As the debate around US crude oil exports grows and Pemex is reported to have sought a license to export crude to the US as part of an exchange, the Center on Global Energy Policy today released a new issue brief that examines the potential for crude exchanges from the Mexican perspective, including the reasons Mexico might seek additional supplies and under what conditions it would make sense. The brief was authored by Center Fellow Adrian Lajous, who served as the Director General of Pemex (CEO) and Chairman of the boards of the Pemex group of operating companies from 1994 to 1999. The views expressed are those of the author.
A Pemex affiliate has applied to the US Department of Commerce for a license to export 100,000 barrels per day of light crude and condensate in exchange for Mexican heavy crude. Such application is currently under review. Much of the discussion around the potential exchange has focused on its ability to provide an additional export channel for growing volumes of US oil production threatening to overwhelm the US refining system. This issue brief examines the exchange from the perspective of Mexico, which has traditionally been one of the top oil suppliers to the United States.
Specifically, the paper:
- – Articulates the market logic for lightening the crude slate of three Mexican refineries;
- – Explains the option of importing crude from the US or using additional quantities of Mexican light crude; and,
- – Explores the market conditions in which the proposed transaction makes economic sense.
The main conclusion of this paper is that for the exchange of Eagle Ford crude for Mexican Maya crude to make economic sense for Mexico would require a relatively wide Brent/WTI price spread, noting that this differential narrowed in the second half of 2014 due to greater pipeline capacity from Cushing, Oklahoma to the Gulf Coast. In January and early February 2015, the arbitrage for exports of Eagle Ford crude appears to have closed and it is difficult to forecast when it will open again and for how long. Price differentials between LLS and Eagle Ford crudes are too narrow for the exchange to take place. The paper also concludes that the potential volume of light crude exports to Mexico must be determined through rigorous and frequent optimization exercises of Mexican refineries, which consider Mexican crude streams as well as crude imports. Estimates of light crude imports of up to 300,000 b/d would imply not only the full displacement of heavy crude from Mexican cracking refineries, but also significant quantities of domestic light crude blends. It would be more prudent to first test the refineries with light crude imports of around 100,000 b/d when they become again economically viable.