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.

Pemex Refinery System’s Capacity and Refinery Throughput

Figure 1. Pemex Refinery System’s Capacity and Refinery Throughput. Sources: Pemex and SENER

Worse yet, Pemex’s refinery system is highly uneconomic to run. The company reported in April that its refining margin had dropped to an all-time low — a negative $12.51/bbl — in the first quarter of 2020, down from a negative $2.64/bbl in the fourth quarter of 2019 and a positive $1.61/bbl in last year’s third quarter.

Pemex and its refineries (colored icons in Figure 2 map) face obvious challenges. Pemex entered 2020 with a staggering $105 billion in debt — more than any other energy company on the planet — and in the first quarter, it posted a $23 billion loss. As for Pemex’s refineries, the company plans to have invested a total of $1.2 billion on repairs and upgrades to the six existing facilities by the end of this year, and a couple of billion more in 2021-23, but as we just said, so far there isn’t much evidence of a big rebound in utilization rates. (The inset in Figure 2 shows the May 2020 throughput and utilization rates at each of the refineries). Similarly, few expect the planned Dos Bocas refinery (yellow icon in map) to come online on schedule three years from now — most projects of that scale take far longer than the ambitious schedule that Pemex laid out. Still, Pemex has a champion in AMLO, who in recent weeks has not only reiterated his support for the refinery projects but also has stuck with his goal of permanently reversing — and eventually eliminating — what had been Mexico’s growing dependence on U.S. refined products.

Pemex Refineries and Utilization Rates

Figure 2. Pemex Refineries’ and Utilization Rates. Sources: Pemex, SENER and RBN

Before we assess what all this might mean for U.S. exports of gasoline and diesel to Mexico going forward, we should take a moment to explain how Mexico’s refined products sector is structured. As we said in Part 1 of this mini-series earlier this month, efforts under way since 2013 to open up Mexico’s energy sector to competition offered new opportunities for U.S. refiners, midstream companies, and motor fuel retailers, among others. For instance, until 2016, Pemex was the only entity that could import gasoline and diesel to Mexico, and until early 2017, independent/third-party importers could not use Pemex’s refined-products pipeline distribution and storage network. Also, by late 2017, long-standing government caps on retail prices of motor fuels were phased out across Mexico. Now, non-Pemex brands account for one-third of Mexico’s more than 12,000 retail motor-fuel stations, and a number of major refiners — including ExxonMobil, Chevron, Marathon Petroleum, and Valero — have acquired or opened gas stations in Mexico and exported motor fuels from their U.S. refineries to help serve those retail outlets.

So, what’s ahead? No one knows for sure, of course, but let’s assume that Mexico’s demand for gasoline and diesel rebounds gradually in the second half of this year and in 2021 as the country, like the U.S., tries to control and reduce the spread of the coronavirus and return its economy and social activity to something approaching normal. AMLO this spring again indicated his strong commitment to restoring Pemex to its former glory by rebuilding its existing refineries and constructing a new, state-of-the-art refinery in his home state. The problem is, Mexico’s economy already is struggling due to COVID and its state-owned energy company is overwhelmed with massive debt. Put bluntly, can Pemex really afford to invest $8 billion or more in a brand-spanking new refinery when there is a much more cost-effective alternative, namely, ramping up its imports of refined products? There’s more: as we said earlier, the company’s refineries continue to have low utilization rates, and their refining margins are deep in negative territory — though margins, at least, may improve as demand for gasoline and diesel recovers.

All this suggests that, try as Pemex might, the company is unlikely to achieve its — and AMLO’s — goals of increasing its existing refineries’ crude runs to 1.2 MMb/d (or 75% of capacity) and opening up the new Dos Bocas refinery by 2023. Instead, Pemex’s best hope may be to focus on improving the most efficient and well-maintained of its refineries and turning to U.S. refineries for the balance of Mexico’s motor fuel needs. That suggests that U.S. exports of gasoline and diesel will return to at least their 2019 levels, and perhaps past the peaks they experienced the year before that.

"We Take Care of Our Own" was written by Bruce Springsteen, and appears as the first cut and first single release from Springsteen's 17th studio album, Wrecking Ball. It was released as a single in January 2012, and went to #43 on the Billboard Hot 100 Singles chart, and #11 on the Adult Alternative Singles charts. Personnel on the record were: Bruce Springsteen (lead vocals, guitar, banjo, piano, organ, drums, percussion, loops), Ron Aniello (guitar, bass, keyboards, loops), Soozie Tyrell (violin, backing vocals), Patti Scialfa (backing vocals), Lisa Lowell (backing vocals), and the New York String Section (strings). 

Wrecking Ball was recorded at Stone Hill, Springsteen's home studio in New Jersey, between January 2011 and January 2012. Produced by Springsteen along with Ron Aniello, it was released in March 2012. Three singles were released from the album. Wrecking Ball went to #1 on the Billboard Top 200 Albums chart, and has been certified Platinum by the Recording Industry Association of America. 

Bruce Springsteen is an American singer, songwriter, and musician. He has sold more than 135 million records worldwide. Springsteen has made 19 studio albums, 23 live albums, one soundtrack album, eight compilation albums, seven EPs, and 70 singles. He has won 20 Grammy Awards, two Golden Globes, one Academy Award, and one Tony Award, and is a member of the Rock and Roll Hall of Fame and the Songwriters Hall of Fame. “The Boss” also has been awarded a Kennedy Center Honor and the Presidential Medal of Freedom, and has been named the MusiCares Person of the Year. Springsteen continues to record and tour to this date, with live dates on hold due to COVID.