Smuggling issues, now from north to south
Yet another conflict is brewing between Mexico and the US. A few weeks ago, the Mexican government seized a vessel containing millions of gallons of fuel, owned by Intanza, allegedly part of an illegal operation linked to members of the Cartel Jalisco Nueva Generacion (CJNG) organization. This change in strategy to tackle fuel smuggling into Mexico stemmed from a request by gas station companies, according to industry sources, part of the deal announced earlier this year to cap fuel prices.
An investigation by NGO Mexicanos contra la Corrupción y la Impunidad (Mexicans United Against Corruption and Impunity) found that there may be customs officers linked to Intanza. “Intanza’s shareholders are Ricardo Ayón Rodríguez and Ramiro Rocha Alvarado, who are also partners with Francisco Javier Antonio Martínez in Belure, a company that manufactures and imports electronic products,” according to the news story published this week. Francisco Javier Antonio Martínez is reported to be the director of the National Port System Administration in Tampico, Tamaulipas.
Mexico’s tax service has renewed its efforts against the so-called “huachicol fiscal”. It’s not clear what sort of impact this has had on public finances, but it is certainly significant. Tax authorities have estimated that illicit fuel sales account for up to 30% of Mexico’s 1.2 million barrels per day of gasoline and diesel demand. In the case of huachicol fiscal, its incentives were reduced when the Finance Ministry exempted fuel from taxes to curb prices; once the tax was reinstated, the incentive returned.
Onexpo, the largest gasoline station trade group, pushed for years to curb illegal fuel imports from the US to Mexico. These imports avoid taxes by being falsely declared as other kinds of oils (like cooking oil). The administration of former President Andrés Manuel López Obrador tried to curb this smuggling by seizing fuel storage terminals from private players during the first years of his administration, an action that was mostly seen as part of his plan to halt the progress made by Pemex’s competitors in gaining market share in fuel distribution.
President Sheinbaum seems to be modifying the strategy to curb these illegal imports. For example, her administration halted fuel imports from Texas by tank truck. The crackdown on fuel smuggling is disrupting illicit supply chains and boosting sales for compliant players operating through regulated imports, though not entirely without some collateral damage: US refiner Valero suffered a temporary suspension of its import permit early this month, as it wrongly got caught up in the investigations apparently due to illegal importers faking its invoices; it was reinstated a few days later. “Although this is all unfortunate and created significant supply disruption for our customers, it is part of an effort in Mexico to limit the import of illegal fuel,” Valero chief financial officer Gary Simmons said in the company’s latest earnings call held last week, looking at the glass half full.
Law enforcement activity took place in the US as well, as agents of the Federal Bureau of Investigation (FBI) arrested an affluent well-known family in Utah on charges of smuggling thousands of cargoes of crude from Mexico to the US. The couple, James Lael Jensen and Kelly Anne Jensen, along with their sons, were arrested inside a mansion valued at close to USD 10 million, while a company related to them, Arroyo Terminal, was seized in the city of Rio Hondo, Texas. The Jensen family allegedly used the storage facilities in Texas to refine the crude and then illegally resell the fuels back to Mexico. Former regulator and energy expert Francisco Barnes calculates that the 2,900 cargoes identified in the inquiry against the Jensen family could contain some 87 mn barrels of crude in total, a small number compared to Pemex’s annual production —over 620 mn in 2024— but an eye-popping figure for a supposedly family-owned company.
One idea (more of a hope, really) under the 2013-2014 Peña Nieto energy reform was that, thanks to competition, private-sector players would invest more in security systems and oversight of their fuel distribution as they could not afford to lose products like Pemex. Now, following the AMLO-Sheinbaum counter reform, it will all once again be in the hands of the government and Pemex. But at least much-needed action is being taken.
Mexico once again weighs on international oil firms’ earnings
In what is becoming a usual quarterly occurrence, international oil firms flagged out the impact on their results from low activity levels in Mexico:
- Weatherford expects its Mexican business to shrink by 30-50% this year because of reduced activity from state-owned company Pemex. “That is very, very significant. And so, we are not assuming a dramatic ramp-up in the second half from Mexico,” said Weatherford president and chief executive Girish Saligram during the company’s earnings call. “We have actually taken what we believe is a very prudent approach, and it is a conservative approach to Mexico.” Weatherford’s international revenue for the quarter stood at USD 1.08bn, down 3% from a year earlier, with Latin America revenue falling by 13%. The company expects weakness in the Mexican market to persist through at least the first half of 2025. “The biggest headwind we face is in Mexico, where activity levels are anticipated to drop significantly compared to the first half of 2024. While a rebound in the second half is possible, we are adopting a cautious and prudent approach regarding our capacity,” Saligram said.
- Halliburton does not expect a turnaround in Mexico anytime soon. Reduced activity in the country pushed Halliburton’s international profit down by 2% in the first quarter. Excluding Mexico, profit grew in the mid-single digits. The administration is working on a plan for the upstream sector following a steep activity decline over the past six months, but implementation could take time, Halliburton chief executive Jeff Miller said during this week’s earnings call. “I don’t see immediate recovery in Mexico, just as the new administration works through what all of this means,” Miller said. “I do expect they’ll find their footing at some point, but it’s too early to say when.”
- “Rig activity in Mexico declined by 52% year over year, now down by 72% from 2023 peak levels,” Baker Hughes chief executive Lorenzo Simonelli said during the first quarter earnings call. The company expects only a slight improvement in the second quarter, citing ongoing uncertainty around US trade policy, weak oil prices and stagnant activity in Mexico. “We expect a softer seasonal recovery in both international and US markets,” said Simonelli, pointing to execution of the subsea and surface pressure system backlog and lower near-term activity levels.
- SLB reported higher activity in parts of the Middle East, North Africa, Argentina and offshore US, along with strong growth in its data center and digital businesses in North America. However, those gains were more than offset by a larger-than-expected slowdown in Mexico, a slow start in Saudi Arabia and offshore Africa, and a steep decline in Russia.
In other energy news…
- President Sheinbaum appointed a close former aide, Juan Carlos Solís, as head of the newly created National Energy Commission (CNE), according to multiple sources; the government hasn’t made an official announcement yet. The new commission will assume most of the responsibilities of the Energy Regulatory Commission, which is phasing out. Under the new legal framework, Sheinbaum can directly appoint the regulator’s first head. Future appointments will require congressional ratification. Solís is a telecommunications engineer from UNAM, and holds engineering master’s and PhD degrees, mentored by Sheinbaum and Pemex chief executive Víctor Rodríguez. He has been with the President since she was Tlalpan borough chief and later Mexico City’s mayor.
- Mexico’s new energy reform and Pemex’s turnaround plans may fall short of improving the state-owned company’s financial outlook, putting pressure on the government to provide additional support, rating agency Fitch said. It reaffirmed its “stable” outlook on Mexico’s ‘BBB-‘ rating, citing a prudent macroeconomic framework, strong external finances and a large, diversified economy. But the rating remains constrained by “muted long-term growth, weak governance, fiscal challenges from a low revenue base and rigid budget, and contingent liabilities from Pemex.” The plans announced by President Sheinbaum to improve Pemex’s financial health are unlikely to result in a major turnaround, as they lack significant changes in operational strategy, Fitch said. “This could necessitate further support beyond the USD 7bn included in the 2024 and 2025 budgets and assumed in our baseline for coming years,” said the agency. “The sovereign is exploring ways to support Pemex more effectively, without increasing the amount, to improve its liquidity and financing options.”
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