Increasing Energy Infrastructure in Mexico

In recent years, the need for storage capacity in Mexican ports has increased significantly considering the ever-changing conditions of the energy industry. 

In recent years, the need for storage capacity in Mexican ports has increased significantly considering the ever-changing conditions of the energy industry. The vast majority of traffic has been made through four strategic locations: two ports in the Pacific coast, (Manzanillo, Colima and Lázaro Cárdenas, Michoacán) and two ports in the Atlantic coast (Altamira, Tamaulipas and Veracruz, Veracruz). The Ministry of Communications and Transportation (“SCT” for its abbreviation in Spanish) has set as a purpose, through the National Plan of Development, that the aforementioned ports should become International Class Ports. Therefore the SCT is prompting their respective Port Authorities to begin the process of modernization and expansion through public bids and to increase the storage capacity of these four ports as well as their draft port to allow access for bigger vessels.

Likewise, Mexico’s Ministry of Energy (“SENER” for its abbreviation in Spanish) has set as a purpose, the increase of hydrocarbons storage capacity. This aims to build a reliable and sufficient inventory of hydrocarbons, ensuring an uninterrupted supply for a certain amount of time. Accordingly, the SENER along with the Energy Regulatory Commission (“CRE” for its abbreviation in Spanish) , established as a preliminary statistic measure, the obligation for all permit holders to report periodically all handled volumes to inform to the public the market conditions. The aforementioned obligation is of particular relevance for the economic agents (trading and distribution permit holders of the energy industry that trade or distribute gasoline, diesel or jet fuel products to final users or retail stations. SENER appoints these permit holders as the first ones to be bound to have minimum storage inventories. The purpose of the periodic reports is to determine an average of handled products for each economic agent and establish, based on that average, their individual minimum storage obligations during consumption days. The creation of commercial inventories will allow uninterrupted supply in the event an interruption on imports or in case other emergency arises. The ultimate beneficiary of an uninterrupted supply would be the final users or retail stations.

On September, 2015, Mexico, in alignment with the then recent 2013 Energy Reform, expressed interest in joining the International Energy Agency (IEA). It aimed to increase private investment within the energy industry and to assist in further developing its energy market. On November 7TH, 2017, the IEA formally invited Mexico to become its 30th member. Its Executive Director, Dr. Faith Birol met with Mexican President Enrique Peña Nieto on Mexico City on December 12th, 2017. Mexico’s Senate ratified the entry of Mexico into the IEA as a full member country on January 2nd, 2018. Mexico became the first Latin American country to join the aforementioned agency.

The IEA establishes for its net crude oil importers members, the obligation to maintain total inventories equivalent to -at least- 90 days of their last year crude oil imports average to ensure the domestic supply in case of an interruption of those imports. Many countries adopted the measure of maintaining these inventories after the 1973 oil embargo that prompted the subsequent oil and economic crisis, which showed the need to count with emergency stocks within a country, in case of a sudden interruption of supply. As part of these efforts and to ensure such inventories, the SENER published on the Federal Official Gazette on December 12th, 2017, the Public Minimum Refined Products Storage Policy (hereinafter referred to as the “Policy”).

As proved by other IEA member countries, the establishing of commercial inventories was reported as a great benefit as opposed to strategic storage carried out by the State, since private distributors and traders shall fulfill the minimum storage obligations, and will be forced to find available capacity in storage facilities, for such purposes, which will incentivize the development of new private storage infrastructure along the entire country. It is worth to mention that the minimum storage inventories of each trader or distributor should be located in the operating regions of each trader or distributor. Some IEA´s countries like the U.K., Sweden and Italy make their inventories almost exclusively from commercial inventories. It is achieved mainly by imposing the obligation to market participants rather than building significant State strategic storage capacity. Nevertheless, no IEA country relies entirely on the latter given the fact that all have within different degrees commercial inventories. Ports increasingly will play a crucial role in the fulfillment of the commercial minimum storage, as an optimal import/export point of hydrocarbons, into and from the country.

The creation of International Class Ports and the building of fluids terminals within them will increase the storage capacity of said Ports and present an opportunity for investors or economic agents of the energy industry. Additionally, these ports will allow Post Panamax vessels to dock on them, therefore their receiving capacity will be significantly increased. Thus, the development of said International Class Ports would play a crucial role for building up the necessary commercial inventories that SENER has proposed. As more oil, gas, oil refined products and petrochemicals can be received and more storage terminals are built within the ports, the consumption rates per capita in the country could potentially increase, as more supply is available. The resulting economic benefits are potentially significant. SENER expects that in order to fulfill the minimum storage obligations, traders and distributors will prompt storage permit holders to build more hydrocarbons terminals. The IEA estimates the economic results of the Energy Reform would reach 1 trillion USD by 2040. Although 64% of that amount corresponds to the upstream sector, which in consequence will have an increasing production, it will create an enhanced cycle with more interest and investment in the entire energy sector benefiting midstream activities, among many others. The ports being the natural import point have a pivotal function in the implementation of the Energy Reform. SENER established as a particular goal of this administration to increase the storage capacity, especially from terminals, which are linked to refined products and gas transport systems.

Land communications infrastructure including pipeline transportation systems linked to the International Class Ports will bring important benefits. Being such cases in particular, the Veracruz and Lázaro Cárdenas ports, which are two of the three best-communicated ports (the other one is the Guaymas, Sonora Port) in the country. In contrast, the Altamira and Manzanillo Ports have different conditions, which have some challenges regarding land communications. However, both have regasification terminals connected to the National Gas Pipeline System that gives them an additional advantage -similar to the Ensenada Port- that shares this characteristic in Mexico. Increasing and modernizing infrastructure such as communications to these ports has become one of SCT’s top priorities according to the sector’s National Development Plan.

While all four International Class Ports are set to achieve the goal, the Veracruz Port is so far the one that is deemed as the most advanced port in terms of modernization and expansion process. It has conducted the necessary bids for new terminals including a bid for fluids terminal. It will be the fourth hydrocarbons terminal in Veracruz although this one will be significantly larger. The aforementioned process is divided in two stages, the first stage includes 5 new terminals with one fluids terminal set to be ready this year according to Port Authority Officials and when fully completed the second stage in 2030, the Veracruz port is set to become one of the biggest and more important ports in the world. Plans and expectations on other International Class Ports are not falling behind since both Lázaro Cárdenasand Altamira Port Authorities are actively seeking to allocate resources through public bids, placing companies under the conditions that would allow them to build one and two fluids terminals, respectively. Currently, both Altamira and Veracruz Ports have privately-owned hydrocarbons terminals although it is noteworthy to point out that while not an International Class Port, the Coatzacoalcos, Veracruz Port also has significant privately-owned storage capacity within its terminals, all subject to the CRE regulation and therefore to eventually become part of the commercial inventories in Mexico.

Recent successful bids within the energy sector have demonstrated the investors’ confidence in the energy projects and the relevant policies, referring specifically to the minimum storage levels, can be achieved as detailed by SENER in its Policy. The minimum storage obligation, in the case of permit holders, as mentioned before, initially will be limited to gasoline, diesel and jet fuel and will be divided into eight regions throughout the country with permit holders having the obligation to maintain a certain amount of supply days inventories in reserve, beginning in 2020 and further increasing in 2022 and 2025 in accordance to the following table:

According to SENER’s Policy, the minimum storage inventory obligation could be fulfilled through tickets which are financial rights that a trader or distributor acquires over the inventories of other trader in order to fulfill their commercial inventory obligation. In this sense, the trader or distributor is indirectly, through other trader or distributor securing the minimum storage obligation. The ticket represents part of one hydrocarbons storage inventory. In case of a declared emergency, the tickets will have a redeem or release mechanism for the reserved volumes to enter in the market as part of the commercial inventories. The financial rights over excess volumes could be traded outside the market as a commodity. If implemented this measure would present an additional choice for traders and distributors to comply with the minimum storage inventory obligation of the SENER by 2020.

Additionally to moving towards the IEA minimum storage inventories obligation, these measures will further increase the energy national security infrastructure improving Mexico’s storage capacity and thus the energy infrastructure and services offered. It will allow more flexibility and redundancy, in case of imports interruption and will also increase investors certainty creating competitive conditions among players that ultimately benefit the end users, creating more available investment options, that strengthens the energy sector and assist the economic development of the country.

Definitively, turning the most important Mexican ports into world class and first-rate ports with large and new storage terminals capable of receiving vast amounts of oil and gas as well as refined products, will contribute to achieve energy sufficiency in Mexico in the long term as the SENER, SCT, CRE and Port Authorities are seeking to do. This will certainly present an interesting investment opportunity as direct and indirect benefits will begin to surface.

1.  On December 12th, 2017 the SENER issued the Public Minimum Refined Products Storage Policy which states that the gasoline, diesel and jet fuel traders and distributors shall have to meet the minimum storage obligations, although this does not imply that permit holders of other hydrocarbons would not have the same obligation in the future.

2. 

3.  Post Panamax vessels are those that exceeded the Panama Canal allowed dimensions of 427 m (1,401 ft) in length, 55 m (180 ft) in beam, and 18.3 m (60.0 ft) in depth.

4. IEA’s Mexico Energy Outlook 2016 Report pg. 17

5. IEA’s Mexico Energy Outlook 2016 Report

6. Integral Port Administration personnel (API for its Spanish name)

7. The second stage doesn’t include any hydrocarbons terminal.