Ixchel Castro
Manager of Oil and Refining Markets for Latin America
Wood Mackenzie
View from the Top

Gauging the Future for Gas, Refineries

Wed, 01/18/2017 - 07:23

Q: What does PEMEX’s five-year plan released at the end of 2016 mean for its refineries?

A: The plan emphasizes PEMEX’s need to focus on truly essential activities and to look for potential synergies with the private sector. The first challenge will be to improve refining production and reach levels close to the average of the last five years, meaning approximately 65 percent capacity. This will decrease imports but will surely not be enough to close the gap imported products currently fill. We have already seen the first results coming from auxiliary services outsourcing but patnerships to reconfigure Tula, Salamanca and Salina Cruz will have the biggest impact. Those projects will not be finished in the next five years but they will need to start soon if Mexico truly wants to fight the current refining products deficit it suffers.

Q: What factors make Mexico an attractive prospect for investors in refining compared to other Latin American countries?

A: Mexico’s main advantage is its size. Mexico is the main gasoline importer in Latin America and will remain so for the next 20 years unless new refining capacity is built. Furthermore, its geographical location, economic stability and reliable market with plenty of scope for growth for internal fuel providers makes it even more attractive.

Q: How do the shutdowns of Mexico’s refineries impact their competitiveness and trader interest?

A: In 2016, refining production in Mexico reached a historic low. Lack of reliable auxiliary services and nonprogrammed maintenance work meant that PEMEX could not benefit from the attractive margins brought about by low crude oil prices, while other North American refineries did. These problems contribute to Mexico’s inability to produce more valuable fuels such as cleaner gasoline and diesel.

But low production is not the only factor to consider. Because there are still three refineries with zero conversion capacity, PEMEX continues to produce more fuel oil than the local market needs. This defect has intensified because CFE is retrofitting its fuel oil generation plants to natural gas. Investors see this as a huge opportunity to increase their profitability in the short run through production normalization, performance improvement and the potential production of lighter crudes, even if it means importing them.

Q: How could the possible renegotiation of NAFTA or aggressive US trade policies impact Mexico’s gasoline market?

A: Blocking gasoline imports from the US to Mexico would affect the domestic market as much as it would affect the refineries on the Gulf’s coast, so it is unlikely to happen. Other measures such as the introduction of additional taxes would be reflected in consumer prices in Mexico, and could, depending on their magnitude, make supply from other regions more competitive, like Europe for example. Managing close relations with possible European suppliers is something Mexico has done in the past and could be reactivated if necessary. In the end, the question is not whether the local market can be supplied or not but how it would affect the final consumer price. This will depend not only on the region but also timing and quality regulation. In any case, a sudden lack of gasoline would have other economic effects and would push the development of alternative modes of transport in the long run.

Q: How do developments like BP’s plan to open 1,500 new gas stations over the next five years impact the market?

A: This can be considered the first step toward a more attractive and reliable Mexican market. BP’s participation in the Mexican market follows several other similar projects that have been announced but that are not yet ready to provide a reliable and independent gasoline supply. Besides having other companies opening gas stations here, the next step will be to have gasoline produced and imported by private parties in the different distribution centers.