August 09, 2017

Mexico to See First Commercial-Scale Blending of Fuel Ethanol

Stratas Advisors

This excerpt is from a report that is available to subscribers of Stratas Advisors’ Global Biofuels AssessmentNorth America, and  Latin America services.

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According to Mexican news reports, a number of independent Mexican retailers are importing ethanol from the US to blend with gasoline starting in August 2017.  About 300 retailers in the states of Jalisco, Colima, Michoacan, and Nayarit have signed an agreement through Innova Petromex with Valero to import US ethanol.  Innova Petromex is an association whose goal is to import fuels at competitive prices for its members.

The decision to import ethanol follows the Regulatory Energy Commission’s (Comision Reguladora de Energia - CRE) June 26, 2017 decision to modify its gasoline specifications to allow ethanol blends up to 10 vol%.  The regulation maintains the ban on using ethanol-blended gasoline in three metropolitan areas - Mexico City, Monterrey, and Guadalajara, the latter being Jalisco’s state capital. The four importing states, excluding Guadalajara, made up around 9% of Mexico’s total gasoline demand in 2016.

Assuming that all four states, with the exclusion of Guadalajara per the gasoline specification, were to blend ethanol for the rest of 2017 (September through December) at E10, they would need roughly 2-3 mb/d (thousand barrels per day), or around 40 million gallons, of ethanol.

Source: Stratas Advisors, Mexican Secretary of Energy, August 2017

Though small, this jump in demand would kick start Mexico’s ethanol market, which has the potential to consume around 66 mb/d (1 billion gallons) under an E10 regime—excluding the three banned metropolitan areas.

In addition to the four states already beginning to import fuel ethanol, Stratas Advisors estimates that three additional states in northeastern Mexico with significant logistics infrastructure also have the potential to incorporate ethanol economically into their gasoline supplies (Pemex is adapting storage tanks in at least two of these states for use with ethanol).  The combined potential ethanol demand under E10 blending in these states plus the four already importing ethanol is close to 20 mb/d (290 million gallons).

Source: Stratas Advisors, Mexican Secretary of Energy, August 2017

Ethanol consumption growth in Mexico faces two primary obstacles.  The first is the question of Pemex’s use of ethanol within its gasoline.  Although the Mexican state-owned energy company has contracts to buy and blend small volumes of ethanol and is in the process of upgrading its storage and dispatch terminals in Veracruz and Perote to handle anhydrous ethanol, MTBE remains its oxygenate of choice due to its low cost.  Given Pemex’s dominance of the retail market (where it makes up around 91% of all service stations), significant ethanol penetration into the country will require distribution through at least some portion of the NOC’s retail sites.  In the meantime, independent retailers may drive ethanol demand in Mexico as the retail sector’s liberalization is completed in all states by the end of 2017.

In addition, the lack of domestic production would need to be remedied if the ethanol market is to help local producers as the government claims.  As things currently stand, the use of ethanol in Mexico will benefit primarily US producers in the short- to medium-term, as Mexico’s local industry remains focused on beverage and industrial ethanol production, and only limited blending/storage infrastructure is available.  Local sources report that the retailers currently importing ethanol are negotiating with local tequila plants to help them handle, store, and denature the imported product.

Stratas Advisors estimates that fuel ethanol demand in Mexico for the balance of 2017 will likely be less than 20 million gallons, assuming only partial E10 penetration in the four states currently importing.  Total fuel ethanol demand in Mexico has the potential to see rapid and significant growth, however, if these states continue to blend ethanol into 2018, and especially if additional areas of the country join them in adopting the fuel.

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