Mexico to Delay Clean Diesel Rule as Fuel is Scarce: Sources

Mexico's government, dealing with fuel shortages stemming from a crackdown on theft, is expected to postpone a new rule requiring pumping stations to sell cleaner diesel, according to sources with knowledge of the decision and documents from the regulator.

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The measure has lost traction mainly due to lack of infrastructure, but also because of fears that it would exacerbate fuel shortages that emerged following President Andres Manuel Lopez Obrador's orders to shut key fuel pipelines to combat rampant theft, according to two of the sources.

Lopez Obrador's crackdown has led to long lines at stations as deliveries are largely being made by truck rather than through pipelines, as fuel theft is endemic in Mexico.

Mexico's new rule will require ultra-low sulfur diesel, or ULSD, to be sold in the coming months. But at least two of state-run Pemex's refineries have not been updated to produce diesel with less sulfur content, so the country is expected to rely almost completely on imports from the United States.

Mexico last year used 390,000 barrels per day (bpd) of diesel, 28 percent of total fuel consumption, mostly imported from the United States, according to the Energy ministry.

Mexico's Energy Regulation Commission (CRE) on Dec. 28 suspended implementation of the ULSD rule to allow six more months to ensure an adequate supply of ULSD in portions of nine states in the country's western and central regions, where diesel consumption is heavy.

The rest of the country will be required to start ULSD sales by March 31 after producers, transporters and distributors start switching to the new fuel in the coming weeks, according to the resolution.

But the rule has not yet been made official, creating doubts on the date it will take effect. A source at the regulator said plans call for it to be published in the coming days.

The CRE document said "the Tula and Salamanca refineries do not have capacity for producing ULSD, and infrastructure for transportation and storage is limited."

Mexico currently allows up to 500 parts per million of sulfur in motor diesel. The new rule would cut that to 15 parts per million, similar to standards in the United States, which reduces overall carbon emissions.

Shippers worldwide are gearing up for similar changes to begin in 2020 that would limit the kind of fuel tankers can operate on to low-sulfur fuels.

Mexico's refineries have suffered from underinvestment and poor maintenance in recent years. Pemex's diesel production has dropped to 118,000 bpd in 2018 from 313,400 bpd in 2013, according to company data.

Traders that were preparing for growing ULSD imports from the United States, the continent's largest producer of distillates, are now waiting for the document to be released to better plan purchase volumes, two sources said.

No ULSD imports entered through Mexico's major oil ports in early January, according to Refinitiv Eikon data. Last year through October, the United States sent about 294,000 bpd of low-sulfur distillate fuels to Mexico, according to U.S. Energy Department data.

"Pemex does not have capacity to produce the ULSD the country would demand, and it also lacks capacity to import all the volume that will be consumed once the new rule starts," one of the traders said.