PEMEX Gasoline Market Perspectives: An Update

During the current government administration, the basis of PEMEX's strategy for its refining branch is to increase gasoline and other fuel production, so that the country reaches self-sufficiency, reduces dependence on imports and lowers prices for the Mexican consumer. 

This strategy required a profound change in the existing refining infrastructure and of the industrial policy objectives, which have evolved from an economic and financial approach in past administrations to a volumetric perspective, aimed at increasing production at any cost.

To this end, a modernization program for the six existing refineries at the National Refining System (NRS) was launched to increase its productivity and utilization rate, which fell to 36 percent from 2019-2020. This program is still in the process of implementation and has consumed a significant amount of operating and economic resources.

At the same time, it was decided to start the construction of a new refinery, with a capacity to handle 340     MBD of Maya heavy crude oil from adjacent oil fields and configured to process heavy residuals through a coking facility to avoid fuel oil production.

To complete this strategy, PEMEX purchased the remaining 50 percent stake of Shell’s Deer Park refinery in Texas, where PEMEX already owned 50 percent     , aiming to claim this capacity as part of Mexico’s domestic production. Deer Park has a process capacity for 340,000 Bl/day with a gasoline yield close to 40 percent compared to 33 percent of the NRS, but its production should be considered as an import as 70 percent of its crude feed is sourced outside Mexico. 

Current NRS crude process capacity is 1,640,000 Bl/day, which will increase to 1,980,000 by 2023 with the addition of the Olmeca refinery.

So far, the results of this strategy have been limited for the following reasons: 

• Obsolescence of the six operating refineries that currently comprise the NRS, whose modernization has been very expensive and complicated without generating conclusive results. 

• Three out of these six refineries have no coking facilities to convert fuel oil (liquid) into coke (solid), so increasing production generates greater volumes of high sulfur fuel oil (more than 3.5 percent sulfur content), which pose serious logistical problems due to constraints in tank storage capacity. These volumes affect the economic performance of the NRS due to the limits on sulfur content in fuels used by maritime vessels — the main outlet for fuel oil — to 0.5 percent  established by the International Maritime Organization (IMO), which has reduced market size and prices.

• Degradation of the quality of the mixture of local crudes that currently feed the SNR, especially heavy crude (Maya), both in density (API), and by the growing content of impurities, such as sulfur, water, sand and metals. Imports of best quality crudes to enrich the mix are not being considered  by PEMEX.

• Operational deficiencies due to a lack of automated systems and overstaffing. 

Taking this into account, it is estimated that the utilization rate of NRS’ total capacity (including the Olmeca refinery), will increase from 49 percent in 2023, to 62 percent in 2025 due to a gradual growth of product yields in the system. 

Increasing capacity and utilization rates will boost total fuel production, but the existing configuration scheme of the NRS, including the Olmeca refinery, will allow gasoline production to reach at most 493 000 bl/day by 2025, but also generate higher volumes of fuel oil.

This will prove to be a challenge for the economics of the refinery system, as it is well known that residual fuels are almost always sold below crude prices. In this case, fuel oil production will represent around 30 percent  of total refinery output that should be traded at a discount over crude price.     

The most intriguing result of this effort will be that full gasoline self-sufficiency will not be reached

PEMEX’s gasoline supply demand balance for 2022-2025 shows:

• Increasing sales, by reversing the collapse in 2020-2021 from the effects of the pandemic and government measures designed to inhibit the import and sale of fuels by third parties. 

• Increasing production by the NRS, through rising capacity and utilization levels, but well below anticipated sales.

• Declining imports, with the caveat that around 40 percent of these imports will come from the Deer Park refinery.

The combined effect of these facts will put PEMEX in a far better position within the gasoline domestic market. We believe that the anticipated imbalances will not contradict the government’s effort to increase Mexico’s gasoline self-sufficiency.

However, with a moderate expansion of crude oil production, in accordance 

with official estimates, the increasing crude volumes processed in the NRS will provoke an important decrease in the amount of oil available for export and in the foreign currency revenues generated by these sales.

This could further pressure the country’s balance of payments as oil revenues still account for a significant share of total government income.

The administration’s gamble is that the expanding production of gasoline and diesel at the NRS will reduce their imports and the associated expenses, balancing the PEMEX foreign currency account.