operandi of milking pipelines, causing unbearable losses for a so-called productive company which intends to increase the petroleum revenue.

The hydrocarbon shortage, therefore, is pandemic and its mitigation would go pyrrhic, by incurring in extremely high costs.  No wonder the level of importation of products has reached record levels, which would have been unimaginable a few months ago. It should come as no surprise the import terminals are overdriven from having to handle such high volumes.

Behold the deadlock: current fuel prices do not cover Pemex's opex and discourages capex to build new strategic logistics projects, be it by the private sector or Pemex. One can only hope that oil prices keep on recovering to a competitive unhampered market price level.

In a nutshell, Downstream is not bearing the fruit harvested in other segments of the sector. So much it could even appear to be in a lower state than it was before the reform, if looked at shallowly. This is due to the Downstream being the touchstone, the efficiency index of the energy reform; whence the average citizen appreciates its progress and benefits. There is surely a lot progress to accomplish, along with the incumbent political cost to pay by the current administration; not only because of certain unfulfilled expectations, but also for the impression of a sectorial relapse.

Some causes

Far from attempting an exhaustive diagnosis, there nevertheless are several circumstantial causes that can be pinpointed, other than the usual historical ones that provoked the current situation of Pemex, and which to a large extent motivated the constitutional reform itself.

Industrial complexity

The Downstream industry is complex. It involves more factors than in an ordinary business plexus; namely, different types of products are distributed: there is a great variety of assets: terminals, interdependent pipelines...; the refineries have asynchronous maintenance cycles vis-á-vis relevant demand curves; often unit failures affect system supply. Last but not least, there are only eleven thousand service stations, grosso modo, for two million square kilometers of territory and 130 million inhabitants; let alone they are supplied by means of a fleet of tanker trucks, which have their own difficulties.

Transversal Approach

One or two ad hoc bodies that manage the entire incumbent production chain regulate several energy subsectors. Such are the cases for electricity or natural gas. The same is true with Upstream, which is also managed in a comprehensive way. This is not the case for Downstream, whose regulation is dismembered between several entities: SENER, CRE, COFECE...  That hinders the coordination between regulators and Pemex. And as it happens with the so-called tragedy of the Commons, while belonging to everyone, it belongs to nobody...

Regulatory impertinence

Cats may be felines, but not all felines are pets.

The fact that the gas companies and participants of the Wholesale Electricity Market belong to the energy sector does not mean that the same scheme of deregulation should also work for those of the Downstream segment. That would be a truism if it were not for the Open Season announcement with regards to Pemex' Logistics Assets.

Open season?

It is very difficult for a system as complex and overdriven as that of the primary logistics of Pemex to operate overburdened with a large number of independent operators. These operators would be reserving capacities in the different parts of the system and introducing products through the importation terminals.

The system is in need of an exclusive technical operator which currently cannot be anyone else but Pemex itself; and of powerful computer systems to manage inputs, outputs, nomination rules, operation, conflict resolution, priorities, among others.

Bottom-line, the situation calls for an independent entity to handle all these processes on the basis of public transparent both transmission and storage rates.

Another important factor for an Open Season to be successful is that there be different operators in the market to serve clients not supplied by Pemex. Currently, Pemex is supplying nearly the entire market. It goes without saying, a company, before opting to reserve logistical capacity, needs clients or a market to supply.

Hopefully, that will happen in the near future.

Strategic indefinition

One of the most noticeable causes is that Pemex has not defined its strategy for Downstream. Hopefully, from the dawn of the discussion of the Reform, Pemex had outlined a strategy: a comprehensive one including refining and primary distribution (Midstream), as well as retailing (Service stations and other points of sale); and that it had defined in which parts of the value chain and in which ways it would participate.

Nowadays, the operators in the market barely know what Pemex wants to do with its refineries; they also scarcely know the company's plans regarding their logistics assets, and are unaware of how and where they want to participate in the retailing market —service station business owned by franchisees or permit holders whose commercialization of the return on hydrocarbon goods and services represents a significant percentage of their income.

The CRE has taken the initiative by advancing deadlines, declaring Open Seasons and taking another series of measures to accelerate reform in the Downstream, let alone the announcement that the country is opening the retail market to private participation nine months beforehand. Unfortunately, these efforts could turn out to be ineffective should Pemex be not clear about its plans and objectives, and should the regulation be not coordinated with the tasks Pemex has to perform to make it possible. Without Pemex working in the same direction, regulation, no matter how well conceived, will hardly suffice.

Solutions

The presidential term is coming to an end and more sustainable results are yet to be seen. For the most part, the people is still expecting more tangible fruits of the Reform, other than politically-costly increases in the price of gasoline ... It should then not come as surprise that some political actors are wagging a counter-reform as an electoral slogan. Worst, it would not be all that populist a measure should by virtue of a poor regulatory design, the system were to demise.

In the face of this challenging outlook, the next ones are a few feasible solutions.

Governance

When it comes to bureaucracy, there is no doubt that the Principle of Subsidiarity must be applied: "as little as possible, as much as necessary".

Under this premise, the recommendation is to create an autonomous regulatory body, such as CENAGAS for the gas industry and CENACE for Electricity.

The ideal situation would be a team (a coordinated body from the sector) made up of Pemex, the CRE, COFECE, and chaired by SENER's Undersecretary of Hydrocarbons. Such a team would synergize a peripheral vision —the big picture, as it were—, with the data to be reconciled, the course to follow, the goal to arrive at, and the authority to execute.

Mandate

A clear mandate, binding on Pemex's directors and advisers, must emerge from this coordinated body; to guide Pemex's Downstream business strategy in the long term and to face crises like the present one, while keeping the constitutional imperatives of the Reform.

Synchronicity

With its peripheral vision, and its ability to reconcile agendas, this new body could establish a schedule of Reforms that finally keep in step with the rhythms of Pemex and those imposed by the market.

* * *

There are still 16 months left in this presidential term, which seems to be sufficient time to impose order in this segment of the sector and to abundantly perceive the results that all Mexicans had in mind when this bold energy reform was approved.

Hopefully these lines shall serve to urge the authorities not to pass up this opportunity presented to us on a silver platter.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official opinion, position or institutional view of Rodríguez Dávalos Abogados.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions