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Analysis

Dos Bocas Gets the Go-ahead

By Peter Appleby | Tue, 01/21/2020 - 19:06

In 2019, President López Obrador placed the country’s pursuit of energy sovereignty through the revitalization of the oil and gas industry at the heart of his National Development Plan. Key to this was the modernization of the failing National Refinery System (SNR), which in December 2018 was functioning at just 30 percent of its total capacity, or 492Mb/d, and the construction of the new Dos Bocas refinery located in the state of Tabasco approximately 80km from Villahermosa, the state's capital. According to the president, the construction of the Dos Bocas refinery is set to cost US$8 billion. Winners of the restricted tender for the first five construction packages were announced in July and include Flour Enterprises and ICA Flour (Packet 1), Samsung Engineering and Acociados Constructores DBNR (Packets 2 and 3) and KBR together with Grupo Hostotipaquillo (Packets 4 and 5), while the management of the construction will be overseen by the Ministry of Energy.

The refinery is set to be completed in approximately three years and is expected to produce 170Mb/d of gasoline and 120Mb/d of diesel to be transported across the country via maritime channels and pipeline networks. According to a conservative estimate proposed in the PEMEX Business Plan, the rehabilitation of the existing six refineries and the inclusion of Dos Bocas will lift the processing capabilities of the SNR to 1,021MMb/d in 2021, 1,163MMb/d in 2022, and 1,479MMb/d in 2023.

The tightening of the purse strings on PEMEX’s budget has hampered its ability to repair the refineries of the SNR in recent years, some of which are in dire need of maintenance. The figures are stark: in September 2010, the SNR produced a collectively averaged 1.21MMb/d. By September 2019, that total had fallen to 620.3Mb/d.

One of the knock-on effects of the long-term decline in refining capacity has been the rising level of refined fuel imports arriving into Mexico, most of which have come from the US. Though the reasons for this are multiple, the arrival of international operators, including those in the retail sector, has been the most significant factor. In May 2018, there were 11,992 gas stations in Mexico. A year and a half on, there are some 13,000 gas stations, of which over 3,600 are run by the private sector. As of August 2019, private companies represented 16 percent of gasoline imports into the country and were responsible for 38 percent of diesel imported; a tripling of imported fuels between August 2018 and 2019.

PRIVATE ROLE IN REFINING

The administration’s investment into the six existing refineries of the SNR is expected to bring dividends for the country by reducing costs associated with refining crude north of the border. However, infrastructure and transportation capacities must also grow to move refined fuels throughout the country, says Ruben Cortina, Executive Director of Tarsco. This is where the private industry can support PEMEX’s production objectives. “The government is now pushing to reactivate PEMEX’s assets, which will be useful, but these assets alone will not meet the country’s infrastructure demand. The country needs notonly terminals but also marine ports, railroads, roads and pipelines to move the product,” he says.

Ricardo Diogo, Director of Business Development at Oiltanking, agrees the underperformance of Mexico’s refining assets, combined with the Energy Reform, created an opportunity that private companies are keen to meet. “We see a big opportunity in introducing midstream assets and addressing the imbalance in terms of what the country produces in crude oil and respective refined products. We believe that part of the imbalance is structural and the other is contextual. The refineries are not running at optimal capacity, which creates opportunities for midstream in the medium term. More international and national investors will introduce tank terminals, pipelines and logistics to cope with the real needs of the fuels market,” he says.

PRIVATES TO PLUG STORAGE GAPS

The inadequacy of the country’s storage capacities was demonstrated in January and February 2019, as the government ordered the closure of pipelines in an attempt to reduce fuel theft, known locally as hauchicol. The pipe closures caused fuel shortages and urban centers were heavily affected. In Guadalajara, a reported 70 percent of gas stations were without gasoline, causing extensive shortages. If the administration is to be successful in achieving energy security for the country, it must expand PEMEX’s 30MMb storage capacity, which would supply just 3.4 days of the national demand, that is split between its 80 land and marine storage terminals.

Mexico’s underwhelming national storage capacity is particularly apparent when contrasted against member nations of the International Energy Agency, including the Czech Republic, Ireland and Greece, which are obliged to manage a strategic petroleum stock of at least 90 days. The US, meanwhile, holds the world’s largest strategic petroleum reserve with a capacity of up to 727MMb. Though PEMEX Logistics still controls 54 percent of the storage market, private sector activity is growing and will be crucial for expanding Mexico’s storage capacities to bolster its energy security.“Infrastructure and storage is an integral part of any nation’s energy autonomy. This reduces vulnerability to shortages and unforeseen difficulties. In Mexico, with the supply problems present in 1Q19 and when Hurricane Harvey hit Texas in August 2017, the need for comprehensive storage became evident,” says Cristhian Pérez, Managing Director of Vopak Mexico. However, Pérez urges caution. “Infrastructure must be developed in the most efficient way possible because it is such a capital-intensive enterprise. Therefore, requirements must be properly analyzed to highlight deficiencies that can then be solved.” Some private companies are already stepping into the breach to plug the storage gap. Mexico’s Hydrocarbon Storage Terminal, together with Spanish storage company CLH, are constructing a terminal in Acolman, State of Mexico, to secure the storage future of Mexico’s capital city. “With our terminal, we will supply 33 percent of Mexico City’s demand, which is around 155,000b/d. The amount of gasoline moving through our terminal would meet the needs of Guadalajara,” says former Director General Edgar Gutierrez.

FUEL THEFT IMPACTS RETAIL

Huachicol has resulted in the loss of MX$147 billion over the last three years. According to PEMEX statistics, there were 12,581 incidents of theft from pipelines, including those managed by third-party operators, in 2018 alone. The states of Puebla, Hidalgo and Guanajuato witnessed the most fuel theft, with 1,815, 1,726 and 1,547 incidents reported respectively. While pipeline closures produced supply problems, this measure and more stringent security, resulted in a 30 percent reduction in theft from PEMEX pipelines between December 2018 and September 2019.

The existence of fuel theft continues to finance organized crime in Mexico and also poses extreme risk to the public. A horrific reminder of this occurred in Tlahuelilpan, Hidalgo, in January 2019. Additionally, theft discourages the investment of financial resources into the safe and legal expansion of gas stations, an area where Mexico still lags behind. According to Enco GNV statistics, there is one gas station for every 3,080 cars in Mexico. In comparison, Colombia’s rate is 1:650, while in the US, the rate is 1:1,500. Roberto Díaz de León, National President of the gas station association ONEXPO, considers fuel theft the primary challenge to the growth of the retail sector. “It is necessary to combat huachicol because, frankly, it is our main competitor.” “This clandestine network operates through a category of distributors and establishments known as cachimba, found on roadsides all over the country. For every gas station, there are at least four cachimbas. If there are at least 13,000 gas stations across the country, then you can see that we are talking about a serious distribution web.” If a highly-competitive retail market is to grow and gas station numbers are to climb to the expected total of 16,500 by 2024, then a solution to fuel theft must be found.

Peter Appleby Peter Appleby Journalist and Industry Analyst