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New fields under development will yield light crude

Mexico aims to increase domestic crude refining, curbing heavy exports

Pemex needs a significant financial boost to achieve its output potential

Mexico City — The future of Mexico's heavy crude exports is uncertain as major consumers like India and the US seek alternative supply sources for heavy oil amid sanctions introduced by US President Donald Trump on Iran and Venezuela, analysts said.

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Concerns about Pemex's capabilities to raise production and about ambitious government-set refining level goals are factors relevant to refiners considering Mexico as an alternative supply source of heavy oil, Arturo Carranza, an energy analyst with consultancy group Mercury in Mexico City, told S&P Global Platts.

"There is much uncertainty surrounding Mexico's crude balance, I have some skepticism in general terms that heavy crude exports could be increased considering a short period and Pemex's limited resources and efficiency," Carranza said. "It is more likely that Saudi Arabia or Russia will be a supply alternative for India and other Asian countries than Mexico."

Mexico has produced 1.7 million b/d of heavy oil in April, half of the historic peak production reached in 2003, government data showed. This decrease has been the result of Pemex's inability to replace production from the aging Cantarell complex.

"Pemex has just been able to stabilize its decreasing production over the last months, increasing it is going to be a challenge," Carranza added.

The uncertainty surrounding the future of Mexico's heavy crude oil production should clear over the coming months, Luis Miguel Labardini-Deveaux, a partner with energy consultancy firm Marcos y Asociados in Mexico City, said.

"The next year will be critical to define the ability from the new administration [of President Andres Manuel Lopez Obrador] to increase exploration and production activity," Labardini-Devaux said.

MEXICO'S GOAL: PRODUCING 1.9 MILLION B/D BY END-2019

Currently, the Mexican government is investing capital into Pemex and introducing a new fiscal regime to incentivize an increase in upstream production, Labardini-Devaux added.

Lopez Obrador has an aggressive program to increase production to over 1.9 million b/d by the end of the year, according to Carranza. "This seems like a very ambitious goal," he said.

To achieve this increase in production, Pemex is currently developing 20 onshore and offshore fields this year. Thus far, the National Hydrocarbons Commission (CNH) has approved the development of four of these fields: Xikin, Esah, Cheek and Chocol.

However, despite the development of these fields, the expected new production will be primarily light oil with a 33 API on average, Pemex has said.

In addition to the 20 fields, the state-owned company has a significant potential to increase production from mature fields through enhanced oil recovery, known as EOR, Labardini-Devaux said. A fiscal regime change that would allow Pemex to deduct 60% of its upstream expenses versus 12% would be a major incentive for the company to invest in EOR, he added.

"Pemex has an ample portfolio of opportunities, what the company lacks is more capital injections," Labardini-Devaux said. The company currently has an upstream capital budget of over $10 billion, half of the amount the company needs to reach its full potential, he added.

If Pemex had enough resources, the company could increase heavy oil production at Pit, Ayatzil-Tekel-Utzil and Ek-Balam, shallow water projects, as well as extend the life of the giant Ku-Maloob-Zaap offshore complex, which is entering into its terminal production phase.

Another uncertainty is the ambitious refining goal set by Lopez Obrador of increasing crude processing levels by over 1 million b/d by the end of the year, Carranza said. According to data from the Mexican government, Pemex processed 650,000 b/d of heavy crude during the second week of April.

Three of Pemex's six domestic refineries have a single configuration, preventing them from efficiently processing Mexican heavy crude. These facilities are the 330,000 b/d Salina Cruz, 315,000 b/d Tula and 220,000 b/d Salamanca refineries.

Despite these technical limitations, Mexico's Energy Secretary Rocio Nahle has said Pemex would not import light crude under Lopez Obrador's presidency and it will instead seek to refine its crude oil production domestically.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Jennifer Pedrick, newsdesk@spglobal.com