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Sailing Around the Wall? U.S. Refined Product Exports to Mexico
Changing Mexican energy market encourages flows.
Morningstar Commodities Research
Nov. 10, 2016
Mexico Increasingly Reliant on U.S. Energy Supplies
U.S. trade and immigration policy toward Mexico was at the center of President elect Donald Trump’s
victorious campaign. It is too early to tell how the new administration’s policies will impact trade
Sandy Fielden
Director, Oil and Products Research
+1 512-431-8044
[email protected]
relations with its closest southern neighbor, but Mexico is increasingly reliant on U.S. energy supplies in
the shape of natural gas, natural gas liquids and refined products. That reliance is expected to increase
as Mexican energy market reforms open the country’s internal energy distribution to competition. This
note looks at the source of growing refined product exports to Mexico from the U.S. Gulf Coast and
considers infrastructure developments that will change the current landscape in the next two years.
Data Sources for this Publication
gEIA
gClipper Data
To discover more about the data sources
used Click Here
Growing Refinery Maintenance
Per national oil company Pemex, Mexico consumed an average 816 thousand barrels/day, or mb/d, of
gasoline and 462 mb/d of middle distillates (diesel and jet fuel) in the nine months to September 2016.
However, growing maintenance problems and a lack of upgrading investment in the country’s six
refineries, mean that Mexico has become increasingly reliant on imports to meet domestic demand.
Imports of refined products have grown steadily since 2013 when they averaged 359 mb/d of gasoline
and 107 mb/d of distillate—respectively 46% and 27% of domestic demand. By 2016 (year to
September), imports had jumped to an average 476 mb/d of gasoline and 170 mb/d of diesel or 60% and
47%, respectively of domestic demand. This has happened despite of Mexico’s status as a major crude
oil producer and exporter. Although Pemex has promised to invest more in domestic refining
infrastructure, the impact of lower oil prices and declining crude production on capital budgets, has so
far delayed the necessary plant upgrades.
Expanding U.S. Shale Exports
Almost all Mexico’s refined product imports come from close by Gulf Coast refineries that process about
9 million barrels/day, or mmb/d, of crude. Mexico is not only reliant on the U.S. for refined products, but
also for supplies of natural gas liquids in the form of liquefied petroleum, gas or LPG—a mixture of
propane and butane—that is used for heating, cooking and industrial purposes. U.S. exports of LPG to
Mexico doubled from an annual average 50 mb/d in 2013 to 108 mb/d through August 2016 according to
the U.S. Energy Information Administration, or EIA. Over the same period, the U.S. also doubled exports
of pipeline natural gas across the border to Mexico from an average 1.8 billion cubic feet/day, or bcf/d,
in 2013 to 3.6 bcf/d on average in the year through August 2016. The U.S. has so far been able to
comfortably meet Mexico’s expanding energy demand because of the recent boom in domestic crude
and natural gas (and associated liquids) production from shale and increased crude throughput at Gulf
Coast refineries discussed in our June note (U.S. Refiners Lose Crude Price Advantage).
Page 2 of 6
U.S. Product Exports to Mexico | 10 November 2016
In fact, Mexico is an increasingly important destination for U.S. exports of refined products, particularly
gasoline. Mexico accounted for an annual average 47% of total U.S. exports of finished gasoline and
gasoline blending components or 237 mb/d in 2013, according to EIA. By 2016 (average through
August), shipments to Mexico increased to 377 mb/d or 52% of the gasoline total. Over the same period,
Mexico accounted for a smaller portion of U.S. middle distillate exports—just 9% of the total in 2013 or
119 mb/d, growing to 13% of the total or 183 mb/d on average in 2016 through August. Most of these
exports are sent by ship from U.S. Gulf docks to either the Tuxpan or Salinas Cruz ports on Mexico’s East
Coast.
Energy Market Reform
Before 2014, Mexico’s energy market was a Pemex monopoly, meaning that imports of refined products
(as well as sales and purchases of other energy commodities) were entirely controlled by the national oil
company. Up until this year, all refined product purchases from the U.S. had to be made by Pemex,
typically operating through its international subsidiary PMI, issuing regular tenders that U.S. refiners and
traders bid on. Energy market reforms initiated in 2013 and designed to open Mexico to outside
investment and competition, started to take effect in 2014 and by April 2016 led to the first award of
refined product import permits by Mexico’s new Energy Regulatory Commission, or CRE. These permits
give domestic and international competitors to Pemex—including trading companies Trafigura, Koch,
Cargill, Castleton Commodities, BP and Shell—the right to import gasoline and diesel as well as other
products. Between April 1 and Nov. 7, 2016, the CRE awarded one-year permits to 145 companies
allowing them to import up to 3 mmb/d of gasoline, and to 209 companies allowing them up to 2.1
mmb/d of diesel imports. Despite these import permits dwarfing Mexico’s current import needs (as
noted above—476 mb/d of gasoline and 170 mb/d of diesel on average through September 2016),
virtually no actual imports have occurred yet. That is because Mexico’s market reforms have not yet
allowed access to Pemex infrastructure to distribute fuels or ended government control over domestic
fuel prices—rendering commercial imports logistically difficult and uneconomic. Government efforts to
address one of these issues by removing price controls from Jan. 1, 2017 are still expected to be rolled
out slowly and could be constrained by other existing taxes. Bottom line is independent refined product
imports to Mexico by traders and refiners must wait for further deregulation to take effect.
Gulf Coast Refined Product Flows
In the meantime, as we have said, flows of refined products from U.S. refineries to Mexico are
considerable and growing. To get an idea of the origin and destination of these flows we looked at
waterborne shipping data provided by ClipperData covering monthly average flows originating from Gulf
Coast ports and destined for East Coast Mexico or West Coast Mexico over a 22-month period from
January 2015 to October 2016 (Exhibit 1). Most Gulf Coast refined product exports were headed to East
Coast Mexico (90% of gasoline, 84% of distillate and all naphtha). Average East Coast Mexico shipments
during the period were 250 mb/d of gasoline and 102 mb/d of distillates with a smaller 14 mb/d flow of
naphtha. Distillate volumes increased in 2016 as U.S. Gulf prices weakened due to oversupply. Refined
product flows to West Coast Mexico from the Gulf Coast over the 22-month period (not shown on the
exhibit) were much lower (an average 28 mb/d of gasoline and 19 mb/d of distillate), because they
U.S. Product Exports to Mexico | 10 November 2016
require passage through the Panama Canal, which increases the freight cost such that they cannot
compete with exports from the U.S. West Coast. Comparing ClipperData Gulf Coast flows to EIA total
exports and assuming exports to Mexico come only from the Gulf or West Coasts, we calculated that
West Coast exports to Mexico during 2016 to August were running at around 50 mb/d each for gasoline
and distillate.
Exhibit 1 Refined Product Exports from Gulf Coast to East Coast Mexico
Gasoline
Diesel
Naphtha
500
450
400
thousand barrels/day
350
300
250
200
150
100
50
10/1/2016
9/1/2016
8/1/2016
7/1/2016
6/1/2016
5/1/2016
4/1/2016
3/1/2016
2/1/2016
1/1/2016
12/1/2015
11/1/2015
10/1/2015
9/1/2015
8/1/2015
7/1/2015
6/1/2015
5/1/2015
4/1/2015
3/1/2015
2/1/2015
0
1/1/2015
Page 3 of 6
Source: ClipperData, Morningstar
Next we analyzed ClipperData to understand the refining region that exports to East Coast Mexico
originated from over the 22-month period. We grouped together individual shipments that ClipperData
tracked for gasoline and gasoline blending components (Exhibit 2) as well as distillates (Exhibit 3) bound
for East Coast Mexico by five main refining regions along the Gulf Coast. The five regions were: Corpus
Christi, Texas (closest to the Mexican border); Houston, TX (including Deer Park, Galena Park, Baytown,
Texas City, Galveston, Houston and Pasadena); Beaumont/Port Arthur, TX; Lake Charles, Louisiana; and
the New Orleans, LA/Mississippi Delta region (including Baton Rouge, LA, Belle Chase, LA, Garyville, LA,
Norco, LA, Pascagoula, Mississippi and Saint Rose, LA). The data shows gasoline exports to East Coast
Mexico mostly came from Houston (46% on average) and Port Arthur/Beaumont (30% on average)
refineries. Corpus refineries represented a much lower 9% of gasoline shipments—even though it is
physically closer to Mexico. This reflects the fact that Corpus refineries are currently not export-oriented.
Far less gasoline came from Louisiana than Texas with just 8% on average shipped from Lake Charles
refineries and 6% from New Orleans/Mississippi refineries.
U.S. Product Exports to Mexico | 10 November 2016
Exhibit 2 Gasoline Tanker Shipments to East Coast Mexico by Refining Region Origin
Houston
Corpus Christi
Beaumont/Port Arthur
Lake Charles
New Orleans/Mississippi
180
160
140
thousand barrels/day
120
100
80
60
40
20
10/1/2016
9/1/2016
8/1/2016
7/1/2016
6/1/2016
5/1/2016
4/1/2016
3/1/2016
2/1/2016
1/1/2016
12/1/2015
11/1/2015
10/1/2015
9/1/2015
8/1/2015
7/1/2015
6/1/2015
5/1/2015
4/1/2015
3/1/2015
2/1/2015
0
1/1/2015
Page 4 of 6
Source: ClipperData, Morningstar
The mix of origins for distillate cargoes headed to East Coast Mexico over the same period was more
evenly distributed than gasoline with an average 23% from Houston, 24% from Beaumont/Port Arthur,
21% from Lake Charles, and 24% from New Orleans/Mississippi. In 2016, there was a doubling in
distillate loadings from Louisiana—up in St. Charles from 14 mb/d on average in 2015 to 30 mb/d in
2016, and in New Orleans/Mississippi up from 17mb/d to 34mb/d. Louisiana refineries typically process
more crude supplies from Offshore Gulf of Mexico that are medium sour grades producing higher
volumes of middle distillates. In general, the analysis shows most exports of gasoline come from Texas
refineries with more diesel hailing from Louisiana—especially during 2016.
U.S. Product Exports to Mexico | 10 November 2016
Exhibit 3 Diesel Tanker Shipments to East Coast Mexico by Refining Region Origin
Houston
Corpus Christi
Beaumont/Port Arthur
Lake Charles
New Orleans/Mississippi
60
50
thousand barrels/day
40
30
20
10
10/1/2016
9/1/2016
8/1/2016
7/1/2016
6/1/2016
5/1/2016
4/1/2016
3/1/2016
2/1/2016
1/1/2016
12/1/2015
11/1/2015
10/1/2015
9/1/2015
8/1/2015
7/1/2015
6/1/2015
5/1/2015
4/1/2015
3/1/2015
2/1/2015
0
1/1/2015
Page 5 of 6
Source: ClipperData, Morningstar
These waterborne flows of roughly 400 mb/d of gasoline and distillate exports to Mexico from Gulf Coast
refineries will change in two ways during the next two years if the CRE energy market reforms are
completed per the timetable. First, as direct imports by permit holders become feasible when Mexico
ends price controls and deregulates internal infrastructure, the market will open to many more players
than PMI. Second, several refined product pipeline and rail infrastructure projects are due to be
completed by the end of 2018 to take advantage of direct deliveries to Mexican demand centers. These
projects (that we will detail in an upcoming note) will replace some of the existing waterborne flows and
increase the attractiveness of exporting refined product from the Corpus area where many of the
pipelines will originate.
Energy Trade Flows Critical to Any Trade Policy Review
Whatever restrictions might be placed on trade and immigrant flows between Mexico and the U.S.
during the Trump Administration, U.S. energy producers will be anxious to protect growing hydrocarbon
exports to our southern neighbor. Exports of refined products are set to increase as the Mexican market
is opened to competition and more direct transportation routes are developed. In the meantime,
Mexico’s appetite for U.S. gasoline and distillates has played a significant part in sustaining Gulf Coast
refining margins. K
Page 6 of 6
U.S. Product Exports to Mexico | 10 November 2016
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