Hundreds of Mexican fuel buyers may be acquiring imported US fuels at discounts as high as 60pc thanks to a tax avoidance system using multiple rail lines and storage terminals, according to commercial documents seen by Argus.

An analysis of a database of more than 3,500 gasoline and diesel order invoices in November and December from a marketer shows that thousands of cargoes are being sold at significant discounts to wholesale prices posted by Mexico’s state-owned Pemex. The invoices seen by Argus had an average price per liter that was 54pc below Pemex’s wholesale average prices for gasoline and diesel for those same months.

Federal excise fuel taxes represent roughly 25pc of final retail fuel prices at recent levels, so avoiding those duties would allow a company to shave off a significant part of the wholesale price.

The invoices seen by Argus encompass more than 115mn liters (723,000 bl) of regular gasoline, premium gasoline and diesel that sold for close to Ps1.4bn ($70mn), or an average $2.30/USG. The roughly 11,850 b/d represented a 5pc share of the average 230,000 b/d of private-sector gasoline and diesel imports into Mexico in those two months. Both Pemex and private-sector companies imported an average of 767,000 b/d of gasoline and diesel in November and December.

Mexican distributor Energex said last month that rail lines operated by Kansas City Southern (KCS) were being used to move US diesel into Mexico that was labeled as other fuels, such as biofuels or base oils that are taxed at lower rates. Other fuel market participants in Mexico now say the problem is bigger than one rail operator or one terminal, as it also involves rails operated by Union Pacific (UP), BNSF and Ferromex.

Kansas City Southern Mexico (KCSM) said it was unaware of any such smuggling through its rail lines and terminals, although it “understands the seriousness of the situation,” and will cooperate with any further investigations.

Railroad BNSF declined to comment and Union Pacific did not respond to a request for comment.

Ricardo Sheffield, head of Mexico’s consumer protection agency (Profeco) praised retailers on 15 February for offering lower diesel prices, but warned that the agency will be “closely watching for any diesel that might be entering the country irregularly” and for tax evasion.

In some cases the diesel cargoes are selling for as much as 60pc below Pemex-posted prices, according to the data seen by Argus. The energy ministry (Sener) did not respond to a request for comment.

A press release circulating in early February that appeared to come from Mexico’s tax authority (SAT) warned fuel retailers that officials would increase inspections for tax evasion, but the SAT said that the release was forged.

See it, say it

Still, fuel transporters and the government should be well aware of the issue, several market participants said.

“They should have a fiduciary responsibility to know their customers and require shipment ordersand validate the customs formswith the energy ministry to ensure all volume that moves on their line into Mexico is being done legally,” said an executive at one company who asked not to be named.

Several of the companies listed in the database as having purchased fuels at what appear to be below-market rates are established firms. The company listed as purchasing diesel at a price 60pc below Pemex’s wholesale price holds verified commercialization and import permits from Mexico’s energy regulatory commission (CRE).

Within the database reviewed by Argus, diesel was sold for as little as Ps7.56/l ($1.42/USG) for a 30,600 l (8,000 USG) cargo. This is 56pc below Pemex’s diesel wholesale average price of Ps17.30/l ($3.25/USG) in November. The Ps231,835 total cost was paid upfront in cash.

Wholesale diesel delivered to Mexico’s east coast from the US Gulf coast averaged $1.16/USG excluding taxes in November, based on Argus‘ assessments. Including Ps5.6212/l ($1.12/USG) in fuel excise taxes, wholesale diesel prices inside Mexico should cost at least $2.28/USG, or 60pc above the lowest price in the database reviewed by Argus.

For gasoline purchases listed in the database, the lowest price was Ps11/l for a 27,000 l purchase inDecember, a month in which Pemex’s wholesale price for the fuel averaged Ps17.03/l.

Shipments listed in the database bought at unusually low prices arrived through key transloading rail terminals in the state of Nuevo Leon, including the Garcia terminal operated by Mexican company Titsa, Servicio Ferrovial Monterrey’s terminal in Escobedo and a third operated by Azimsa in San Nicolas.

Mexico’s retail fuel association (Onexpo) recently warned against fiscal huachicoleo, using a word that refers to the also rampant practice of physical fuel theft. The association warned the growing number of volumes that are not paying full taxes are hurting legitimate retailers, and could create safety and environmental threats if the product does not meet quality specifications.

Complaints of systematically underpriced fuel imports coincides with increased scrutiny by the US administration of commercial ties with Mexico in the context of the US-Mexico-Canada Agreement (USMCA).

It also comes as the Mexican government continues to roll back an opening to foreign investment across the energy chain. Foreign access to the Mexican fuel market — mostly benefiting US refiners, transporters and marketers — was a hallmark of Mexico’s 2014 energy reform package.

While President Andres Manuel Lopez Obrador’s administration has been steadily closing off foreign investment channels, the opening of the fuel sector has so far remained mostly intact.

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