We Take Care of Our Own, Part 2 - Pemex's Struggles Bode Well for U.S. Refined Product Exports

U.S. exports of motor gasoline and diesel to Mexico increased steadily from 2013 through 2018 as demand for refined products south of the border increased and throughput at Pemex’s six older, investment-starved refineries declined. U.S.-to-Mexico shipments of gasoline and diesel sagged in 2019, though, as Pemex started to implement a major refinery rebuilding program, and fell further in the spring of 2020 as the social and economic effects of COVID kicked in and Mexican demand for motor fuels plummeted. So what’s ahead for U.S. refined product exports as Mexican demand gradually rebounds later this year and in 2021? As we discuss today, that will largely depend on the Mexican government’s determination to have its debt-laden energy company produce gasoline and diesel at a loss and proceed with expensive refinery projects.

It was clear by the middle years of the 2010s that Mexico was becoming an even bigger buyer of U.S.-sourced motor fuels. In 2013, U.S. exports of gasoline and diesel averaged 184 Mb/d and 115 Mb/d respectively, according to the Energy Information Administration (EIA). By 2018, those volumes had increased to 511 Mb/d for gasoline and 288 Mb/d for diesel — gains of 178% and 150%, respectively. As we discussed a couple of years ago in Into the Void, this growth in U.S. refined product exports to Mexico filled a supply vacuum that had been created by falling production of refined products at Pemex’s aging refineries. Then, last year, in Slow Down, we said that U.S. export growth momentum had waned, primarily due to logistical challenges within Mexico; exports of U.S.-sourced gasoline to Mexico fell 8% to 472 Mb/d in 2019, and exports of diesel dipped by 1 Mb/d to 287 Mb/d.

Also last year, Mexico’s then-new president, Andrés Manuel López Obrador — typically referred to as AMLO — announced that he would make the rejuvenation of Pemex production and refining sectors a top priority. Among other things, AMLO set a goal of increasing the energy company’s refinery utilization rate to 75% by 2023 and committed to building a new $8 billion, 340-Mb/d refinery in Dos Bocas in Mexico’s Tabasco state, again by 2023. Running at 90% of rated capacity is a routine thing among most refineries in the U.S. –– at least it was until COVID-related demand destruction this spring sent U.S. refinery utilization rates tumbling to less than 70%. In Mexico, though, Pemex’s set of six refineries, with a combined capacity of 1.6 MMb/d, often operate at a combined capacity of less that 40%. As illustrated by the sum of the colored layers in Figure 1, the combined average monthly crude oil throughputs at the six refineries since January 2018 have bounced around between 464 Mb/d and 767 Mb/d, or 29% and 47% of what the refineries were designed to handle (dashed black line), according to Mexico’s Secretaría de Energía (SENER). Most important, there’s no clear trend toward improved utilization rates.