Since the 2013 energy reform, investors have found a range of opportunities in Mexico’s liberalised downstream energy sector. The new regulatory framework opened up former state-owned petrol stations to private operators and, more recently, has offered services companies the chance to be involved in the programme to upgrade the country’s refineries.
Mexico has six refineries: Salamanca, Tula, Nuevo León, Minatitlán, Dos Bocas and Santa Cruz, which are operated by Petróleos Mexicanos (Pemex), the state-owned oil company. Altogether, the facilities have a capacity of 1.6m barrels per day (bpd), but in recent years the utilisation rate of the country’s refineries has fallen considerably, from around 75% in 2013 to 40% in 2018. Underinvestment and poor infrastructure has caused Mexico to become increasingly dependent on imports as production has declined. According to the US Energy Information Administration, crude oil inputs in Mexico decreased from 1.2m bpd in 2013 to 600,000 bpd in 2018.
However, the government has ambitious plans to revive the segment. In May 2019 President Andrés Manuel López Obrador, colloquially known as AMLO, announced that the country will be self-sufficient in petroleum production by 2022, following the completion of a new refinery. AMLO has also pledged to invest $1.3bn to upgrade the six existing refineries.
Mexico’s downstream industry has been disrupted by price liberalisation in recent years. A measure was passed in 2016 to align fuel prices with international prices, therefore keeping the country’s manufacturing sector competitive. When these changes were first introduced they led to a spike in fuel prices; by early 2017 prices had risen by 20%. This sudden rise resulted in nationwide protests, and the government eventually allowed fuel retailers to set their own prices in an act of capitulation.
Supply & Demand
As production continues to fall, supply shortages remain a significant problem in Mexico. In 2019 average petrol consumption reached 843.9m bpd, and demand has been projected to grow by around 2% per year between 2019 and 2028, reaching 1.1bn bpd by 2028. The rate of demand reflects the country’s GDP growth and the expansion of the middle class, making households more likely to purchase cars as incomes continue to rise.
Mexico relies heavily on fuel imports to meet demand. Of the country’s total petrol consumption, 335.5m bpd came from domestic refiners and 508.4m bpd was imported. Therefore, the country depends on imports for around 60% of its fuel consumption, most of which comes from US refiners.
Prior to the comprehensive energy reform introduced in 2013, Pemex was the sole operator of the country’s petrol stations. Although the state-owned firm still controls the majority of sites, the reform opened the market to private downstream companies. At the end of 2018 Pemex operated 9930 stations and private companies managed the remaining 1656 stations.
Although the reform aimed to make the segment more competitive and efficient, petrol stations have still faced difficulties in recent years. In early 2019 fuel shortages hit the country, which caused panic buying and long queues. Consumers rushed to fill tanks and jugs, resulting in the temporary closure of some petrol stations. One reason for the fuel shortage was the government’s decision to switch off petrol ducts in an effort to combat fuel theft, another long-standing issue in Mexico. The contingency plan involved bringing in fuel by road, but congestion caused some stations to be underserviced.
To shore up supply and burn cleaner fuels, Mexico is planning to add ethanol to its fuel blends. According to the Ministry of Energy (Secretaría de Energía, SENER), the country will need at least seven more biofuel plants, each with a capacity of 100m litres per year in order to satisfy ethanol requirements.
President López Obrador made the recovery of the country’s downstream sector a key part of his campaign pledge. The new government has committed to reviving existing refineries, which are operating with outdated facilities. It is hoped that this will help the country to reclaim energy security and reduce dependence on US fuel imports, which are more price competitive than Mexican refined products. Although AMLO’s goal is for Pemex to produce 100% of Mexico’s petroleum by 2022, the country’s refineries currently operate at around 40-50% capacity due to a chronic lack of investment. The existing refineries are also configured to only handle a specific blend of light, medium and heavy crude oil to produce petrol.
The cornerstone of the government’s plans to boost the downstream segment is the Dos Bocas refinery in AMLO’s home state of Tabasco. According to local media, construction of the 340,000-bpd refinery commenced in mid-2019 and is expected to be completed by 2022. The project had originally been planned with the assumption that experienced foreign firms would be better candidates than the state-owned company. Now, however, the refinery is to be managed by Pemex as the government rejected bids from private companies due to the fact that they could not commit to completing the facility by 2022 and for less than the planned budget of $8bn.
However, the state-run company is likely to face financial difficulties, as it is around $104bn in debt. “Pemex has struggled for a long time,” Valeria Moy, director of think tank México ¿Cómo Vamos?, told OBG. “Mexico needs to refine oil instead of buying petroleum, but the country lacks refining expertise, which is likely to cause the financial situation to deteriorate further.” According to Moy, Pemex is the most indebted oil company in the world; it needs to balance investing in capacity building and infrastructure as well as tending to its debt obligations.
In addition, some sector players have pointed out Pemex’s lack of expertise compared to private operators. “Pemex is efficient at producing crude in shallow waters, as production costs are lower compared to other parts of the world,” Arturo García Bello, energy and natural resources partner at Deloitte México, told OBG. “While Pemex is strong in some parts of the energy value chain, such as shallow-water extraction, it has not been efficient in refining.”
Nevertheless, there may be opportunities for investors within the programme to upgrade the country’s existing refineries. According to Ricardo Solis Hernández, head of oil and gas for the UK Department of International Trade, companies with expertise in engineering, environmental studies and consulting could find contracting opportunities.
Another potential complication for Mexico’s refineries is ensuring the country can produce both heavy and light crude grades. According to García Bello, Dos Bocas refinery will be designed to process heavy crude oil, meaning that it will not solve the country’s shortage of light crude. “To produce fuels such as petrol, the refineries need light crude,” he said. “If Mexico does not increase its light crude reserves, the country will continue to need to import light grade oil.”
In order to solve the gasoline trap, Pemex may benefit from borrowing knowledge from its Deer Park refinery in Houston, Texas, where it holds a 50% stake with oil major Shell. The 275,000-bpd refinery capacity processes 100m barrels of crude per year. Even if Pemex increases its refining efficiencies, it will most likely continue to depend on importing the right crude grades in the medium term to round out its slate. Although Mexico can rely on US imports for now, particularly due to their low prices, a rise in US prices or a change in the exchange rate would have a significant impact on local consumers.
In addition, the refinery problem cannot be solved without attending to Mexico’s upstream structural challenges. Even if the country expands its refining capacity, it will increasingly depend on light crude imports as demand for petrol rises. Until oil production increases, imports of light crude for refineries and exports of heavy crude will diverge. This poses balance of trade issues for the central government. As a result, some sector players have suggested that the authorities should place more focus on upgrading existing infrastructure, rather than bringing new capacity on-line. “Pemex’s six functional refineries are working at less than half of their capacity,” Victor Ortelli, managing director for Latin America at engineering firm CH2M, told OBG. “A more productive strategy would be to let companies work on maximising the production output at the refineries that are not operating at full capacity.”
Given the difficulties Pemex is likely to face in boosting capacity at its existing facilities and managing the construction of a new refinery, many observers believe that the involvement of private firms will be essential for the government to reach its goals.