Major International Oil Firms Changing Face of Mexican Retail Fuel Sector
November 5, 2018
Mexico has seen an influx of international oil companies expanding into the domestic retail fuel sector in the past few years, thanks to the ongoing energy reform.
These new international players are slowly changing the culture and dynamics of the Mexican retail fuel market as they aim to expand market shares. According to the Mexican government, more than 25% of the country's service stations operate under 49 brands others than Pemex.
OPIS notes that the leading private brand is OXXO Gas, a private Mexican conglomerate, with close to 500 stations. The major international brand with the largest retail presence in Mexico in terms of the number of stations is BP, which has about 350. Followed by Shell and ExxonMobil. Other international players include Chevron, Gulf, Costco and Repsol.
Private brands may be making large strides in expanding their retail presence in Mexico, but Pemex continues to dominate that industry, which has a total of about 12,000 stations. International oil companies see strong opportunities for Mexican retail fuel industry, considering the relatively small number of retail
stations in Mexico compared with the U.S. Texas alone has about 12,000 retail stations.
Also, international companies expect Mexico to be a regular fuel importer for the foreseeable future.
However, many international and domestic retail companies continue to buy fuel from Pemex, at least for now. Marathon has secured storage and pipeline capacities from Pemex on a term contract, allowing Marathon to bring in their own fuel supplies from the U.S. to Mexico for sales.
So far, only ExxonMobil has its own fuel import terminal at Cadereyta, which caters to U.S. products flow into Northern Mexico from Texas. ExxonMobil's terminal in Cadereyta is supplying fuel to the Mobil branded stations.
Some other oil companies have signed up storage space contracts with logistics companies which are building new private terminals in Mexico. Valero is going one step further to build three terminals in Mexico to sell fuel on a delivered basis.
Ground Level
On the street, international oil companies are working to replicate the same retail fuel services and products offered in the U.S. for the Mexican market, at least to a certain extent.
International companies, including BP, Shell and ExxonMobil, are introducing a standard salary and benefits package for pump attendants at a retail station. All Mexican retail stations are full-service, unlike the U.S., which have both full-service and self-service, depending on state laws or individual dealers.
Many dealer-operated Pemex brand stations do not ensure the offer of a mandatory salary and benefit package for its pump attendants. Many Pemex station owners do not offer a monthly salary, and if they do, the salary is deemed very minimal.
The culture of Mexican retail stations dictates attendants get most of their income from tips or "propina" from drivers.
However, the international companies have mandated that all branded dealers for their brands have to comply with a standard salary and benefit package for their pump attendants, in addition to tips that the attendants will receive for filling up cars.
Some international brands have turned away potential dealers who had wanted to convert to their brands from Pemex because these dealers declined to sign the contractual agreements, which include mandatory compensation for pump attendants.
Some international brand representatives told OPIS that newly converted dealers flying the major international retail brands saw a demand or sales volume increase of about 70%-80% in the first year after converting from Pemex.
The sharp volume increase was partly attributed to curiosity among Mexican consumers wanting to try a new brand or service. Also, new international brands have embarked on a marketing and advertising blitz amid their ongoing expansions.
They conceded that the sharp sales volume increases experienced in the first year are not sustainable over the long run.
However, the sales volumes of these major international branded stations would remain significantly higher than the volumes sold during the Pemex branded days, they said.
"It may not be 80% higher after the first year. It would still be about 50% higher than before (Pemex branded days)," a source said.
Major international retail branded fuel prices on the street are typically a few pesos per liter higher than Pemex stations, but sources said that retail margins for international brands are competitive with Pemex brand, which had increased its retail margin for dealers recently.
Pemex's stronger retail fuel margin for dealers is a way for Pemex to offer discounted fuel supply to retailers to keep their market shares. Some major players, including OXXO Gas, continue to buy from Pemex, which could offer a major buyer a "sweet deal" or substantial price discount.
Pemex's fuel price discount is a subject of intense debate in the industry as well as within the government. The government had said that Pemex routinely sold fuel below supply cost as a subsidy or to defend its market shares. It remains unclear if Pemex would continue this pricing practice, which does not create a level playing field for new players.
Pemex and the Mexican government are already reeling from financial constraints, and the elimination of fuel subsidies or price discounts could help shore up Mexico's financial profile. However, the incoming president, Andres Manuel Lopez Obrador (AMLO), had hoped to keep fuel prices low as a campaign promise.
Different Rules
Despite the close proximity to the U.S., the Mexican retail fuel market operates by a different set of rules as many international oil companies have found out.
Many new dealer-owned major brand retail stations do not operate the convenience store on-site if there is one. Many Mexican retail stations only feature gasoline pumps without a convenience store, but this is slowly changing with the influx of international brands.
In the U.S. retail fuel sector, a major part of a service station's profits or margin, as much as two-thirds, comes from selling merchandise, food and drinks at a convenience store.
In Mexico, many dealer-owned international branded stations lease out the land on-site to a major convenience store operator like OXXO.
Sources said that OXXO, a dominant player in the Mexican c-store industry, has the brand recognition in Mexico and it also has the economies of scale to provide the best logistics for such a service.
They also said that many branded dealers do not want to deal with the hassle of significant theft issues at c-stores in Mexico.
Many international companies are continuing to expand their retail presence in Mexico despite the political uncertainties surround the new president. Industry sources expect the new president, who is viewed a nationalist, to maintain the status quota for the energy reforms as far as the rules and constitutional laws
are concerned.
However, AMLO could work to slow down the progress of the energy reform. He had already frozen the upstream exploration and production tenders for the Gulf of Mexico indefinitely. He had said that he would want to review some aspects of the energy reform to protect the national interest. AMLO also aims to use Pemex as a driver to develop the Mexican energy market, but that AMLO's goal goes against the market liberation move. One of the goals of the energy reform is aimed at breaking the monopoly of Pemex in the domestic market.
--Edgar Ang, eang@opisnet.com
Valero Cranks Up Product Export Supply System into Mexico
October 24, 2018
Mexico City -- On both sides of the U.S.-Mexico border, new fuel supply infrastructure for Valero Energy Corp. is beginning to come on line, enhancing its product exports network and sales offering in Mexico.
Three Texas facilities and seven in Mexico will help boost the refiner's global product export capacity from a current 736,000 b/d to a potential 1 million b/d, according to a presentation made at the OPIS U.S.-Mexico Petroleum Summit on Wednesday.
The Magellan-Watco rail loading facility in Houston made its first loading over the Oct. 20-21 weekend, Marcus Valenciano, director of product supply, Gulf Coast, told attendees of the conference which concludes on Thursday. The terminal is unit-train or manifest capable, connects by pipeline to Valero Texas City and Houston refineries, and has access to main railroad lines.
Valero's McKee refinery in the Texas Panhandle has a rail loading facility that can now load gasoline as well as diesel rail cars. Two unit-trains a week can be loaded at the terminal, and it can blend both Mexican metro and "non-metro" grades of both regular and premium gasoline.
Thirdly, Phase 1 of the Magellan Valero Pasadena terminal, with up to 10 million bbl of storage, gets underway in November, providing four ship docks, Gulf Coast connectivity with 42-inch lateral lines, and butane and ethanol
connectivity. The Valero phase of the project will have 4 million bbl position, unit train connectivity, a pipeline connected to Texas City and Houston refineries, an Aframax-capable dock and a truck rack in full operation in Q4
2019.
At about the same time, Valero's largest investment in Mexico fuel infrastructure - the 3.4 million bbl of storage at Veracruz, Puebla and Mexico City, all fully subscribed by Valero - is expected to be starting up.
Built by IEnova, the marine terminal at Veracruz will have a deep water port, unit-train loading and truck loading bays. Groundbreaking for the other two terminals, also built by IEnova, will take place in November with full
operations seen by the end of 2019 or early 2020.
The Puebla and Mexico City terminals will have 1.3 million bbl of storage between them, truck loading bays and unit-train unloading capability. Veracruz import capability has been designed for 100,000 b/d of gasoline, diesel and jet fuel.
Valero's contracted Mexico logistics facilities include:
- Nuevo Laredo pipeline and terminal, with diesel available in December and gasoline by late 2019 (NuStar)
- Monterrey rail transloading, where gasoline and diesel sales began in September (Ferromex)
- Guadalajara rail transloading:diesel sales began in October, gasoline sales begin in November (Silos Tysa)
- Chihuahua rail transloading: first diesel rail cars arrived in September,gasoline by early 2019 (USD Group)
The company's focus is truck rack sales to all customers near its Mexico terminals, including branded distributors under the Valero brand or the other Valero family of brands; unbranded customers and other third parties, such as
major oil companies or private label branded distributors.
For those racks Valero provides a daily price in pesos per liter, which isn't posted but is sent to contract customers. Because Valero controls the fuel's logistics all the way from the U.S. to the Mexican terminal rack, the customer
"has no risk," company executives said at the conference.
--Beth Heinsohn, bheinsohn@opisnet.com
Mexican Fuel Market May Face Escalation in Price War
November 5, 2018
A price war with the potential to escalate is brewing in the Mexican wholesale fuel market as private importers are adopting aggressive marketing strategies to snag more market share from Pemex.
Some private importers are guaranteeing customers and end-users in Mexico a too-good-to-miss deal of daily price discounts to Pemex's posted prices.
Pemex, the dominant player in the Mexican retail market, on the other hand, has been selling fuel below supply cost to its retailers and Pemex-branded stations.
Oil company sources in the U.S. and Mexico agree that a price war could be on the horizon, but the sustainability of prolonged heightened competition on prices would be questionable.
Sources said that private importers could not possibly guarantee to beat Pemex prices every single day forever due to the financial implications for profit margins.
Some private importers, including refiners, trading companies and domestic players, are sourcing fuel from the U.S., and they are hoping to take advantage of the new private terminals and pipelines being built in Mexico.
The aggressive price offers could be limited to only a few large refiners and trading houses, sources said.
In theory, a large refiner in the U.S. could have a lower supply cost compared with trading companies and marketers.
Some refiners are working on oil terminal projects in Mexico. A combination of competitive supply cost and access to private terminals would allow a large refiner to offer a price discount to Pemex.
"A well-integrated large U.S. refiner with access to logistics could be aggressive in fuel pricing in Mexico," a source said.
Apart from large refiners, a large global trading company could also participate in a price war in Mexico. Global trading companies could optimize their large trading and supply network around the world to offer the best
prices in Mexico.
It is also noted that an initial sharp price discount from a new player is a marketing strategy to lure customers and gain market share. The price discount does not usually last over an extended time period.
Besides supply cost and private terminal access, fuel importers are at the mercy of the IEPS tax, which could make or break a fuel import deal. Some importers are now holding fuel in the U.S. in order to manage their risks. They
will only import when impuesto especial sobre productos y servicios, or the IEPS tax, falls and the import price is lower than Pemex.
The IEPS tax plays a major role in stabilizing local fuel prices as well as in the private imports of fuel into Mexico.
The bottom line is that some private importers could eat some margin in order to get some share in a new market.
Meanwhile, Pemex has been selling fuel in Mexico at below supply cost, with the aim to defend its market share against new players.
Mexico implemented its energy reform a few years ago, and one of the goals was to break the monopoly of Pemex in the domestic market. The energy reform has become a paradox as Pemex, a state-owned company, is eating substantial margin in order to defend its turf.
Alejandra Palacios, chairwoman of the Mexico Federal Commission (COFECE), has said that COFECE would also propose to eliminate fuel price discounts by Pemex in order to create a level field for all players.
Pemex has been found to have offered substantial fuel price discounts in Mexico from February to July, Palacios said. Some industry sources said that the period of price discounts could have been much longer than the six-month period.
Pemex's aggressive price discounts are hurting the company's bottom line, which also reflects on the Mexican government.
Some fuel importers do not expect Pemex to continue to subsidize fuel prices due to the company's financial constraints. Also, Pemex needs to shore up financial strength to support its ambitious refinery projects, including
building a new refinery and upgrading all six existing refineries.
Besides Pemex, there is a conundrum of keeping Mexican fuel prices low.
The incoming president, Andres Manuel Lopez Obrador (AMLO), had previously pledged to keep fuel prices low when he take office on Dec. 1.
In theory, AMLO could not dictate prices in the liberated Mexican fuel market, but he could control Pemex prices in Mexico. AMLO could also cut taxes, including the IEPS, to control fuel prices.
It remains unclear what AMLO plans to do with domestic pricing, but some sources expect AMLO to take a middle of-the-road approach, which is to keep the status quo.
Meanwhile, Pemex's trading arm, PMI, is responsible for more than 90% of gasoline imports and about 80% of diesel imports into Mexico.
However, private importers are expected to make more inroads into the Mexican fuel market in the future as the energy infrastructure is expands.
So far, pipeline projects are progressing slowly due to right-of-way permitting issues.
For the near term, private importers will rely mostly on trucks and rail. Marine transportation will be available in the longer term.
Edgar Ang, eang@opisnet.com
Mexico to See Extended Slowdown in Energy Investments Until Q2: Sources
October 30, 2018
Mexico is expected to continue to see a standstill in energy investments at least until the second quarter of next year as oil and gas companies look for directions on potential political and regulatory moves by
the country's new president, some industry sources in Mexico told OPIS.
Andres Manuel Lopez Obrador (AMLO), Mexico's new president, will take office on Dec. 1. He has given mixed signals before and after the election on the energy goals he hoped to achieve during his six-year term. The contradictory statements by AMLO on energy issues have kept private investors on their toes.
AMLO has touted nationalism and making Pemex great again, and at the same time, Mexico and Pemex would need a substantial cash inflow to achieve its lofty goal.
OPIS reported in June that Mexico had seen a considerable slowdown in new energy investment interest in the months leading to the July 1 elections and this temporary pause was expected to be extended to after the elections.
Last week, sources in Mexico told OPIS that many potential investors remain on the sidelines, waiting for clear directions from AMLO on the future of the Mexico energy industry.
Potential issues for private companies investing in Mexico could include price wars, competition with Pemex and contractual changes with Pemex.
"Those companies who have already invested in midstream projects in Mexico are now trying to complete their projects as soon as possible...If the projects are already done or almost completed, the government would not be able to stop them," they said.
Rule changes in Mexico may not necessarily hurt private midstream companies, sources said.
"If it is no longer feasible to import fuel privately due to the rule changes or the market dynamics change, we will lease our import terminals (in Mexico) to Pemex," a midstream player said.
Private companies are hoping to import fuel into Mexico to compete with Pemex, which still dominates the Mexico oil products market after three years of energy reform.
PMI, the trading arm of Pemex, is responsible for 95% of gasoline imports and 85% of diesel imports into Mexico.
So far, some sources expect AMLO to take the middle of the road approach without tweaking the energy reform too much. He is not expected to accelerate the energy reform or slow it down considerably, especially for the downstream sector, they said.
However, in the upstream sector, it remains a wait-and-see scenario as AMLO had frozen future tenders for exploration and production in Mexico indefinitely until the first oil production from the current tenders. AMLO had highlighted upstream assets as national resources, and this declaration is part of the Mexican constitutional law.
Also, AMLO aimed to increase transparency in upstream contract bidding as well as increase Pemex's profit sharing in these contracts.
It is noted that Mexico is already facing a rapid decline in oil production. A lengthy slowdown in upstream investment could be detrimental to Mexican oil production.
Sources said that Mexico would receive higher profit netbacks from upstream investments versus downstream expansion, given the country's limited financial resources.
--Edgar Ang, eang@opisnet.com
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