Mexico’s Refinery Output Slides as Government Opens Fuel Market

  • Pemex’s six refineries are operating at 51% of capacity
  • State producer seeking to sell stakes as budget shrinks

Mexico’s refineries, already operating at barely half of capacity, are facing more headwinds in the form of competition from imported fuel and a falling maintenance budget for 2017. 

Mexico opened its energy industry to outside investment and more competition in 2013 in a bid to offset a rapid decline in oil production. Petroleos Mexicanos, the state-owned oil company, is headed for its 12th consecutive year of declining output and has seen its government-controlled budget slashed for 2017. The CEO of Pemex is seeking joint-venture partners for its six refineries in Mexico.

“I wouldn’t be surprised if some of the Mexican refineries close once they liberalize the market,” Andrew Echlin, an oil products analyst at Energy Aspects Ltd., said on the phone from New York. “Pemex’s refineries clearly need a lot of money put into them, and Mexico is now allowing fuel imports, which definitely complicates the picture because why not just get a terminal and get it from the Gulf Coast.”

Pemex processed 848,611 barrels a day of crude in August, the least since 1990 and down 20 percent from a year earlier, according to data from the Mexico Energy Information Agency. The refineries are operating at 51 percent of their capacity of 1.65 million barrels a day, data compiled by Bloomberg show. The slide is set to continue in 2017 amid government cuts to Pemex’s budget. The company declined to comment.

Mexico could eliminate government-set fuel prices as soon as next year as it works to open the energy market. Other recent reforms have enabled private companies to buy stakes in Pemex’s refineries and to sell and distribute fuel in Mexico.

Shrinking Budget

The Mexican government has allocated 392 billion pesos ($19.7 billion) for Pemex’s 2017 budget, down 18 percent from 2016, according to documents on the Finance Ministry website, prompting Pemex to cut back on oil and gas exploration and production and refinery maintenance. The company has said for several months it plans to sell refining assets and form joint ventures with private partners to drill in Mexico’s oil fields.

The maintenance cuts will affect Pemex’s asset sales plans, said Andrew Shepard, a refining and oil product markets analyst at Wood Mackenzie in Houston.

“Deferred maintenance spending can limit run rates and increase the cost of getting these assets to operate efficiently in the future, ultimately making them less valuable to potential investors,” he said in an e-mailed response to questions.

Pemex forecasts that crude production will fall to 1.925 million barrels a day in 2017 from the current 2.2 million. “Falling crude output is another side of the coin, so access to feedstock has become a challenge,” Echlin said.

Pemex Chief Executive Officer Jose Antonio Gonzalez Anaya said in an April 19 interview at Bloomberg’s New York office that bringing in partners may include giving up an operating interest in refineries, which he said lose 100 billion pesos a year.

In July, the state producer agreed with private equity firm First Reserve Corp. to acquire an ultra low sulfur gasoline facility at the Madero refinery to lease back to Pemex, which will continue to operate it.

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