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Mexico: ethanol industry braced for uncertain energy sector reforms

Mexican Energy Sector Reform

For stakeholders in the Mexican ethanol industry, these are uncertain times. Since 2013, the country has been undergoing a gradual process of energy sector reform, initiated by the outgoing President, Enrique Peña Nieto. But those reforms may be in jeopardy.

In the broadest terms, the goal of the reforms has been to attract foreign investment through price liberalisation, increased competition and the creation of a more transparent marketplace. Supporters of the policy hope that it will reverse a decade and a half of decline in domestic oil and gas production.

For the biofuels industry, the optimistic view is that it will also contribute to the growth of Mexican ethanol production by lessening the influence of the state-owned oil company, Pemex. A proposed gasoline standard, which if accepted would raise the ethanol blend wall from 5.8% to 10%, could also help to stimulate a growth in domestic production.

However, since the sweeping electoral victory on July 1st of the populist politician Andrés Manuel López Obrador, the progress of these reforms has been cast into doubt. When Obrador assumes office in December, he will control both chambers of the Mexican Congress, giving him the power to alter Nieto’s reforms as he sees fit. He has already suggested that a review will be needed to assess how far they contribute to the country’s self-sufficiency in transport fuels. He has also pledged to review the oil and gas contracts already awarded to foreign investors.

Not only will López Obrador have the power to alter Mexico’s energy reforms if he so chooses, but he will also feel emboldened by a strong vein of public dissatisfaction with their effects. Although sectoral reform was widely expected to decrease the prices Mexican consumers pay at the pump – particularly in light of low oil prices – the reverse has in fact been true.

In practice, price liberalisation has centred on the elimination of fuel subsidies. The result has been a near doubling of fuel prices, which in turn has contributed to currency inflation. Despite much of the cost to consumers having come in the form of fuel duties, there is little appetite among regulators to reduce what is a substantial source of government revenue. Likewise, without privately owned distribution and storage infrastructure, other market players have had difficulty engaging in the kind of free competition with Pemex that would help to push prices down.

Standing against López Obrador if he decides to make significant changes is the $200 billion in foreign capital already invested in Mexican oil and gas since the reforms were initiated. Due to a convoluted regulatory regime around exploration contracts, very little of this investment has so far borne fruit. But given the likely extent of Mexico’s unexplored resources, there are genuine prospects for growth.

That presents the incoming president with a dilemma. For Mexico to achieve energy self-sufficiency, it will need to greatly expand its upstream oil and gas operations. López Obrador’s stated agenda is to do so without recourse to foreign investment. But $200 billion is a level of resource expenditure that Pemex and the Mexican government simply can’t match. According to the outgoing President Peña Nieto, 800,000 jobs would be on the line if the reforms were called off. Jeopardising foreign upstream investments would also be likely to make Mexico more dependent on imports of foreign oil and gas.

Implications for the Ethanol Industry

Amidst the wider turmoil surrounding Mexican energy sector reform, there is an absence of clear signalling on what the outcome may be for the ethanol industry. The incoming energy minister, Rocio Nahle, has been vague about the role of biofuels in the new administration’s energy policy, instead emphasising a general push towards renewable energy sources.

In the opinion of Dr Julio Escandon, Director of the Center for International Agribusiness at the Universidad Anáhuac, the “logical impact of an energy policy that favours self-sufficiency and the use of renewable energy would be to promote the local production and use of ethanol mixed with gasolines produced by Pemex”. Diversifying Mexico’s fuel sources would also reduce the burden of meeting the country’s growing transportation sector demand placed on Mexico’s nascent upstream operations.

Escandon is hopeful that if the new gasoline standard is introduced, interruption of oil and gas sector reform should not adversely impact ethanol demand. “Ethanol usage is decoupled from the origin of the gasoline”, he says, so “its usage and growth will mirror the demand for gasoline in Mexico.”

A complicating factor, however, is López Obrador’s commitment to Pemex. The President Elect has already proved his interest in the company by tapping a long-time political ally to take over as the company’s CEO, and pledging 49 billion pesos towards Pemex refinery upgrades. The reason this commitment should be concerning is that Pemex has historically been inimical to the biofuels industry.

That is partly due to a long running battle between ethanol producers and the Methyl tert-butyl ether (MTBE) lobby to secure position as Mexico’s fuel oxygenate of choice. Pemex’s ownership of MTBE production facilities has made the company reluctant to promote the use of a competitive fuel additive, despite the controversy that has arisen over MTBE’s harmful ecological effects (the MTBE lobby has typically countered claims of aquifer contamination from MTBE with claims of ozone emissions from ethanol combustion).

Pemex have also been the target of litigation intended to limit their uptake of ethanol. The company were only recently able to overturn an injunction that capped the company’s ethanol blend rate at 5.8% in defiance of the proposed gasoline standard.

Another source of uncertainty is how the increased demand generated by a 10% ethanol blend rate would be satisfied. Additional imports of fuel ethanol would certainly be required, but whether there would be a shift towards increased domestic production over time is less clear. Escandon points out that for many domestic producers of sugarcane ethanol, selling to the US or European markets (willing to pay a premium for sugarcane ethanol’s enhanced GHG savings), would be a more profitable alternative. In this case, much of the domestic demand would likely be satisfied by imports of corn ethanol from the US.

With so many unknowns surrounding the new administration, ethanol industry stakeholders would be well advised to stay clear of investment – at least for the time being. “Several business plans that I have developed are currently in the freezer,” Escandon says. “[But] after the definitive energy policies are laid out, be ready to invest in all sections of the fuels value chain. The investors that position themselves early will reap the greatest benefits.”

Want to find out more? The Ethanol Latin America Conference will be convening in Mexico City on December 4th, three days after President López Obrador takes office. It will be the industry’s first chance to respond to the new administration and identify new investment opportunities.

High profile speakers will include:

  • Ana Cecilia Porte Petit Anduaga, Director of Biofuels, Mexican Ministry of Energy (Sener)
  • Rene Zacahula Dominguez, Director General, Grupo Báltico
  • Humberto Jasso Torres, Executive President, Mexican Sugar Chamber
  • Benito López Martínez, General Manager, Bioenergéticos Mexicanos S.A.P.I. de C.V. (Biomex)
  • Carlos Alberto Torres, CEO, Ciprof Energies

Hear from these speakers and others on the introduction of E10, new investment opportunities and the outlook for international trade.

Ethanol Latin America Conference


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