The path of the so-called historical energy reform implemented since 2016 in Mexico has taken an unexpected (and for many, an unfavorable) course correction over the last two years. The new administration has openly stated its plans to restore Pemex’s prevalence in the domestic retail market, which in some respect means reducing, or supposedly disincentivizing, participation of private companies in several segments of the energy supply chain.
Parallel to these events, Pemex is offering discounts to wholesalers and retail owners in an attempt to convince them to abandon other brands and return to Pemex, either for product trading or for actual stations branding.
In addition to Pemex working to regain the upper hand in the retail market, there are other important ways that Mexico will impact the overall US market, particularly the USGC.
1) Refining Capacity Available for the USGC
US authorities recently approved Pemex’s purchase of the remaining 50% of the Deer Park refinery from Shell, which will give Pemex total control of the refinery by the end of the year. Although details have not been released, some unconfirmed news related to the purchase allege that the refinery will continue operations for the next two years under the direct participation of Shell’s personnel to assure continuity, while Pemex completes the organizational transition.
Even though Pemex’s participation in the US refining system is only limited to this asset, the impact will be felt in the USGC, as in theory, the totality of the product slate will have as primary destination the Mexican market, which imports significant volumes of gasoline, diesel, jet fuel, LPG, among others.
2) Exports of Heavy Crude Oil
As part of President Lopez Obrador’s mid-term strategy, Pemex is aiming to avoid crude exports as of 2023. If the strategy is implemented, several USGC refiners will need to seek alternative sources of crude oil, most likely Canadian grades.
The decision to stop crude exports aligns with the administration’s pledge to upgrade the domestic refineries, and by doing so, increase utilization rates as well, which over the last few years have hovered in the range of 29% to 40% nationwide. Additionally, the government is considering the successful completion of the new Dos Bocas Refinery during this year, which will include 340 mb/d of CDU capacity and deep conversion capabilities. The government has announced completion of this refinery by mid-2022 and commencement of operations by 2023. Together, the upgrading of the existing domestic refineries and commissioning of the new Dos Bocas refinery, the government claims will eliminate spare volumes of crude oil for exports.
Until Mexico can increase the utilization of its domestic refineries significantly and/or commissions the Dos Bocas refinery, Stratas Advisors thinks it is unlikely that Mexico will curb its exports of crude oil because of the importance of the associated revenue. However, given that the current government is linking the end of crude exports to defending the nation’s natural resources, it is probable that Mexico will stop exports of crude oil, once it is operationally and commercially feasible. Therefore, USGC refineries currently importing heavy crude oil from Mexico need to make plans for alternative sources of supply.
At its peak, Mexico exported 1.8 million b/d of crude to the US (between 2004-2006), with the majority of the volume going to deep-conversion USGC refineries (around 65%-70% of this total was Maya crude). By 2010, crude exports started declining and after a slight uptick in 2018 (exports reaching 900 mb/d), Mexican crude exports continued declining, and over the last few months have averaged 620 mb/d.
Consequently, in terms of determining the price of heavy crude oils, Stratas Advisors expects that the importance of the Maya crude price signal ultimately will be less relevant. Analysts and others that are tracking the status of the WTI-Maya or Brent-Maya to gauge the strength of complex refining margins, will need to get used to monitoring the WTI-WCS and Brent-WCS differentials.
3) Lower Refined Product Imports…Maybe
As we explained earlier, the completion of the new Dos Bocas refinery, the revamping of domestic refineries, and the acquisition of the Shell Deer Park refinery are components of the master plan by the Mexican government that also includes the elimination of the imports of refined products.
Eventually, Mexico could significantly reduce the level of product imports from the US (which currently include 460 mb/d of gasoline and 285 mb/d of diesel), if the bulk of product volumes from the Deer Park refinery are exported to Mexico, and once the new Dos Bocas refinery is fully operational. Taken together, Mexico would have access to an additional 252 mb/d of gasoline and 250 mb/d of diesel. In this scenario Mexico would need to import only 208 mb/d of gasoline, and 35 mb/d of diesel (while the requirement for jet fuel imports would be completely covered).
With consideration of all the relevant factors, there are uncertainties associated with the evolution of the Mexican downstream sector. Regardless of how these uncertainties are resolved, the future changes will significantly impact companies that have been exporting refined products into Mexico, including: ExxonMobil, Shell, Citgo, Valero, Marathon, Koch Supply & Trading.
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