Stratas Advisors

Mexico’s President Andrés Manuel López Obrador took office on Dec. 1 for a six-year term. President Obrador made energy reform and energy independence keystone issues of his campaign. Almost immediately after taking office, President Obrador launched a national initiative to combat widespread fuel theft.

The public theft costs Mexico’s national oil company, Pemex, $3 billion annually. Pemex reported more than 12,500 taps on its fuel pipeline network through the first ten months of 2018. Thieves steal the equivalent of about one-fifth of national fuel consumption or 150 Mbbl/d, and then resell most of these volumes to gas stations.

President Obrador directed Pemex to close the six main gasoline and diesel pipelines across the country in an effort to prevent widespread theft of gasoline and diesel. Originally a radical plan to fight corruption, the clampdown has now become a battle to avert economic turmoil.

The president’s attempts to thwart fuel thieves as they have been draining the pipelines have created a widespread fuel shortage. The government shifted the transportation of products from pipelines to tankers and trucks, while it carries out an inspection program to find and eliminate illegal pipelines and extraction points. Despite best efforts by marketers, trucks and tankers are not able to keep pace with the delivery volumes of a national pipeline network and thus significant fuel shortages have appeared.

Not only is the effort to mitigate fuel theft leading to fuel shortages, it is delaying implementation of the recently passed law requiring fuel stations to convert to only selling ultra-low sulfur diesel (ULSD). The Energy Regulation Commission (ERC) in Mexico was forced to postpone the ULSD rule to provide six extra months to secure an adequate supply of ULSD in nine states where diesel consumption account for 70% of the total demand.

According to the Mexican Energy Ministry, last year diesel consumption of 390 Mbbl/d was about 30% of total fuel consumption. The majority of these volumes were imported from the U.S. According to U.S. Energy Information Administration data, Mexico imported an average of 297 Mbbl/d of diesel from the U.S. in 2018.  This year, imports will be even higher as two of Mexico’s state-run refineries are undergoing modernization to increase their ULSD yield.

Assuming the modernization efforts are successful, ULSD imports will likely still need to increase. We expect that the shift from high sulfur distillate will increase ULSD demand by 170 Mbbl/d. As Pemex's ULSD production is only 15 Mbbl/d, the national refining sector has no choice but to increase imports even if the two small modernization efforts underway are successful.

The future success of Mexico’s oil industry is dependent on leadership’s commitment to fighting fuel theft. At a cost of $3 billion annually, Pemex cannot afford to continue ignoring rampant fuel theft. However, public support for these efforts is tenuous at best with many citizens viewing the country’s oil and gas as a natural right. Higher fuel prices, or limited access to fuels is typically politically unacceptable in countries where the government owns the resource. By enacting this initiative at the start of his term, President Obrador at least doesn’t need to worry about potential impacts on his reelection.

At the same time, even if fuel theft is completely eliminated Pemex needs to address the impact of decades of underinvestment in domestic refining capacity. Effectively combating fuel theft will return significant revenues to Pemex that can then be reinvested in modernizing its operations. There is a risk, however, that instead of reinvesting the revenues, cash is diverted to other government social programs in an attempt to bolster support for President Obrador and his party. This would not be received well by international investors and would significantly hinder future growth.