This article first appeared in Tank Storage Magazine.
The storage and transport games started long ago, back in 2013, when several investors saw the potential demand for refined imported products from Tuxpan Veracruz.
According to the Oil Prospective 2015-2029 report, during this period oil national production will increase by 24.1%, while demand will also increase by 35.9%. This means that due to a lack of Mexican refining capacity, at least for the next 12 years, Mexico will continue to increase its imports of oil products. So far, imports have already increased by 25% from 2014 to 2016, and the US has played an important role, providing 83% of imports. In order to support the new demand, investments in infrastructure are now being made. Currently, there are three important pipeline investments for oil products storage and transportation.
The first is in Tuxpan, Veracruz, one of the most important ports, receiving 36% of the oil products imports in central Mexico. There, Sierra Oil & Gas, TransCanada and Grupo TMM are building an $800 million project that includes a marine terminal near Tuxpan, a 265 km pipeline with a capacity of approximately 100 thousand barrels per day from Tuxpan to central Mexico, and an inland storage and distribution hub in central Mexico with storage capacity of 1.2 million barrels.
The second investment is Monterra Energy and KKR’s $350 million project that includes a 270 km pipeline with a capacity of 100 thousand barrels per day from the port of Tuxpan to Tula, Hidalgo and a storage capacity of 1.2 million barrels. And thirdly, Invex Infraestructura 4 (INI4) is building a $350 million project that includes an approximately 265 km pipeline with a capacity of 165 thousand barrels per day from Tuxpan to Tula, Hidalgo and a storage capacity of 525 thousand barrels. Total supply, assuming completion of these three projects, will be 365 thousand barrels per day, with a total storage capacity of 2.9 million barrels.
Sierra Oil & Gas, TransCanada and Grupo TMM expect to begin marine terminal operations this year and the pipeline, inland storage and distribution hub is forecast to start operations before the end of 2019. The Monterra project is expected to start operations in the third quarter of 2018 and the planned date for the Invex project to start operations is at the end of the first quarter of 2018.
On the face of it, the planned projects would give retailers of refined products enough capacity in 2020. However it is very unlikely that all these new projects will survive.
In fact, according to PA Consulting, maybe only one will survive. It seems like a hunger game scenario, where there might be only room for one, where the winner will get the profits and the positioning. This winner will be the one dealing best with three factors: storage capacity fulfillment, competitive tariffs and project development.
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There are two general strategies for capacity fulfillment of storage infrastructure. The first strategy includes internal demand from the project’s partner potential requirements or from an agreement with a major buyer or shipper under a take-or-pay agreement. In this type of agreement the buyer’s obligation to pay is unconditional whether or not the services are delivered or taken. Such arrangements are used to protect the buyers from price increases and the sellers from price decreases. The main benefit from this strategy is to ensure demand in the long run by offering lower rates in return and reducing the risk profile of the project.
The second strategy is capturing external demand through launching an open season or selling storage capacity in the spot market. The implications of this strategy are greater tariffs, yet there is uncertainty regarding demand for the infrastructure capacity, and uncertainty that will increase the risk of the project.
Monterra Energy is currently working on a mixed strategy. They will leverage the project with the Mexican petrol retail consortium
G500 and a global raw material distributor. For the rest of their available storage capacity, they will launch an open season.
Invex is planning to operate as a fully open season system called Tajin, aiming at both local and international markets specifically from refineries in the Gulf of Mexico area and Europe and Caribbean markets.
There are four main components related to setting storage and transportation tariffs: operational expenditure (OPEX), capital expenditure (CAPEX) and return on capital employed (ROCE) and volume. Every tariff setting methodology considers all four variables in order to remain competitive. Since there is an almost linear relationship between CAPEX and installed capacity, and assuming all companies are expected to have similar OPEX and control over it, access to capital becomes a sensitive variable together with its cost and the associated risk.
Each company brings a different combination of capital and risk bearing capacity, capabilities and complementary assets; the consortia of different firms often is superior to the set that any single firm can bring. The differentiation in the industry will come not only from the assets that the firm owns but also from the integrative capabilities that the firm develops in order to solve key challenges. For each of these three main investments, there are unique project financial and stakeholder arrangements.
Monterra Energy has an equity commitment from KKR, a partnership that significantly increases the access to capital for the project, and provides leverage from key relationships and insight into the country’s complex regulatory and political framework.
Invex (INI4), being a subsidiary company of INVEX Grupo Infraestructura, has access to risk capital and leverages project management experience of the group in similar infrastructure projects developed previously.
TransCanada, Sierra Oil & Gas and Grupo TMM bring together leaders in their own fields. TransCanada provides local and international experience as the leader in the development and operation of North America energy infrastructure and the recently awarded Tula-Tuxpan natural gas pipeline project, complementing TransCanada’s network of Mexico natural gas pipelines. Sierra Oil & Gas is the first independent Mexican oil and gas company to win the first two exploration and production auction blocks awarded, and Grupo TMM provides experience in handling and sorting liquids, maritime transportation, and port management and logistics.
The start date of storage tank and pipeline operations depends mainly on the construction lead times and the approval of all governmental permits. So, even when there are estimated start dates, firms still have to overcome these time-consuming efforts. The right-of-way approvals to implement the projects related to the construction, operation and maintenance, as well as obtaining the land use permit and wharfage, are some of the critical steps that must be achieved before launching operations.
In Mexico, all permits needed to develop infrastructure can be the biggest trap. The right-of-way approvals directly affects the project’s development and construction phases, and could delay estimated start dates or the entire project itself.
The land use permit and modifications of the natural environment regulations could have exactly the same impact to the project. In Mexico, both subjects are critical because of its complex regulatory and legal framework consisting of around 15 different laws, regulations and articles, such as; laws for sustainable development, protection of the environment and national water, conservation of cultural heritage sites, regulatory energy commission articles, federal penal code, and even specific articles of the Mexican Constitution, among others.
Due to the time required to complete the formalities and obtain the permits, as well as to negotiate with the stakeholders, several actions must be carried out at the same time. Therefore, not having the necessary permits on time also causes the firm to incur extra costs due to payments that were already due for items or services that are not being used. In this context, Monterra has shown a competitive advantage due to an existing right-of-way that it previously had to develop its storage project.
Wharfage is another crucial element to take into account because it is limited. Even if all the permits are obtained, the infrastructure is built and the agreements are made with the stakeholders, if the firm wants to launch its operations, it must make sure that it designed and planned properly for available dock capacity to unload the refined oil.
Storage capacity is key for the three supply projects of the Mexican central region and key for the whole refined products supply chain. Sierra Oil & Gas and Invex are facing the same development challenges regarding its construction phases and only Monterra might be a step ahead regarding permits to start operations.
All three projects seem to have a solid financial and risk capital backbone, but different commercial strategies to capture demand. If fuel demand increase occurs as estimated and these three projects are completed as planned, the opportunity for strategic – and competitive – storage facilities business in the Central Mexico region will be realised. Happy storage games! And may the odds be ever in their favour.
Guillermo Bilbao, Alvaro Gutierrez, Hector Angulo, and Nora Hernandez are energy experts at PA Consulting Group.
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