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

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”

Related Topics
 
Related Articles
 
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 (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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