The opening of the Mexican petroleum market
While foreign companies ready themselves to enter one of the world’s largest markets, Mexican petrol retailers look to survive by modernizing their gas stations into service stations.
Almost a year after Mexico decided to open its market to foreign investment, and remodel their current hydrocarbon and electricity industries, with its biggest energy reform since 1938, changes have come at a slow pace but a wide range of new business opportunities have emerged. The re-election of President Peña Nieto on the 7th of June assures the continuity of the liberalization process.
Leading oil and energy companies across the globe have been patiently waiting for a chance to enter the 11th biggest economy in the world. President Enrique Peña Nieto passed the Hydrocarbon Law last year, ending the monopoly that state-owned Petroleros Mexicanos (Pemex) had enjoyed since the 1938 nationalization of the energy resources.
Through the constitutional amendments, new structures were set for the industry of oil, natural gas, and electricity. Some new aspects were introduced, such as competition in refined product and electricity markets, private investment into various segments of these industries, and ownership deals. However, Pemex and the Federal Power Comission (CRE) will continue to be the main industry actors and none of their existing assets will be sold to private enterprises.
According to Adrien Lajous, from the Center on Global Energy Policy of Columbia University, the reasons behind the transformation and liberalization of the energy sector are mainly the “steep drops in oil production over the past 10 years and a weak GDP growth”. “Mexican imports of gasoline, diesel, LPG, and natural gas have been growing rapidly, due to refining capacity constraints and badly managed Pemex refineries”, explained Lajous.
Other experts point at the extreme inefficiency and corruption of Pemex as two mayor explanations.
Historically, fuel prices have been subsidized by the government, sometimes providing consumers with values complete disengaged from international reality. Since the energy reform, monthly increases were set to eliminate the gap between the Mexican and the relevant external price of fuel. From 2018, private companies will be able to import gasoline and diesel into the country.
The reforms have been, and will continue to be, gradual, especially in the retailing sector. Non-Perex service stations will be legal from 2017, giving an entry to international petroleum retailers like Exxon, Shell or Chevron.
There are currently 10,800 gas stations in Mexico, which generate around 400,000 direct and indirect jobs. Almost 75% of the petroleum retailing market is in the hands of small and medium companies – they only have one or two stations. These small operators, who live on basic revenues from gas commercialization, are the ones who feel wearier of competing against the leading international petroleum companies.
On July the 15th, the Mexican government will announce the winners of the first private initiative contract to open up the sector. A country holding 14,000 million barrels of proven crude oil reservoirs with an opening market is bound to provide some excellent business potential.
As some experts have pointed out, Mexican gas stations as we know them are going to disappear. The liberalization of the fuel distributing and selling sector will test Mexican entrepreneurs to reinvent themselves, by modernizing and expanding, or watch how petroleum giants like Exxon take over their industry.
In some comments made to the media, José Ángel García Elizondo, president of the biggest Mexican service station owners guild, known as Onexpo Nacional, recognized the challenge and set the lines for the new business model. “The opening of the market will make us transform our current gas stations into real service stations”, said García Elizondo.
Reflecting modern service stations around the world, Mexican owners will be looking to, not only commercialize gasoline, gas or diesel, but to offer a wide range of services for the consumer, such as a variety of ways to pay, restaurants, car cleaning, restaurants, and others. “We are working to position Mexico as a worldwide leader in the sector of service stations”, said García Elizondo.
The renovation of many of the out-of-date gas stations in Mexico will be a huge business for equipment suppliers. Mexican gas station owners have until 2017 to modernize their stations before foreign giants with the latest technology and unlimited resources become competitors.
The challenge for retailers is to expand and establish themselves. FEMSA, who have been operating for years under the Pemex subsidiary Oxxo Gas and constitute the largest retailer in the country, will be able to operate under their own name, and is planning to open another 50 gas stations in the next five years. The other leading retailer, 7-Eleven, will be start by expanding the number of stations from 182 to 200.
Oxifuel is another retailer wanting to develop after the reform. This company, which now only holds 18 fuel stations, is looking to introduce ethanol at a mayor scale by opening 100 new stations in the next two years through franchise, reported El Financiero. Oxifuel believe there is a big market to be filled with ethanol fuel, which is currently 3 pesos per liter cheaper than gasoline. Pemex will stop controlling 50% of gas stations franchised by the state-owned company.
The appearance of many new petrol stations will generally result in a loss of revenues by small-time Mexican owners, who will find it harder to keep up with the today´s retailing standards. This could also be a chance for Mexican retailers to take their business to the next level, by modernizing and expanding their offer, as some experts point out.
For Adrien Lajaus, regulation and bureaucracy will constitute one of the biggest challenges. “Regulations will have to build on narrow existing foundations, as the scope of the CRE had been very limited”, explained Lajaus.
Pemex´role in the new energy industry is also coming under scrutiny. “As Pemex looks to stay relevant and participate with Western integrated oil majors in joint ventures, we expect a rapid ‘catch-up’ process will be required in terms of both technological modernization and management,” said a report by research firm Sustainalytics on the Mexican energy reform.
The big players of the petroleum industry are optimistic about the future Mexico holds as a business target. “We believe Mexico has the potential to become an important player in the energy market”, pointed out Shell director for Mexico, Alberto de la Fuente.
Other challenges which affect the development of the petrol industry are social instability, and the market insecurity – 80% of gas stations have suffered delays in distribution due to theft. In the days before the recent elections, thousand of Mexicans protested against the education reform being implemented by the government, and in support of the 43 students who disappeared in September last year, who are believed to be dead. In the states of Oaxaca and Chiapas, people sabotaged many gas stations, and restricted their access in an act of outrage.
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