Mexico could take multiple paths toward energy self-sufficiency: Fuel for Thought

Mexico President-elect Andres Manuel Lopez Obrador has planned sweeping changes to the country’s energy landscape. Among the key goals of the incoming administration is to make Mexico self-sufficient when it comes to its energy needs, including meeting its rising motor fuel demand.

A capstone to Lopez Obrador’s plan is construction of a new refinery that will end Mexico’s dependency on imports of refined products and cut domestic prices.

However, considering Mexico’s tight public finances and state-owned Pemex’s unsustainable debt levels, there are many alternatives to building a new refinery the incoming government could evaluate.

The incoming administration said a new refinery in Southern Mexico will be built in three years at a cost of $8.5 billion, but the project’s capacity and how construction will be financed is still unclear. However, Rocio Nahle, the incoming energy secretary, has said the new administration seeks to increase the country’s refining capacity from 1.6 million b/d today to 2.2 million b/d.

That cost estimate to build the new refinery could be on the low end based on recent projects.

Last year, Hartree Partners projected that building a 100,000 b/d greenfield refinery in Guyana would cost $5 billion due to the expenses of associated auxiliary services, but the cost of a refinery capable of processing Mexican heavy crude oil would probably be much higher.

It took Northwest Refining six years and $9.7 billion to complete its 79,000 b/d Sturgeon heavy oil refinery in Canada this year.

Any heavy oil refinery would need an expensive cracking capacity to be profitable, considering the expected decrease in the value of fuel oil prices amid changes in marine fuel transportation in the next decade.

UPGRADES AND ADDITIONS

One alternative to building a new refinery in Mexico would be to acquire or enhance existing refineries in the country, which has historically been a cheaper venture.

Pemex has been trying to find partners in recent years to raise the resources required to install cracking capacity at its 220,000 b/d Salamanca, 315,000 b/d Tula and 330,000 b/d Salina Cruz refineries. The new government could further encourage those efforts.

Based on Pemex’s data, reconfiguring the three refineries would cost around $9.35 billion and would produce an additional 375,000 b/d of gasoline and diesel and close to 15,000 b/d of jet fuel while eliminating fuel oil production. That kind of output is similar to a 400,000 b/d refinery.

While Lopez Obrador seeks to cut Mexico’s dependency on imported fuel, Pemex branching out to operate a foreign refinery isn’t a bad idea, especially considering US Gulf Coast and Caribbean refineries close by are more efficient than existing facilities in Mexico.

Mexico could look at partnering with the government of Curacao to operate the 330,000b/d Isla Refinery. With the downturn of Venezuela’s PDVSA, that national oil company isn’t in the condition to continue operating Isla Refinery. It is expected PDVSA won’t be able to renew its long-term lease over the facility due to its financial woes.

Leasing Isla Refinery would create significant capex savings for Mexico compared with building a new refinery. Based on news reports, the Curacao government is looking for a 30-year leaseholder that can spend $1.5 billion to overhaul the refinery and supply crude oil for its operation.

If the Mexican government was able to save $7 billion by leasing Isla Refinery, these funds could be used by Pemex to drill nearly 70 ultradeepwater wells like the one it will drill at its Trion project this fall.

For a highly indebted company like Pemex with limited resources, focusing on high-return upstream projects could reap benefits. Pemex CEO Carlos Trevino has told S&P Global Platts it has upstream projects with returns exceeding 100%, while expected returns in its downstream portfolio are 10%-25%.

Another market opportunity for Pemex is Petrobras’ 110,000 b/d Pasadena refinery in Texas. The facility was involved in a corruption scandal after the Brazilian oil company paid $1.2 billion to acquire the facility compared with the $42.5 million spent by the previous owner.

The refinery is being sold by Petrobras, attracting interest from several companies. It does require major maintenance work, but acquiring and repairing the facility would be less expensive than building a new greenfield refinery.

TAKE A STAKE

Another option Pemex could evaluate is acquiring a stake at another refinery in the US Gulf Coast, as it did at Shell’s 340,000 b/d Deer Park, Texas, refinery in 1993. Shell is the operator of the facility, while Pemex is one of its largest crude oil suppliers.

Pemex could be a valuable partner to any US Gulf Coast refiner, providing a reliable supply of heavy crude oil and ensuring future demand for the facility.

The US Energy Information Administration estimates motor gasoline demand in the US is expected to slide 26% to 6.62 million b/d in 2030 from 9 million b/d in 2016. In contrast, Mexico’s Energy Secretariat (SENER) estimates combined gasoline and diesel demand will grow 50% by 2030 to 1.65 million b/d from 1.1 million b/d in 2017.

US refiners such as Valero, Andeavor and ExxonMobil are keen to make inroads into the Mexican market to shore up the expected decline in demand for gasoline in their own market. It is probable that like in other declining markets, such as Japan, refineries that can’t secure demand amid a decrease in fuel consumption will be shut down, and that makes a partnership with Mexico a profitable possibility.