Mexican Biofuels Seen Meeting 3% Blending Target In 2012

"I think it can be done," says Raul Felix, climate change and renewable energy practice coordinator at Baker & McKenzie in Mexico City. "However, Pemex is going to have to pay much more to make [supply] projects feasible."

Indeed, many say Pemex, the state-owned oil giant, has failed to meet much of its promise to raise bioethanol and biodiesel prices for producers, something they view as a make-or-break factor for the industry's development.

"Prices are below international levels so people have postponed many manufacturing projects until they come up," Felix says, adding that selling petrol to other companies would be unviable as Pemex is a monopoly with the largest filling infrastructure in the Aztec country.

Julio Campos, a consultant at Frost & Sullivan's renewable energy team in Mexico City, agrees.

"There are many companies with the willingness and money to build refineries but they are unlikely to do anything until Pemex says 'okay, we are going to start blending now,'" he notes. "They keep saying they are going to do it but they don't say when -- so everyone's left guessing."

Despite Pemex's lack of clarity, Campos says the industry is about to hit an inflexion point as oil prices continue to rise, making Mexican imports pricier.

"Our gasoline demand is rising 3.7% a year but we don't produce that much oil anymore. In fact, our oil production has fallen 30% from 2004 to 2010 so we are importing much more gasoline from the U.S. and Japan and it's becoming very expensive, Campos notes. "The government is going to be forced to develop biofuels to lower theses costs.

Campos expects the state will give Pemex the green light to begin blending ethanol with gasoline later this year, opening up the market for ethanol blends ranging from 5%-20% in gas stations.

This initiative will likely be limited to Mexico's three largest cities, the capital Mexico City, Monterrey and Guadalajara. The roll out was already planned for 2010 when the 3.7% target was supposed to be met but observers again blamed Pemex and the government for acting too slowly to reach these goals.

Some blending has been achieved, however, with Pemex now mixing some ethanol with gasoline in the Northern part of the country. Still, these blends are part of a pilot test rather than a full-fledged marketing initiative. According to Campos, currently some 5% of the nation's gasoline is blended with bioethanol.

Biodiesel just Behind

Regarding biodiesel, experts said the market has been developing more rapidly than ethanol in recent months. However, uptake is limited to government and corporate fleets that use the fuel to promote their green initiatives.

Campos says the Peribus urban bus system in Mexico City is using 20% biodiesel blends while other public transport companies are employing similar amounts.

While there is no specific blending target for biodiesel, observers expect it will reach something similar to bioethanol in two years.

Already, a slew of companies are working to produce the fuel from animal fats, jatropha (which a major project underway in Chiapas), vegetable oils and nopal (an edible Mexican plant). For bioethanol, several projects are also being pursued to develop fields of agave, which is used to make Tequila, as well as maize and soy.

So far, most of Mexico's biodiesel production has been earmarked for export to Europe while bioethanol output is being sold to the U.S.

Still, Felix is hopeful the government will begin supporting the industry's local development this year when Mexico's economy is expected to recover from a three-year recession.

"We need biofuels for our internal demand and the government knows this," Felix says. "We just got out of the worst recession in three years and we are now starting to grow so the government will have more financing resources now."

Felix says Pemex's rejection to industry pleas for higher prices stems from the government's own budgetary constrictions. The oil giant has stated it can't develop the business without a higher debt [financing] ceiling or more support from the state.

Moreover, observers say the state's biofuels program has also favored wind, solar and hydraulic power development instead of biofuels, which they see as a market that can develop with fewer subsidies than the others. A campaign to increase energy efficiency has also been on the government's mind.

"The money has not come in [for biofuels] because of other political and budgetary priorities but the Energy Secretary has acknowledged this is now becoming more important to kickstart the industry's development," Felix adds.