Private Investment and its Role in Mexico's Refining Sector

Q: How will the construction of the Dos Bocas refinery, and the modernization of Mexico’s other six refineries, help expand gasoline productivity?

A: While the announced investments in new capacity and existing refineries would allow Mexico to increase gasoline production, this volume likely will not be enough to make a drastic change in import requirements. Given the financial challenges of pursuing different projects at the same time, we expect that the increase in utilization will be limited and the country will continue to require at least 500Mb/d in the long term, most of it likely coming from the US market.

Q: What impact will the Dos Bocas refinery have on the administration’s goal of energy autonomy?

A: A refinery with the right configuration to process heavy-sour crudes that is operated at market standards would be one step forward in the goal to achieving higher gasoline production. However, this will not be enough to reach energy autonomy and will not necessarily add value to PEMEX as a company without optimizing the complete operation. One point to highlight is that all the announced measures are focused on supply efforts to increase production, but there is less emphasis on demand-side measures that could also contribute to reducing Mexican dependency on gasoline imports.

Q: Many commentators have expressed doubt as to the budget and time frame for the Dos Bocas project. What challenges do you foresee?

A: According to similar refineries that have been built in recent years, we would expect five to six years as a reasonable period with a budget of approximately US$10 billion.

Q: How pronounced a role will private micro refineries have on future refining capacity?

A: We see the economics of micro refineries as challenging, particularly if the crude more suited to these projects, light and sweet, has to be imported. This adds costs to refineries that have shown very week margins in the past given their very simple configuration.

Q: What role do you expect private investment to play in the redevelopment of Mexico’s refining sector?

A: We would expect their participation to focus on the retail segment as has been the case until now. There is a great deal of opportunity in the midstream segment, but pipeline operations are where private investment will continue to face significant security, regulatory and financing challenges. As a result, participation in terminals, road and rail transportation are the segments where private investment could focus in the short term, taking advantage to also bring their own product into the country.

Q: How is Wood Mackenzie advising clients on investments in the Mexican refining market?

A: The questions that we receive from clients focus on two main topics: the prospects for the Dos Bocas refinery and keeping track of the private investments that have been announced but not developed yet in the market. While there is still interest from the bigger players, we have seen a slowdown in the interest of the rest of the world as the government’s policy has shifted toward a stronger PEMEX that controls all the segments of the value chain. Mexico is still an attractive market, but there is less certainty about the regulatory and policy advantages given to new players interested in coming to the market.

Q: What main challenges will Mexico’s oil and gas industry face until 2024, from both a private and public perspective?

A: One of the main challenges that I would highlight is fuel quality. Ultra-low sulfur requirements are already a global standard and Mexico remains behind the curve in terms of enforcing legislation and having the ability to produce it domestically.

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