Crude Summit: New refineries key to Mexico supply

Mexico, the chief US destination for booming gasoline exports, expects to slash its demand over the next five years under a plan that assumes massive refining investment.

Mexican refined product demand will increase by 1pc a year through 2020, including annual increases of 1.3pc for gasoline, 4.4pc in jet fuel and 4.2pc for diesel, PMI executive vice president of refined and petrochemical products Margarita Perez said today at the Argus Americas Crude Summit in Houston.

PMI supplies 50pc of Mexico's gasoline demand through import trade from sources like the US, which through the first 10 months of last year sent the country an average 220,000 b/d of finished gasoline — almost half of all US exports of the fuel.

The relationship was a reminder at a conference focused on new crude arbitrage opportunities that the US has for five years already sent fruits of its shale boom abroad. Total US product exports have increased by almost half since 2011, according to the Energy Information Administration. Refiners such as Marathon Petroleum, Phillips 66 and Valero have invested to add export capacity from their US Gulf coast refinery docks.

But Mexico would slash its imported gasoline demand by 8.9pc a year under a plan to heavily invest in Pemex's six refineries and build three more, Perez said. Whether the country can follow through on the plan and cut US imports will depend on its success financing the upgrades.

Laws opening up Mexico's energy sector to private investment began reshaping Pemex in 2014. Pemex plans to use sales and lease back agreements with the private sector as well as an investment vehicle similar to US master limited partnerships (MLP) called a Fibra E to support projects upgrading Mexico's low-sulfur gasoline and diesel production.

Mexican product demand had fallen by 0.9pc a year between 2011 and 2015. But fuel production had fallen by 2.1pc a year over the same period because of its inefficient refining system.

"Right now, our refineries are low efficiency and the products are not enough to cover clean product demand," Perez said.

Pemex had suspended plans to upgrade its refineries after plunging oil prices led the Mexican government to slash its 2015 budget by $4.1bn. But the company needs to upgrade the facilities to compete as reforms dismantle its long-standing upstream and downstream monopolies, and laid out the new financing options last month.

Mexican downstream plans could influence US Gulf coast refining investments. Refiners may need to boost octane production to meet Mexican demand, which last summer contributed to tight supplies of higher-octane fuel. Perez said she did not know whether the new refining capacity was required to be built in Mexico.

Changes to Mexican midstream ownership underway at the same time could create new supply opportunities for foreign refiners if Mexican facilities do not catch up. Imports currently do not penetrate into major city markets such as Mexico City or Monterrey. And investments could include a cross-country pipeline cutting costs for US Gulf coast refiners to send products to the Pacific.