Runnin' Down a Dream, Part 3 - Mexico's Plan to Revive their Crude Oil Refining Sector

While U.S. refineries are again running hot and heavy after the end of this year’s seasonal fall maintenance period, Mexico’s refineries have continued to struggle to operate at more than 30% of their capacity, a decline that is exacerbated by that country’s tumbling oil production. In recent years, Mexico’s dismal refinery utilization rate has been a boon for U.S. refiners on the Gulf Coast who can ship, pipe or truck gasoline to America’s southern neighbor in short order. Now, Mexico’s new president, Andrés Manuel López Obrador (AMLO), is pushing to solve Mexico’s refinery problems by building a new one. Today, we discuss Mexico’s growing dependence on U.S. gasoline, and whether building a new refinery south of the border will change things.

As we mentioned in our recent blog Going to Mexico, Mexican crude production has fallen sharply in the past 10 years. At 1.76 MMb/d in October 2018, total output is less than half what it was in 2005. [It’s worth noting here that the majority of that crude — nearly 61% of the 1.76 MMb/d total in October — is categorized as “heavy” or low in API gravity, according to Mexico’s state-run oil company, Petróleos Mexicanos (Pemex)]. Much like Pemex’s oil production rates, refining rates have collapsed, too. And to make matters even worse, Mexico’s refineries are relatively simple — that is, not complex — and configured to process lighter, sweeter crudes, the exact quality that’s getting harder and harder to come by in Mexico. AMLO has a plan to revive oil output alongside refinery rates — he presented a national oil production plan in Campeche last week, in which he pledged to boost production to 2.4 MMb/d in the next six years.

Mexico’s falling crude production has exacerbated already dire operating conditions at Mexico’s six refineries, which have a combined capacity of 1.6 MMb/d. Unlike the U.S. refining sector, which is made up of multiple competing entities — most of which are publicly traded companies — Mexico’s half-a-dozen refineries have been owned and operated by government-owned Pemex for decades. Without competition among the facilities, Pemex has struggled to perform the semi-annual refinery maintenance programs that are typical among refiners in the U.S.  As of October, Pemex’s refineries as a group were operating at just over 30% of their total capacity — compared with U.S. utilization rates north of 90%. Figure 1 shows the nationwide refinery run rates for Mexico over the past 10 years. The recent dramatic declines started in early 2014, when runs dipped below 1 MMb/d, or 62.5% of capacity. Since then, the drop-off has continued — as of October, not a single Mexican refinery was operating at more than half its capacity, according to Mexico’s Secretaría de Energia (SENER). At the current rate of 485 Mb/d, the country-wide system is operating at the lowest rates in about 30 years.

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