The situation as it stands in Mexico today is that PEMEX refineries are unable to return to the levels of efficiency and production they saw 10 years ago when they averaged 303,400 million barrels per day of refined hydrocarbons.

During 2014, PEMEX about 35% of the distillation capacity of Mexico went unused, mainly due to lack of investment in facilities. The underinvestment was evidenced through poor maintenance, persistent fails, and the large number of unscheduled shutdowns. While the global refining industry requires large investments for narrow profit margins, in the case of the Mexican oil company the capital demand needed is 40 billion up until 2020 in order to maximize operations, a level unlikely for a company that is currently experiencing large losses due, inter alia, to the collapse of production and consequently crude exports. Added to this is the current precipitous decline in the price of Mexican mixed crude oil.

The main challenge for PEMEX Refining then is to reverse the financial losses generated by its activity, which at the end of 2013 exceeded 15 million 123 thousand pesos, in other words, 72% of the losses of the national oil company in general terms. PEMEX makes a considerable loss on processed barrel, and at the same time cannot achieve its goal without regaining refined production, which has decreased in the last five years by more than 12%. Part of this decline has to do with the fact that the six Mexican refineries in existence are not designed to distill heavy crudes, which are mainly produced by the parastatal.

The insufficient supply of Mexican refined products to the market, mainly gasoline and diesel, demand for which continues to increase at a rate of 2.6% per year, has resulted in heavy import reliance from the US, which currently covers more than 40% of demand. In figures this breaks down as follows: for a consumption of 803.700 million barrels of gasoline and 400,500 of diesel, Mexico imports from its neighboring country 395.600 barrels of gasoline and 132,800 of diesel. Because of this, one of the main causes of losses in refining had to do with the pricing, because so far no import costs were recognized and high subsidies were maintained, meaning that the retail prices of gasoline and diesel did not reflect the actual costs incurred by Pemex.

To tackle this situation, PEMEX intends to purchase up to 100,000 barrels per day (bpd) from Mexico’s northerly neighbor, as US light crude and condensate could be mixed with domestic heavy oil to improve the process in Mexican refineries. Thereby, the use of the installed capacity of the National Refining System, specifically in Salamanca, Salina Cruz, and Tula refineries could be substantially developed. In exchange for receiving the light hydrocarbon, Pemex would commit to export heavy crudes to the US for both countries to seize the configuration of its refineries. This would not represent an additional commitment of 803,000 barrels of Mexican crude oil that were already exported on average to the US last year, according to the Mexican oil company. Both the Secretary of Commerce of the United States, Penny Pritzker, and the Mexican ambassador to the US, Eduardo Medina Mora, has confirmed that negotiations between the two countries for the export of US light crude to Mexico are “on track”.

Until now, PEMEX had refused to import crude, preferring to remain self-sufficient, but its oil, increasingly heavy and difficult to process, has reduced its refining capacity. Moreover, the oil producers in the US are seeking new ways to sell the huge amount of shale oil produced. Export to a natural market like Mexico seems a good choice, provided such exports are authorized. Since the 1970, US law has prohibited the export of crude oil, although there are exceptions to this law, such as Canada, which like Mexico is among the top three suppliers of crude to the US. Therefore, under NAFTA, there seems to be no real reason for this exchange to not to occur. So perhaps such an agreement would be no bad thing, enabling the refining capacity of PEMEX to be increased while at the same time leveraging exports of heavy crude.


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