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Will Mexico's gain lead to gulf coast pain?

Will Mexico gain lead to gulf coast pain

By Tim Fitzgibbon

In the last two years, Mexico’s refining throughput has seen a 50 percent decline due to a series of planned and unplanned outages. While this is a serious hit to Pemex’s profitability, it has been a boon to Gulf Coast refiners and exporters.

As recently as 2015, the Pemex domestic refining system was seeing typical throughput levels of over 1 million barrels per day. Due to a series of shutdowns from both unplanned incidents and scheduled major maintenance, throughputs in late 2017 and early 2018 have been less than 600 thousand barrels per day.

Mexican refineries have seen a sharp drop in capacity

Mexico’s major refinery shutdowns

  • Salina Cruz (330 kbpd) – Mexico’s largest refinery which experienced a fire in June 2017 and an earthquake in September 2017, causing most of the units to be down through the end of 2017. The refinery had a slow start up in 2018, but all units were reported running in April 2018
  • Tula (315 kbpd) – operating at lower utilization in the past few years, but not due to any long-term outages
  • Cadereyta (275 kbpd) – experienced a shutdown for the month of July 2016 due to a water shortage (necessary for the boilers)
  • Salamanca (250 kbpd) – operating at lower utilization in the past few years, but not due to any long-term outages
  • Minatitlan (240 kbpd) - Was shut down from August 2017 to January 2018 due to extensive maintenance, slowly restarted in Q1 2018
  • Madero (190 kbpd) – Was shut down from August 2017 to January 2018 due to extensive maintenance, slowly restarted in Q1 2018

As a result, exports of light products (gasoline, diesel, and jet fuel) to Mexico were up 120 thousand barrels per day in 2017 versus a year earlier. This puts Mexico far ahead as the largest importer of refined product from the US with almost 800 thousand barrels per day, or around half of total US exports.

However, there is now the risk that a return to higher throughput by Mexican refiners could pose to Gulf Coast exporters. Three of the plants currently seeing the majority of outages (Salina Cruz, Minatitlan, and Madero) are now reported to be back online and increasing crude throughputs. The Salina Cruz refinery has had a slow start to the year, but all the units were reported back in operation in mid-April, processing about 250 thousand barrels per day (out of the 330 thousand barrels of capacity).

In early 2018, Pemex announced that they expect to increase crude processing capabilities at their refineries to 900 thousand barrels per day in Q2 2018. In early May, the downstream director stressed the focus on refining margins to measure success. Even at a high throughput capability, margins may drive reduced throughputs until Mexico can find the optimal crude slates and output balance. The country’s largest refineries (Tula, Salina Cruz, and Salamanca) are designed to process light crude oil, so when they process heavy crude, they are less efficient at producing more valuable products like transportation fuels. There are talks to boost volumes and margins at these refineries by importing light crudes from places like the US, depending on the differentials. While Pemex decides how to run their refineries over the next few months, US refiners will continue to push product over the border while they can, however, they must realize that Mexico backing down on imports will require a diversion of exports to other, less-attractive, and more distant markets, such as Africa and potentially Asia.

For US refiners this is likely to translate to somewhat lower prices but not lower utilization. Structural advantages from abundant local crude and natural gas should keep Gulf Coast refineries running flat out. And the ability of the Mexican refiners to keep capacity running once it is back online will continue to be of keen interest to the rest of the industry.

Tim Fitzgibbon is a senior industry expert based in Houston.