Mexico Crude Needs New Markets as U.S. Exports Surge, Citi Says

Mexico’s reliance on oil exports to its northern neighbor is being jeopardized by the U.S. shale boom, forcing suppliers to seek new buyers, Citigroup Inc. said.

Mexico, which exports about 880,000 barrels a day of crude to the U.S., is being “pushed out” by its chief trading partner as demand diminishes, according to Ed Morse, global head of commodities research at Citigroup in New York. U.S. imports of Mexican crude fell 13 percent to the lowest in more than 20 years in 2013 because of increased domestic production, according to the U.S. Energy Information Administration.

“Something’s got to give,” Morse said yesterday in an interview at the Institute of the Americas energy conference in La Jolla, California. “The U.S. has not been a good neighbor to Venezuela or Mexico in the way the shale revolution has unfolded.”

Production of tight oil and shale gas accounted for almost 90 percent of the U.S.’s crude growth the past two years as the country nears a historic high in output, according to the EIA. Hydrocarbons, including natural gas, crude and petrochemical exports, are now the country’s largest export product, Morse said. The U.S. is the world’s biggest exporter of petroleum products, he said.

State-owned Petroleos Mexicanos announced May 19 that it will send its first shipment of Olmeca light crude to Switzerland in July. Pemex, as the company is known, also announced shipments of light crude to Hawaii, Japan, India and California this year.

Increased Output

“Pemex has lost around 300,000 barrels of daily exports to the U.S. in the last few years and are certainly starting to make it up by selling Olmeca into Europe and the Pacific basin,” Morse said. “That can only go so far because their basic refining center is the U.S. Gulf of Mexico,” which limits market expansion, he said.

Mexico passed legislation last year to end Pemex’s 75-year oil-production monopoly and allow private companies to enter the energy industry. Pemex, which has seen oil output fall nine straight years to 2.5 million barrels per day from 3.3 million in 2004, is forecast by the government to add at least 1 million barrels to daily production by 2025.

Mexico could produce as much as 4 million barrels of oil a day if legislation is implemented appropriately and the industry is properly regulated, Morse said. The country needs to enforce stricter guidelines and transparency to ensure the safety of new investments, he said.

“The resource bases will not be the constraint to reaching that targeted level of production,” Morse said. Successful integration of foreign companies will depend on “whether the government can assure that companies can surmount business practices that are deemed to be illegal in most of the world.”

Mexico took control of oil services contractor Oceanografia SA on Feb. 28 after Citigroup alleged $400 million in loan fraud. The Ciudad del Carmen, Mexico-based company, which provides maintenance and support services for offshore oil projects, receives most of its sales from Pemex contracts.

To contact the reporter on this story: Adam Williams in Mexico City at awilliams111@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Alex Devine, Randall Hackley

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