Just What I Needed: Refined Product Pipelines Secure U.S. Supplies As Mexican Refinery Upgrades Begin

Mexican production of gasoline, diesel and jet fuel continues to fall and Mexico’s imports of these refined petroleum products from the U.S. are rising fast to keep pace with increasing demand. Longer term upgrade projects to increase Mexican refinery transport fuel are finally underway. But before refinery upgrades make a dent in imports, two ambitious refined-products pipeline/terminals projects will make it easier and more efficient to move large volumes of gasoline, diesel and jet fuel from Texas refineries into Mexico.  Today, we update our coverage of fast-moving developments in Mexico-U.S. hydrocarbon trading.

In the past few months we’ve talked a lot about Mexico’s energy sector, particularly it’s evolving relationship with the U.S. regarding oil, natural gas, natural gas liquids (NGLs) and refined petroleum products. In several blogs—including The Gas All Went to Mexico and As We Send Gas Through the Streets of Laredo—we discussed Mexico’s growing dependence on U.S.-sourced natural gas, which is fueling more and more of the country’s power plants and industries. We also considered all the gas pipelines being built to move that gas south. In our Enciende Mi Fuego (Light My Fire) series, we described Mexico’s need for increasing amounts of liquefied petroleum gas (LPG, e.g., propane/butane) from the U.S., and again we looked at the pipelines being installed to move LPG to Mexican consumers. And then, in our With a Little Help From My Friends series and Drill Down report, we looked at the big picture, namely the growing energy interdependence of Mexico and U.S. in everything from oil to natural gas and NGLs. We did made reference to refined petroleum products like gasoline, diesel and jet-kero,in those analyses, but didn’t dive too deeply into them because there was so much else to talk about. In the past few weeks though, three significant developments have occurred, giving us an opportunity to revisit the topic.

First a quick recap. Mexico, you may recall, is between a rock and a hard place when it comes to hydrocarbons. It has extraordinary crude and natural gas resources, but oil production has been declining and gas production has been flat, in part because state-owned Petróleos Mexicanos (Pemex) has been unable to make the investments needed to boost output. Pemex’s refineries also need upgrading; there have been disconnects between 1) the types of crude that Pemex produces (mostly heavy) and the capabilities of the company’s refineries, and 2) the yields of various refined oil products (fuel oil, gasoline and diesel, for instance) that Pemex’s refineries can produce and the domestic demand for those products. Mexico and Pemex have been trying to get things back on track, in part by opening up the hydrocarbon sector to private-sector investment and competition. These efforts have come in fits and starts—and, it’s got to be said, they’ve occurred at a particularly challenging time, with crude prices near their lowest levels in a dozen years and investment cutbacks being the order of the day.

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Pemex’s production of gasoline and diesel has been stagnating for several years and fell again in 2015. Gasoline production averaged 425 Mb/d in 2010, and 422 Mb/d in 2014; in 2015 gasoline production fell almost 10%, to 381 Mb/d (380 Mb/d in December 2015, down 7 Mb/d from December 2014; dark gray bar segments in Figure 1).

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