Carlos Rafael Murrieta Cummings
Chief Operating Officer
View from the Top

Roadblocks Lie ahead for PEMEX Refining

Wed, 01/22/2014 - 13:48

Q: To what degree will PEMEX’s transformation into a productive enterprise of the state affect its refining and distribution activities?

A: Refining activities will be affected to a significant degree. It is not merely a matter of the refining activities, but of all the variables that surround them. I should preface this by underlining that we do not set public policy; we only implement parts of these policies. However, questions have to be answered. In an open market, prices have to be set, but who will define the prices of the fuels? What kind of taxes will be applied to gasoline, diesel, and all other types of fuels? Additionally, it remains to be defined how the supply of fuels will be handled in places where the cost of supply is higher than the average. For example, who is going to supply the Tarahumara region, where the price of gasoline is very different from what it is in Mexico City? Who is going to pay for the logistics? These aspects must be defined by the government through public policy so that industry players can abide by those rules to supply the market. In the end, Mexico and its consumers will experience this transformation as end users. I think it will have more implications for natural gas, energy, and fuel supply than for crude oil production. Crude oil production is going to provide money and resources for the government to set up social programs and pay for infrastructure development, among other elements. People will see the changes in the price of gasoline at the pump and the price of natural gas for domestic use. In this regard, the government needs to strike a good balance between two issues: income for the state and public policy.

Q: To what degree is PEMEX willing or planning to invest significantly in increasing its refining capacity?

A: We need to invest in the infrastructure that we need and that we know can make us money. PEMEX needs to be able to supply energy for the country at a low cost, which is its main function. In this case, supply does not mean national gasoline or diesel production, but the best way to provide that supply. Restrictions currently exist on imports, exports, and production but once all these elements have been entered into an optimization model, the reality might begin to look different. Would we consider selling our refineries if an optimization recommended it? That could be an option that we would have to analyze on a case-by-case basis. At this point in time, the model aims to optimize production at a feasible cost and we use that to define the equation for crude oil production. We know the price of imports, the price of crude, and we know that we can export the crude, if we do not consume it. However, we make more money with every barrel we process than we do with the export or import of the equivalent products. There has been speculation that PEMEX should not be in charge of importing these materials, but I believe PEMEX has yet to carefully define where it can make money as a company. I do not want to give away business opportunities, such as trading, production, or logistics. If PEMEX can make money somewhere, it must stay in that sector, but if it cannot, that business must be cast aside.

Q: What are the main obstacles preventing PEMEX Refining from turning a significant profit every year?

A: PEMEX makes money every year on the production side. For example, when talking about the prices PEMEX has authorized for the products it transports, you must consider that the cost of transportation in a PEMEX pipeline is only related to the pipeline. We only contribute to its marginal cost, not to its replacement cost. We also consider that the pipeline has infinite capacity, so the price ends up obtaining a subsidy as we are not able to recover everything. That is the problem in the downstream segment. Today, PEMEX’s rough loss figures in refining are around US$25 per barrel, which is crazy. Even when burning crude, we would not lose that amount of money. But the situation only becomes clear once you understand how the indirect costs and losses are reflected. We have high amounts of subsidies and other factors to consider, but the real problem is logistics, which costs about US$3 per barrel. This is what we need to work on. Everything else is structural. If we open the downstream market, it does not matter which companies come to Mexico as they will all face the same problem. And should they seek to buy PEMEX’s refineries, they will ask for the price in order to develop a business case. This leads to a matter of contention. If foreign companies can manage to fix the price issue, then PEMEX will not want to sell its refineries, since the company will see it as feasible to turn a profit itself. Nevertheless, for the moment, not a single refinery in the world manages to lose as much money as we do.