Slow Down - U.S. Motor Fuel Exports to Mexico Hit a Rough Patch

For some time, U.S. motor fuel exports to Mexico had been increasing at a healthy pace, reliably filling the void created by a series of production setbacks at Pemex’s refineries south of the border. From 2014 to 2018, U.S. gasoline exports to Mexico soared by more than 160%, from an average of 197 Mb/d five years ago to 517 Mb/d last year. Diesel exports rose by nearly 130%, to 279 Mb/d, over the same period. But that export-growth momentum has since sagged — in fact, export volumes for both gasoline and diesel actually declined in the first few months of 2019, primarily due to logistical challenges within Mexico. Also, Mexico’s new president has proposed ambitious plans to boost state-owned Pemex’s refining capacity, possibly posing a longer-term threat to U.S. exporters. So, is the boom in refined-product exports to Mexico over? Today, we examine what’s behind the downshift, and what the Mexican government’s effort to reinvigorate Pemex’s existing refineries — and build an entirely new one — may mean for U.S. gasoline and diesel exports in the 2020s.

Mexico’s shift from net energy exporter to the U.S. (primarily in the form of crude oil) to net importer (lots of U.S.-sourced gasoline, diesel and LPG, plus growing volumes of natural gas) has been a frequent topic in the RBN blogosphere. Back in 2015, in our With a Little Help from My Friends Drill Down Report, we noted that Mexico has tremendous potential to become energy self-sufficient, but troubles at state-owned Pemex had slowed efforts to develop new oil fields and left its half-dozen refineries operating at only about 60% of their 1.6-MMb/d capacity. Well, it turns out that those were the good ol’ days — as we pointed out late last year in our Runnin’ Down a Dream blog series, Mexico’s crude production (which averaged 3.3 MMb/d in 2005 and 2.3 MMb/d in 2015) had fallen to less than 1.8 MMb/d by then (it’s since dropped further to less than 1.7 MMb/d), and Pemex refineries were operating at less than 40% of their capacity. The decline in Mexico’s energy fortunes has been a boon to U.S. refineries, motor fuel marketers and shippers. We’ll start with gasoline.

Figure 1 below contrasts the drop in Mexican production of gasoline since 2014 (yellow line) with the rise in imports of gasoline from the U.S. (orange line). (Note that Pemex provides only the annual average production volumes for the 2014-16 period.)

Figure 1. Mexico Gasoline Production and Imports from the U.S. Sources: Pemex, Energy Information Administration and RBN (Click to Enlarge)

As you can see, by 2017, Mexico’s imports of U.S. gasoline exceeded Pemex’s gasoline production, a situation that continues to this day. It’s a similar state of affairs in the diesel market (see Figure 2), with Pemex production (blue line) ratcheting down and diesel imports from the U.S. (green line) rising. But the import trend in both markets shifted in early 2019. In 2018, Mexican imports of U.S. gasoline averaged 517 Mb/d, but in the first three months of 2019 they averaged only 507 Mb/d; imports of diesel fell from 293 Mb/d in 2018 to 279 Mb/d in the January-through-March (2019) period. And no, it’s not a seasonal thing. In the first three months of 2018, gasoline imports averaged 559 Mb/d (10% higher than in the same period this year) and diesel imports averaged 305 Mb/d (also  about 10% higher year-on-year).

Figure 2. Mexico Diesel Production and Imports from the U.S. Sources: Pemex, EIA and RBN (Click to Enlarge)

The primary reason for the decline in U.S. motor fuel exports to Mexico earlier this year appears to be the logistics logjam brought about by Mexican President Andrés Manuel López Obrador’s decision in early January 2019 to (1) temporarily shut down a number of major refined products pipelines that criminal gangs and others had been routinely (and illegally) tapping to steal gasoline and diesel, (2) step up security along these and other pipelines (then restart them), and (3) turn to railroads and trucks in the short-term to help move gasoline and diesel that traditionally had been piped (see No Es Justo). AMLO, as Mexico’s leader is often referred to, had good reason to act (fuel thievery is costly and deadly), and, according to a June 4, 2019, presentation by Pemex, the effort seemed to work — fuel theft came down 93%, from 78 Mb/d in December 2018 to 5 Mb/d by May 2019. Still, the partial and temporary shift from pipeline delivery of motor fuels to trucks and rail caused hiccups in gasoline and diesel deliveries and, for a while, slowed operations at a few of the Mexican ports that receive U.S.-sourced motor fuels.

More generally, as we said almost a year ago in Más, the Mexican market continues to suffer from shortfalls in the infrastructure required to efficiently import, store and distribute large volumes of gasoline and diesel. Until 2016, Pemex was the only entity that could import motor fuels to Mexico, and until 2017, independent/third-party importers could not use Pemex’s refined-product logistics system, which, in addition to pipelines, includes more than 70 storage and distribution terminals. Since then, Pemex has provided at least some third-party access to its assets, and a number of midstreamers, railroads and terminaling companies have been working to develop new marine terminals, fuel storage and other facilities south of the border. But these projects take time — for example, Andeavor (now part of Marathon Petroleum) announced a year ago this month (in June 2018) that it plans to build a $100 million refined products terminal in the city of Rosarito in Mexico’s Baja California state (just south of San Diego, CA), but that project is not expected to be completed until sometime in 2020. Similarly, IEnova (the Mexican subsidiary of Sempra) in July 2018 was awarded a 20-year contract by Mexico’s Topolobampo Port Administration to build and operate a refined products marine terminal in the city of Topolobampo in the state of Sinaloa (on the eastern side of the Gulf of California). But the $150 million first phase (with 1 MMbbl of storage capacity for gasoline and diesel, as well as infrastructure to receive and send out refined products) won’t be finished until the second half of next year. The same goes for IEnova’s plan (announced in April 2018) to build a $130 million marine terminal with 1 MMbbl of motor fuel storage capacity in Ensenada, Baja California state (an hour’s drive south of Rosarito).

These and other refined product-related infrastructure projects (see our Into the Void series for more) will eventually boost Mexico’s ability to efficiently distribute gasoline and diesel to the country’s 10,000-plus service stations. The big questions, though, are (1) whether U.S. motor fuel exports to Mexico will resume their growth and (2) whether plans by AMLO and Pemex to significantly increase the state-owned company’s output of refined products will bear fruit. The answer to the first question depends in large part on the answer to the second. Pemex has indicated recently that it plans to make investments and operational changes that will enable its refinery fleet to run at as much as 90% of its capacity — two and a half times the fleet’s current utilization of about 35% — within two years. (That’s a very tall order — Pemex hasn’t enjoyed utilization levels that high since the early 1990s.) In a May 26 (2019) visit to Pemex’s refinery in Salamanca, AMLO, who assumed office late last year, stated that the volume of crude oil being processed at Pemex’s six refineries increased by 14% from December 2018 to May 2019 (from 510 Mb/d to 579 Mb/d). A few days later (on June 2), the Mexican president presided at the ceremonial groundbreaking of the planned $7 billion-plus, 340-Mb/d refinery in Dos Bocas, Tabasco state, which AMLO has said he expects to be up and running within three years. If and when that happens, the new refinery (which would be Mexico’s first since 1979) would have the capacity to produce about 170 Mb/d of gasoline and 120 Mb/d of diesel — and presumably the ability to put a big dent in U.S. motor fuel exports to Mexico.

Where is all this headed, and what will it mean for U.S. gasoline and diesel exports to Mexico? We’d put our money on export volumes at least holding steady — and possibly resuming their growth — until Pemex provides longer-term evidence that it’s truly improving its refineries’ performance.

"Slow Down" was written by Larry Williams, and originally released as a single by Williams on Specialty Records in 1958. Williams's version features a funky shuffle beat from drummer Earl Palmer, and a raunchy honking tenor sax solo by Plas Johnson. The Beatles had been covering "Slow Down" in their live sets from 1960 to 1962, and revived it for a live taping for the BBC's Pop Go The Beatles television show in 1963. They recorded it in the studio, with George Martin producing, in June 1964, and it originally appeared in the UK on The Beatles Long Tall Sally EP later that summer. The song’s first appearance in the U.S. came on Something New, Capitol's third Beatles album, which was released in July 1964. Capitol released "Slow Down" as a single, backed with a cover of Carl Perkin's "Matchbox" (another early cover from The Beatles repertoire), where it went to #25 on the Billboard Hot 100 chart.

Personnel on the recording were: John Lennon (lead vocal, lead guitar), Paul McCartney (bass), George Harrison (rhythm guitar), Ringo Starr (drums) and George Martin (piano). Something New's cover photo was a picture of The Beatles taken from “The Ed Sullivan Show.” The album also features the group covering another Larry Williams song, "Dizzy Miss Lizzy." The album spent nine weeks at #2 on the Billboard Top LP's chart, right behind the band's A Hard Day's Night, at #1. "Slow Down" has also been covered by British neo-mod group The Jam and Dutch rockers Golden Earring.

The Beatles were an English rock band formed in Liverpool in 1960 that changed the course of musical history. They made 13 studio albums, five live albums, 53 compilation albums, 21 EPs, and 63 singles; they also made four feature-length films. The Beatles have sold more than 800 million physical and digital records worldwide, and have won one Academy Award, one American Music Award, four Brit Awards, 11 Grammy Awards, 15 Ivor Novello Awards, 17 NME Awards, and 3 World Music Awards. They are members of the Rock and Roll Hall of Fame, the UK Music Hall of Fame, and the Vocal Group Hall of Fame. Paul McCartney was knighted in 1997 and Ringo Starr (Richard Starkey) in 2017. John Lennon died in 1980 and George Harrison in 2001. McCartney and Starr both record and tour to this day.