With 10 days to go before Mexico opens its gates to liberalized oil products imports, the actual incremental volume for oil products imports to south of the border is expected to be very small and limited to only truck deliveries in the near term, industry sources in Mexico and the U.S. told OPIS on Thursday. Early independent and private importers are expected to face logistics challenges and strong price and supply competition from PEMEX and PMI.

In the longer term, there could be unit train deliveries from Port Arthur, Texas, to Monterrey in northeast Mexico as early as June-July, depending on construction of a terminal in Monterrey.

The breaking of the monopoly of PEMEX in Mexico, which is the aim of the government, will likely happen eventually, but it will not occur overnight. It will take some time, strategy and planning. Early pioneers are likely to encounter strong competition from PEMEX, and a lack of privately owned terminals, marine facilities and pipelines will create more obstacles for free-flowing imports.

Senior government officials and oil players had repeatedly said that Mexico needs an infrastructure build-out to facilitate oil imports before the actual products flow. Also, government and PEMEX officials had said that working with PEMEX would offer a meaningful working relationship for foreign companies and investors as PEMEX brings the know-how in the Mexican market.

In February, Mexico’s President Enrique Pena Nieto announced in his keynote speech at IHS CERAWeek in Houston that Mexico would bring forward the planned opening of its domestic oil products markets to April 2016 from 2017. Pena said that the domestic market will be opened to third-party imports of gasoline and diesel into Mexico.

Since the unexpected February announcement, some U.S. and Mexican companies have been talking about building oil terminals in Mexico to facilitate this cross-border products move. However, it is just talks so far, and some projects still require permits from the Mexican government.

“Some Mexican entrepreneurs will rush to take advantage of liberalized market place and import products into Mexico via trucks,” a source in Mexico said. “There will be an initial rush to import products into Mexico, but after 1-2 months, they will realize the logistics difficulties and cost disadvantage.”

“There is a reason why PEMEX built and have three refined products pipelines at the U.S.-Mexico border. PMI has the pipeline economics and infrastructure,” he said.

Currently, Mexico has three products pipelines from U.S. to Mexico, totaling more than 100,000 b/d in capacity. PEMEX has two lines, with a total of 75,000 b/d, in El Paso and in Brownsville, Texas. Plains has another cross-border pipeline at El Paso, which is rated at about 35,000-40,000 b/d.

PEMEX’s pipelines have significantly reduced the cross-border truck delivery traffic. Pipeline economics for products deliveries are also stronger than trucks.

Experience Counts

Mexican entrepreneurs have no experience in dealing with cross-border truck deliveries because this market has always been controlled by PEMEX and PMI.

Early importers will have to deal with issues related bureaucracy, delays, safety and security, the source said.

U.S.-to-Mexico truck delivery will have a slow turnaround time of half a day across the several border crossing bridges.

In the longer run, some companies are working to deliver products on unit trains to Northern Mexico from Port Arthur. This could possibly happen in June-July, depending on completion of a terminal construction project.

The U.S. and Mexico are connected by via rail tracks, but an obstacle preventing rail deliveries of oil products is a lack of terminals in Mexico for unloading oil off trains.
 
The new unit train delivery is targeting the Monterrey area, which is also supplied by PEMEX’s Cadereyta refinery, located in the northern state of Nuevo Leon.

For U.S. companies delivering products into Mexico, there is a significant credit risk in dealing with “unknown” Mexican companies, the source in Mexico said.

“Many U.S. companies would sell to PEMEX or PMI with a 30-day credit. It would be risky to sell products to an unknown Mexican company with the same credit facility. The banks will not take that risk, and that risk falls on the seller,” he said.

Rail deliveries into North Mexico are likely to end up with a take-or-pay supply contract with PEMEX, offering a win-win situation for U.S. companies and PEMEX, the source said. A take-or-pay contract will offer credit stability and ratability for U.S. sellers.

In the longer term, a few projects are on the horizon in Mexico, which offer bigger opportunities.

The Howard Energy Partners’ (HEP) Dos Aguilas 72,000-b/d pipeline launched simultaneous open seasons for the U.S. and Mexican portions in the first quarter to solicit indications of interest. The pipeline (expandable to 90,000 b/d) is estimated to cost $500 million and be in service in the first quarter of 2018.

The Dos Aguilas project includes four new refined liquids terminals with a total combined capacity of 1.15 million bbl and approximately 287 miles of 12-inch pipeline.

Centurion Terminals is building two condensate processing towers with a total capacity of 50,000 b/d and a 1.5-million-bbl oil products storage terminal at Brownsville.

Jamex, the take-or-pay buyer of the project, could sell the products to Pemex at Brownsville, which is the transloading point for Pemex’s deliveries to northern Mexico.