Mexico’s energy reform, national elections, the shale revolution in USA and Trump’s renegotiations of NAFTA all spell interesting times for Mexico’s chemical industry.

BY Matthias Lomas

A Brave New World: Energy Reform and the Mexican Chemical Industry

October 03, 2018

IMAGE: Courtesy of Grupo Idesa

“We are facing a historical opportunity to change what has been preventing the country from moving forward,” proclaimed President Enrique Peña Nieto as he presented his government’s ambitious energy reform to Mexico’s Congress in December 2013.

The energy reform promised to prize open Mexico’s oil and gas markets to private competition after nearly 80 years of it being dominated by state-owned company Pemex. Shortly after Peña Nieto’s speech, Mexico’s Congress approved amendments to the constitution to allow the reform to be implemented.

Due to a stifling tax burden levied on it, years of underinvestment and an overly powerful oil union, Pemex’s competitiveness has steadily decreased in recent decades and its reliability as a feedstock partner suffered. This helps explain why Mexico’s petrochemical industry has been in decline since the 1990s, when it was the world’s seventh largest producer. The problem was compounded by plummeting oil prices since 2014, which shifted Pemex’s focus away from petrochemicals. Therefore, Mexico is severely lacking in petrochemical refining capacity. As Ricardo Diogo, director of business development at tank storage company Oiltanking México comments: “Refineries need upgrades which Pemex does not have the money to complete and refining capacity is actually decreasing compared to a growing yearly demand of 2% to 3%.”

However, the energy reform will open up Mexican oil and gas exploration and production, as well as imports from abroad, to private players. Following its announcement, there was cautious optimism among petrochemical players that feedstock supplies would become more competitive with increased competition driving efficiency in Mexican production. Four years on from the reform, refining capacity has not improved, but cautious optimism about the competitiveness of feedstock has given way to bullish predictions. Bidding rounds have generally been successful and some companies are now working in joint ventures (JVs) with international players to produce crude oil and gas. “This is positive for the petrochemical industry and in four to seven years, the impact on feedstock will really be noticed,” predicts José Luis Uriegas, CEO, of the diversified petrochemical player Grupo Idesa.

Idesa was awarded the Onshore Development Block 24 (Tecolutla Block) in Veracruz and has established a JV with Canadian company International Frontier Resources to exploit its reserves. “We have already been approached by a private company selling ethane for next year, which represents a situation whereby, for the first time, companies other than Pemex are supplying ethane in Mexico,” continues Uriegas.  

It is not just domestic oil and gas production that is receiving a boost. Imports of oil and gas from the United States are expected to increase as the importation market is opened up as well. Since December 2015, the Los Ramones (Phase 1) pipeline has added 2.1 billion cubic feet (bcf) of natural gas per day of import capacity from Texas. In fact, according to the US Energy Information Administration (EIA), US gas exports to Mexico have doubled since 2013 to more than 4 bcf per day. “The United States is a natural supplier to Mexico due the proximity of Mexican ports to the US Gulf Coast and all the more important now after the huge increase of US shale gas. We see imports from the United States increasing as the competitiveness of US production increases,” remarks Cristhian Perez, managing director of tank storage company Vopak Mexico.

The effects of the reform go even further. Another major impediment of Mexico’s manufacturing industry, including its chemical industry, is poor access to natural gas, and large parts of the country rely on more costly fuel-oil generation. Mexican industry thus pays more for electricity than its counterpart in the United States. With increased imports from the US market, the situation should become more balanced. This will have positive effects for the whole chemical value-chain as it will not only lower costs for chemical producers but will be a boon to other manufacturers, such as automotive producers, that are key source of demand for chemicals in Mexico.

Progress may be gradual but the energy reform has not been a lead balloon. As Diogo remarks: “We of course want things to happen faster but if one steps back, they can see that within two years a lot has been achieved. In fact, some parts of the reform have actually been delivered ahead of schedule.”

Going forward, the gains may be fragile. Mexico will have general elections in July 2018 and Andrés Manuel López Obrador, current Head of Government of Mexico City, president of the left-wing party National Regeneration Movement and a strong contender to win the presidential election, has promised to reverse the energy reform. Mexico’s chemical industry will be desperately hoping this does not happen. As Diogo succinctly summarizes: “Mexico would lose if it went back on the energy reform given the country is producing 55-60% of what it was producing some twelve 12 years ago and Pemex is still heavily indebted…Going back on the reform would harm Mexico.”

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