Borderline - Mexico's Increasing Reliance on U.S. Motor Gasoline and Diesel

Mexico’s consumption of motor fuels is rising, its production of gasoline and diesel continues to fall, and U.S. refineries and midstream companies are racing to fill the widening gap. The export volumes are impressive: deliveries of finished motor gasoline from the U.S. to Mexico averaged 328 Mb/d in the third quarter of 2016, up 41% from the same period last year, and exports of low-sulfur diesel were up 29% to 194 Mb/d. And there’s good reason to believe that U.S.-to-Mexico volumes will keep growing. Today we look at recent trends in gasoline and diesel production and consumption south of the border, and at ongoing efforts to enable more U.S.-sourced gasoline and diesel to reach key Mexican markets by rail and pipeline.

Mexico is still among the world’s largest energy producers, but its output of crude oil, natural gas and natural gas liquids (NGLs) has been falling for several years, as has the country’s ability to meet its own, internal need for key fuels: natural gas, liquefied petroleum gas (LPG), gasoline and diesel among them. This has caused a lot of angst for the Mexican government and for Petróleos Mexicanos (Pemex), the state-owned energy company, to the point that the country’s entire energy sector is being reformed, starting with a constitutional amendment in December 2013 to allow more foreign and private sector investment, and more competition. We discussed the reform plan at length in With a Little Help From My Friends, our Drill Down Report on the big changes happening in U.S./Mexico energy interactions. Most relevant to our discussion today is the fact that Pemex until April 2016 was the only entity that could import gasoline and diesel to Mexico, and that until early 2017 independent/third-party importers still cannot use Pemex’s existing pipeline distribution network (more on this in a bit). In other words, the Mexican motor fuels market is gradually opening up.

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As we said in the report, Pemex has six operating refineries with a combined crude processing capacity of about 1.5 MMb/d: three coking refineries (Cadereyta, Madero and Minatitlán; total capacity 650 Mb/d) that can break down the higher levels of residual fuel oil fractions in Mexico’s heavy crude into lighter refined products, and three catalytic cracking refineries (Salamanca, Salina Cruz and Tula; total capacity 890 Mb/d). (See Complex Refining 101 for more on refinery types.) Due to operational and other problems, the volume of crude being processed at Pemex refineries has been falling off sharply, particularly in recent months. According to Sistema Informatión Energética (SIE, a part of the Mexican government’s Secretaría de Energía—or SENER––that provides energy statistics, similar to the U.S. Energy Information Administration, or EIA), the six refineries as a group processed an average of only 802 Mb/d of crude oil in October 2016 (a 26% decline in processed volumes since January 2016), which suggests Pemex’s refineries are operating at barely half their 1.5 MMb/d capacity. The problems aren’t just at Pemex’s catalytic cracking refineries. Processed volumes at the Cadereyta and Madero coking refineries fell 55% and 43%, respectively, during the January-through-October (2016) period (due in part to unplanned outages); processed volumes at Minatitlán, the third coking refinery, dropped 9%.

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