Prices for fuel stored in the caverns of Mont Belvieu, Texas, have gone a little berserk.
Three companies, Enterprise Products Partners LP, Targa Resources Corp. and Lone Star NGL LLC, use the caverns to keep natural gas liquids that are traded on the spot market and exported around the world. Butane price fluctuations between the three are usually within a penny or two.
But in December, Enterprise’s butane price spiked as much as 30 cents a gallon higher than the same fuel kept in a cavern that is just footsteps away. Trading volume tripled its monthly average.
“The market just went crazy,” said Kelly Van Hull, director of energy analytics at Houston-based consultancy RBN Energy. “Everybody was off -- it was literally Christmas week -- and perfectly bad timing for somebody to come up short.”
Sudden price volatility can bedevil propane and butane traders and brokers. Reasons vary. Demand can swing, supply can ebb or rise, and every once in a while a trading desk takes a stab at manipulating the market. The last explanation is not unheard of. BP Products North America paid $303 million in 2007 to settle charges by the U.S. Commodity Futures Trading Commission that it tried to corner Mont Belvieu’s propane market. BP declined to comment.
December’s price whiplash still has market participants scratching their heads. Some traders, brokers and analysts, who requested anonymity, said it might be a case of investors covering short sales. Some said record-high shipments abroad took a bite out of tight supplies. But none were able to come up with a definitive explanation.
“I’ve traded NGLs for about 10 years, so I’ve seen a lot of things,” said Joe Sevick, research director for Houston-based Wood Mackenzie and a former trader for Castleton Commodities International and BP Plc. “With the exception of the polar vortex, I haven’t really seen structure like this.”
In January 2014, at the height of that winter’s attack of frigid air, propane traders went on an even wilder ride than what’s happening now. Mont Belvieu’s Midwest counterpart, a storage site in Conway, Kansas, saw wholesale propane prices rise 180 percent in three trading sessions. This month, Mont Belvieu propane at the Enterprise terminal swung by a narrower 16 percent in two sessions.
Ships at U.S. docks fill up the equivalent of two very large gas carriers full of propane each day. The ships sail to destinations all over the world, from the East Coast of Mexico to ports in Japan. Each ship holds the equivalent of 23 million gallons of fuel, or 4.6 million propane cylinders like the ones used to grill burgers.
The best commodity traders know how to take advantage of changing storage capacity when prices swing. The so-called contango play makes it possible to lock in profits by storing supplies to be sold in the future at higher prices.
Jim Teague, Enterprise’s chief executive officer, praised the firm’s traders for their mastery of contango in a Jan. 30 conference call with analysts. The team takes “advantage of opportunities that invariably present themselves when chaos occurs,” Teague said.
Representatives for Targa and Lone Star didn’t return requests for comment. Enterprise declined to comment on Mont Belvieu price fluctuations.
Following the December spike in butane, chaos broke out again at Mont Belvieu, this time among traders of the heaviest NGL, natural gasoline. Enterprise prices plunged relative to those at the nearby Lone Star terminal. Storage constraints seemed to be the culprit. Mont Belvieu, 30 miles east of Houston, was recovering from floods that could have threatened the salt content of brine ponds that are important to fuel storage.
NGL storage depends on the brine, which is injected or removed from the underground sites to control the flow of fuel. Brine is heavier than propane, so it settles at a lower layer. When NGLs go into the cavern, brine flows out and into above-ground containment ponds. To remove propane from the well, brine is re-injected into the cavern to push propane out.
Even with the flooding, Enterprise said the caverns were usable. As the price of Enterprise natural gasoline sank by 21 percent in one session on Jan. 23, the February-to-March contango nearly doubled in value to 8.125 cents from 4.375 cents, New York Mercantile Exchange data show.
Three days later, Enterprise announced it would be auctioning 300,000 to 1 million barrels of storage space in its caverns from Jan. 26 through Dec. 31 at a starting bid of 10 cents a gallon, according to a recipient of the offer. The tender closed the same day it opened, and by the session’s end the contango had fallen back to 4.625 cents.
“It’s enough to make the market screwy,” said RBN Energy’s Van Hull. “It wouldn’t surprise me if we continue to see volatility.”
Thousands of cargo containers bearing millions of emergency meals and other relief supplies have been piling up on San Juan’s docks since Saturday. The mountains of materiel may not reach storm survivors for days.
Distributors for big-box companies and smaller retailers are unloading 4,000 20-foot containers full of necessities like food, water and soap this week at a dock in Puerto Rico’s capital operated by Crowley Maritime Corp. In the past few days, Tote Maritime’s terminal has taken the equivalent of almost 3,000. The two facilities have become choke points in the effort to aid survivors of Hurricane Maria.
“There are plenty of ships and plenty of cargo to come into the island,” said Mark Miller, a spokesman for Crowley, based in Jacksonville, Florida. “From there, that’s where the supply chain breaks down -- getting the goods from the port to the people on the island who need them.”
About 30 minutes before Wednesday’s 7 p.m. curfew, there were few signs of life at the Crowley port besides circling bats. The ground was muddy and the chain-link fence protecting the containers listed to the side. Without street or traffic lights, the area was dark, except for one illuminated crane holding a yellow container waiting to be set down in a row of its blue and red fellows.
The race to move the boxes could mean life or death. The island of 3.4 million is in the throes of a burgeoning humanitarian crisis, without electricity, mobile-phone service or clean water. Puerto Rico’s power grid went darkduring the hottest season of year and may stay down for weeks or months. Of the commonwealth’s 69 hospitals, only 11 have power and fuel. Officials and residents warn of disease without access to clean water.
The devastation is the result of the third deadly hurricane within the past month to confront the Federal Emergency Management Agency and Defense Department.
“You have FEMA personnel spread thin, you’ve got DOD personnel spread thin,” said Senator James Lankford, a Republican from Oklahoma. “Puerto Rico is the biggest challenge of all of them. It’s obliterated their ports, their airports, their infrastructure, their electricity, and supplies need to go by boats. It’s a very challenging situation.”
The U.S. government has now shipped 4 million meals and 1.59 million gallons of water. Domestic firms have moved 9,500 containers to Puerto Rico, according to the American Maritime Partnership. One ship with more than 35 million pounds, or the equivalent of 1,900 planes, arrived Sunday.
Trucks are ready to be loaded with the goods and precious diesel for backup generators, but workers aren’t around to drive. Instead, they’re caring for families and cleaning up flood damage -- and contending with the curfew.
The buildings that would receive supplies are destroyed and without electricity, Miller said. The transport companies that have staff available and diesel on hand encounter downed poles and power lines while navigating 80,000-pound tractor-trailers on delicate washed-out roads.
“It’s one thing to move a little car through there,” Miller said. “It’s another to move a semi truck.”
Russel L. Honore, a retired Army lieutenant general who took over the federal response to Hurricane Katrina in 2005, said the efforts in Puerto Rico require what he called "expeditionary logistics" -- ships, aircraft and trucks that can move goods onto and around the island.
"The only people with that are the U.S. military," Honore said in a phone interview Wednesday. "We need a military commander to run it."
Brigadier General Rich Kim, the U.S. Army North deputy commanding general, will establish a headquarters to help manage the response, the Defense Department said in a news release.
In Washington, debate swirled around the 1920 Jones Act, which requires shipments of goods between two U.S. ports to be made with American-flagged vessels, limiting the amount of shipping and driving up its cost. Critics say suspending it -- or ending it -- is key to helping the stricken island, but the Trump administration has so far refused.
The administration temporarily lifted the rule this month to ensure gasoline-starved Florida received supplies after Hurricane Harvey. And foreign ships that took on gasoline or diesel before 11:59 p.m. Friday are still allowed to unloadon U.S. soil, Customs and Border Protection spokesman Gregory Moore said last week.
At least one foreign tanker that left Louisiana last week took advantage of the existing waiver to help Maria victims in Puerto Rico, according to shipping and chartering data compiled by Bloomberg.
"The waivers make sense in instances where there’s a need and a demand and we’ve exhausted all possible U.S. flagged resources," said Klaus Luhta, vice president of the International Organization of Masters, Mates and Pilots, a union that represents crews on U.S.-flagged vessels. "But to not go through that process is unfortunate, it’s disingenuous and it violates the law."
Meanwhile, Crowley’s storage space in San Juan is clogged by containers full of goods that normally would go on the shelves of stores like Wal-Mart. Miller said those boxes must move so the company can get even more emergency supplies on the ground.
“Priority right now is on the government relief cargo,” Miller said. “The sooner we can get commercial customers to come pick up their loads, the quicker we can get those shipping containers back in circulation.”
It took five weeks for the largest U.S. oil refinery to get back to normal after Hurricane Harvey.
It’s taking Port Arthur, Texas, a lot longer.
Nearly two months after Harvey inundated Port Arthur, a crucial hub of the global energy industry, the city of 55,000 is struggling to recover.
As attention shifted to Puerto Rico, where the devastation from Hurricane Maria is far worse, water-logged debris still lines the city’s streets. The mess of furniture, carpets and appliances will take months to clear, Mayor Derrick Freeman said. Zika, mold, hepatitis and other health threats are a big concern.
“You’re picking up moldy sheet rock and refrigerators that have flies all over,” Freeman said.
The 2017 hurricane season unleashed its deadly torrents on industries and communities alike, but the ability to clean up and move on separates them. That’s been true not only for Puerto Rico, where most of the island is without power a month after landfall, but to a lesser extent in Port Arthur, also known as Energy City, whose facilities are responsible for 6.3 percent of American oil refining.
Even in Houston, the fourth-largest U.S. city, which received $50 million in recovery funds from the state’s $12 billion disaster-relief fund, clearing mounds of trash will take months, according to a statement from the city.
Though problems persist, the Motiva Enterprises refinery, owned by Saudi Arabian Oil Co., and other Port Arthur facilities, run by Valero Energy Corp. and Total SA, had the resources to return to near-normal relatively quickly. On the other side of the razor wire, it will cost Port Arthur $25 million to cart away all the garbage, according to Freeman. The city received $10 million from the state fund, said Chris Bryan, spokesman for the Texas comptroller. The legislature won’t decide on further appropriations until its next session in 2019, he said.
Port Arthur, 90 miles east of Houston, wasn’t a beacon of financial wellness before Hurricane Harvey, according to the latest census data. In 2015, 27 percent of residents lived below the poverty line, compared with 17 percent in the state of Texas and 11 percent in the U.S. Median household income in Port Arthur is $32,863, more than 35 percent lower than in Texas and the country in general. The town has roughly triple the percentage of black residents as Texas and the U.S.
The economic disadvantages translate into health concerns. Locals have started complaining about “weird” health concerns, including breathing problems and rashes, most likely from homes infested with black mold, said Dr. Marsha Thigpen, the executive director of the town’s Gulf Coast Health Center.
Thigpen said she’s seeing 10 percent more patients than she did this time last year. The center is giving away hepatitis A vaccines and insect repellent to prevent Zika virus, she said.
Prolonged contact with mold can lead to neurological disorders, according to Dr. Claudia S. Miller at University of Texas Health Science Center at San Antonio. Symptoms such as headaches, fatigue, memory loss and difficulty concentrating might appear to be from post-traumatic stress, but those problems also arise from toxic exposure, she said.
Port Arthur’s three oil refineries are part of a peculiar jurisdictional setup. They aren’t sitting on city land. Like the embassies of foreign countries, they’re not technically on U.S. soil either. They’re in foreign trade zones, which allow the refineries an array of federal and local tax breaks.
The refineries are doing well financially. Motiva spent $7 billion on a 2012 expansion that more than doubled the facility’s capacity, to 605,000 barrels a day. The move set up the company to more efficiently process a range of crudes, including oil from Venezuela and Canada’s tar sands.
Saudi Aramco plans to invest $12 billion into another refinery expansion, and $18 billion total into Motiva by 2023.
Total said it’s pouring $1.7 billion into expansion at its Port Arthur plant.
Getting the facilities running after the storm was a priority for more than simply business reasons, said Dan Misko, who works at Exxon Mobil Corp.’s refinery in Beaumont, Texas, 20 miles northwest of Port Arthur.
“They don’t work just for Exxon Mobil, they work for the American people,” Misko said. “It’s important to the U.S. to make sure that we can provide fuel.”
The Port Arthur-based refiners have been generous to their afflicted neighbors. Motiva said it donated $500,000 to the American Red Cross; Total gave $250,000 and Valero $1 million.
Motiva said it gave away fuel and food, supplied as many as 900 meals a day for 10 days to emergency responders and evacuees staying at a local middle school. The company is matching employee contributions to the Red Cross, spokeswoman Angela Goodwin said.
Homes of one of every five Total employees in Port Arthur experienced flooding, and the company helped more than 200 employees with hotel stays, rental vehicles, onsite meals and fuel, said Tricia Fuller, a Total spokeswoman.
They Never Left
Valero delivered hundreds of meals to Catholic Charities Hospitality Center, donated towels to the humane society, blankets to shelters and food to the United Steelworkers union, which represents refinery workers, said Valero spokeswoman Lillian Riojas.
Between Port Arthur and Beaumont, 900 union members were affected by the storm, and more than 500 “lost just about everything,” said Richard “Hoot” Landry, the district staff representative.
“Most of our people never left” the refinery, Landry said last week.
Shifts are returning to normal this week, but refinery employees were working long days, Landry said, so they didn’t have a lot of time to work on their homes, many of which were damaged by the water.
“They’re living with family and friends,” he said. “It’s really a nightmare trying to find good contractors that won’t rip them off, so they’re really stressed right now.”
A few gasoline cargoes around the Caribbean Isles are looking for homes.
Three tankers holding about 1.35 million barrels of gasoline and alkylate, an octane-boosting component blended with motor fuels, are drifting with no instructions for delivery. The cargoes came from India with intent to land in the U.S., but now they’re in limbo as traders from Trafigura Group Ltd. and Mercuria Energy Group Ltd. shop around for the best selling value in the region.
Trafigura left the River Shiner drifting north of the Bahamas after the India-loaded gasoline cargo was diverted away from its New York Harbor destination earlier this week. Mercuria’s alkylate cargo aboard Spottail, which also loaded in India, has floated near Freeport, Bahamas, since March 27. Another Mercuria-chartered ship, Lake Trout, has drifted in the Gulf of Mexico for nearly two weeks.
Representatives of Trafigura and Mercuria declined to comment on the ships or their potential landing places.
“My sense of it is these may be barrels that end up in Venezuela,” Robert Campbell, head of oil products research for Energy Aspects, said by phone from New York. “They tend to bring in alkylate.”
Supplies are dangerously low in Venezuela, he said, and most of the country’s fluid catalytic cracker units that make gasoline are out of commission. Two gasoline tankers from Europe were diverted to Venezuela this week after state-owned Petroleos de Venezuela said it would boost imports after a traffic-stopping shortage in Caracas last month.
“Most of the FCCs if not all of them are down again,” Campbell said.
A surge in government-backed ethanol blending credits has investor Carl Icahn worried that independent refiners like CVR Energy Inc., in which he owns an 82 percent stake, will be bankrupted by the “rigged” marketplace.
"The RIN market will cause a number of refinery bankruptcies," Icahn wrote in an Aug. 9 letter to Environmental Protection Agency administrators Gina McCarthy and Janet McCabe obtained by Bloomberg. “The domino effect of this will be that ‘big’ oil will sop up the bankrupt refineries, causing an oligopoly resulting in skyrocketing gasoline prices.”
Merchant refiners that don’t own retail gas stations are expecting to pay $1.8 billion this year for Renewable Identification Numbers. They can’t generate the credits organically as their integrated counterparts can. As the EPA’s mandates to blend biofuels including ethanol or biodiesel have risen, supplies of the credits have been squeezed this summer. Refiners from Valero Energy Corp. to PBF Energy Inc. are crying uncle.
In an interview on Bloomberg TV Tuesday, Icahn said Jack Lipinski, CVR’s chief executive officer, likened the RINs market to the cocaine cartel controlled by Colombian drug lord Pablo Escobar, who died in 1993.
“He said, ‘I told the New York Times in an interview, I hope it gets out, he says, you know, if Pablo Escobar were alive, he wouldn’t be doing coke, he’d be trading RINs,”’ Icahn said.
Republican presidential nominee Donald Trump, whom Icahn supports, can stop the EPA’s "crazy regulations" on his first day in office, Icahn said in the interview.
"There is no good argument for what the EPA is doing," Icahn said, noting that independent refiners are penalized for something they can’t do. Icahn would also like to see Federal Trade Commission action.
The program’s structure and RINs’ inherent volatility are inviting speculators to the playing field, as there are no laws prohibiting parties from trading the credits, said Paul Cheng, an equity research analyst at Barclays in New York.
To learn how Icahn says he may boost Donald Trump, click here.
"It’s a very stupid system. There’s no other way to put it," Cheng said by phone. "Anyone with sufficient capital can go in and trade the RIN. You can short the RIN, you can long the RIN, it’s totally up to you."
Speculators and investment banks have partnered with gas-station retailers to gang up on refiners that are stuck buying the credits they can’t produce, Icahn said. As a result, the RIN market has become “the mother of all short squeezes” for the independents.
"They are also making secret deals with the blenders to entice them not to sell to the refineries but rather to sell to them," Icahn said. "These speculators are ‘hoarding’ the RINs hoping to get much higher prices as the time nears when refineries are obligated to deliver RINs to the EPA."
Andy Lipow, president of Lipow Oil Associates in Houston, said it’s not clear that these secret deals are taking place as Icahn described. Lipow said the market expects a shortage of credits in the next two years, driving up prices, as the government requirements exceed the amount of renewables used.
“I would actually like to see some of these contracts so I can make up my own mind on whether to agree with Mr. Icahn or not,” he said.
Jimmy Ren, an analyst with Scoggin LLC in New York, noted that Icahn’s letter preceded a report last week that CVR may be staging a takeover of the Israeli-owned refiner Delek US Holdings Inc. Delek rose 10 percent Friday on the news and rose 1.5 percent Monday.
“He was trying to merge CVR with Delek,” Ren said by phone. “Perhaps he is looking to save cost there -- build scale so that he has some pricing power against some of the larger refineries and the gas stations.”
Frank Macchiarola, group director of downstream and industry operations at the American Petroleum Institute, said Icahn is “a very sophisticated player in very large markets” who knows no market is perfect.
“It’s very easy to make vast generalizations about a market over one or two specific instances,” Macchiarola said in a telephone interview. “What he’s really concerned about here is making money for the companies he has a controlling interest in or a large stake in."
The American Fuel and Petrochemical Manufacturers trade group echoed Icahn’s call for reform of the Renewable Fuel Standard program.
"We agree with Mr. Icahn that the RFS is broken and needs to be reformed and independent refiners are getting seriously harmed by the program," Chet Thompson, AFPM president, said in an e-mailed statement. "Congress created the RFS and must move to repeal or significantly reform the program, but until they do EPA can make the program more equitable by moving the point of obligation to the point of compliance.”
Renewable fuel credits for 2016 compliance peaked this year at 97.75 cents July 13. The credits were at 81.875 cents on Monday, according to data from Progressive Fuels Ltd. compiled by Bloomberg.
Mexico’s fuel market liberalization has done something rarely seen before: make California’s pump prices look cheap.
Drivers are flooding across the border to southern California to fill up on gasoline, after protesters blocking distribution centers near the Baja California capital of Mexicali caused stations to run dry. Antunez’s Shell gas station in Calexico is just five blocks away from the Mexican border and rarely has business been as busy as now. Mexicali drivers wait four to five hours to cross into the U.S. just to fill their fuel tanks and then wait two more hours to cross back into Mexico.
“Right now, it’s crazy,” Rodrigo Marquez, 30, a station employee, said in a telephone interview. “We are having a lot, lot of people, everybody is fueling up their tanks.”
As Mexico opens a formerly monopolized market to foreign competitors for the first time in nearly eight decades, the government increased fuel prices to attract imports and outside competition. The 20 percent hike, dubbed a “gasolinazo,” or fuel-price slam, sparked protests across the country that curtailed fuel distribution, leaving Petroleos Mexicanos, or Pemex, struggling to keep its stations supplied.
Unleaded gasoline in Mexicali was increased in January to 16.17 pesos a liter, or $2.815 a gallon. Seventeen miles north across the border in El Centro, California, pump prices jumped 5.3 cents a gallon to average $2.718 as of 5 p.m. New York time Wednesday, according to GasBuddy, a price tracking company.
“There is a very important commercial exchange happening in the border region,” said Jose Angel Garcia, the president of Mexico gasoline retailer association Onexpo. “There are trucks with large tanks being used to bring fuel into Mexico from the U.S.”
Pemex said in a tweet it removed blockades in Mexicali’s fuel distribution center early Wednesday. As of Tuesday, wait times at the Calexico/Mexicali border were twice as long as normal, according to Best Time to Cross the Border, a website created by a University of California-San Diego team.
The demand from Mexico may push prices up further in Southern California, where prices near the border were up 11.8 cents from last week, according to GasBuddy.
As many as 10 cars at a time can be seen lining up at Antunez’s to fill their tanks and the station is having to resupply its own tanks about once a day, Marquez said. Usually the tanks are replenished every three to four days.
California gasoline prices are notoriously volatile and sensitive to supply interruptions due to its geographic isolation from the rest of the country’s refining and pipeline distribution systems, according to Patrick DeHaan, senior analyst at GasBuddy.
“There certainly could be some disruption if motorists coming across the border overwhelm California systems,” DeHaan said.
Phillips 66 loaded its first Panamax tanker for export to Mexico over the weekend. Late on Sunday night, the SCF Prime signaled that it was headed for Pajaritos, Mexico, after loading at Phillips' terminal in Beaumont, TX. Mexico is making history with this pivotal first purchase of Bakken crude from Phillips 66 at the U.S. Gulf Coast (USGC). Up until now, the crude oil trade between the U.S. and Mexico had been a one-way street, with oil moving from Mexico to the U.S. and not the other way around. But now, as Mexico’s state-run oil company Petróleos Mexicanos (Pemex) faces dwindling oil production and refinery outputs, importing light, sweet crude from the U.S. is a new avenue to revive Mexico’s refinery utilization. Today, we examine the new shift in the traditional flows of crude oil across the Gulf of Mexico.
U.S. Gulf Coast refiners have long seen the value of importing and processing Mexican crudes. The U.S. as a whole imported just over 600 Mb/d of oil from Mexico in 2017, and the lion’s share of those volumes were taken straight to Petroleum Administration for Defense District (PADD) 3 — the Gulf Coast. That made Mexico the fourth-largest crude supplier to the U.S. in 2017, bested only by Canada, Saudi Arabia and Venezuela. But while imports of Canadian crudes have surged in recent years — from 20% of total U.S. imports in 2008 to nearly 47% so far in 2018 — imports from just about everywhere else have declined, for a variety of reasons. The Saudi’s Arab Light can be displaced by domestic U.S. grades, while imports from Venezuela have gone down as a result of their declining production (see Meltdown!).
Similarly, crude imports from Mexico have come off sharply in recent years, and the lull corresponds to declines in oil production there. (We covered this state of flux in With a Little Help From My Friends.) Figure 1 compares U.S. imports of Mexican crude with Mexico’s domestic output. The dashed red line (right axis) illustrates the drop in Mexican crude production: year-to-date output is less than half what it was in 2005. (It’s worth noting here that the majority of that crude, nearly 60% of the total 1.8 MMb/d in September 2018, is categorized as “heavy,” or low in API gravity, according to Pemex.) Also in the last decade, at the same time Mexican production was decreasing, U.S. imports of Mexican crude (dark blue and light blue areas in Figure 1) have fallen by nearly 45% — from an average of 1.2 MMb/d in 2008 to 650 Mb/d so far in 2018 (left axis). The dark blue area shows the share of those imports that moved to refining centers on the Gulf Coast.
The decline in Mexican production is felt even more acutely by Mexican refiners than it is by U.S. importers. Mexico relies solely on its own production across its 1.6 MMb/d of oil-refining capacity. And along with Mexico’s oil production, refining rates south of the border are declining. This has led Mexico to import record levels of refined products like gasoline and diesel — mostly from the U.S. — to cover the shortfall from domestic refineries in recent years (see Más).
Of course, a more desirable outcome would be for Mexico to utilize its own refineries. To do that, they would need to import crude to make up for their own declining production. Luckily, their neighbor to the north has hydrocarbons to spare. Mexico is currently importing record levels of U.S. refined products, natural gas, and LPG which have become abundant due to the shale revolution.
Unfortunately, there was a problem regarding oil: the U.S. until December 2015 was saddled with a crude export ban and unable to sell crude abroad without a special license (see Molecule Laws), which Mexico sought earlier in 2015 before the 40-year ban was lifted in December of that year. At that time, Pemex proposed an oil swap of 100 Mb/d — essentially U.S. light crude for the heavy Maya it exports to PADD 3. This light-for-heavy swap could have worked well for both Pemex and U.S. refiners. U.S. shale production is generally light and sweet which makes it ideal for Mexican refineries. On the other hand, Mexico’s flagship crude, Maya, is heavy and sour — that’s one of the reasons complex Gulf Coast refiners like it so much (check out our blog Heavy for more on the dynamics of Maya crude pricing and PADD 3 refiners’ affection for Maya crude.) But even though Mexico was second in line to buy U.S. crude after Canada, Pemex never followed through with a purchase as the U.S. export spigots opened.
Pemex’s trading arm, PMI, purchases crude with a tender system that is common among Latin American national oil companies. The system works like this: Pemex distributes a tender to buy a sum of crude with pricing, delivery, crude specification quality and many more terms of purchase. Tenders can be for long-term contracts or just a spot trade, and are normally linked in price to an objective third-party agency’s price-reporting index for transparency. Governments often publicly announce tenders, and the awards, after a multi-day window to make offers is closed.
Earlier this month (October 2018), Pemex sought to purchase Light Louisiana Sweet (LLS) crude, but the tender failed due to a mismatch in quality specifications and delivery timeframes. The second tender issued later in October to purchase light crude, from the Bakken shale rather than LLS, was finally successful. After more than three years of discussions, Pemex is now signed up to import 1.4 MMbbl of U.S.-produced crude in November, giving Phillips 66 the chance to supply Pemex’s refineries via four 350-Mbbl waterborne cargoes of Bakken oil. As we said in the intro, the first of those cargoes loaded at Phillips 66’s terminal in Beaumont, TX, over the weekend. Late on Sunday night, the Panamax tanker SCF Prime indicated that it was headed to Pajaritos, Mexico, a busy refined-products import terminal on Mexico’s East Coast. The trip to Mexico ought to be short and sweet: SCF Prime is due to arrive at Mexico's East Coast early Wednesday (October 31). A Panamax tanker hauls about 350 Mbbl of crude, which matches the cargo-size tender requirement set forth by Pemex.
Phillips 66 was successful in its bid not only because it could match the desired cargo size but also because it has the capability to export Bakken crude, the exact grade Pemex was looking to buy. The independent refiner is one of the more active crude exporters on the Gulf Coast and its expertise as such meant that it was able to handle the logistical challenges to meet Pemex’s requirements. The Mexico-bound Bakken crude must travel all the way south to the Gulf Coast from North Dakota via the Dakota Access Pipeline (DAPL) and Energy Transfer Crude Oil Pipeline (ETCOP). The crude system originates in North Dakota, makes a stop-over in Patoka, IL, then ships down to Nederland, TX, right next door to Phillips 66’s Beaumont facility. We track all of Phillips 66’s activity in the newly launched Crude Voyager, by the way, and there are plenty more details in today’s edition. (For more on DAPL market dynamics, check out our blog Take My Crude Away.)
In addition to the 1.4 MMbbl of light Bakken crude that Pemex is importing in November, they are also hoping to pick up one additional 350-Mbbl cargo for a late-November delivery. On October 26, just four days after Pemex announced the 1.4 MMbbl deal with Phillips 66, Pemex issued another tender to buy a fifth 350-Mbbl cargo of Bakken crude for delivery between November 28-30, again at Pajaritos. That tender closed October 30 and results will be published either today or tomorrow, so we’ll be keeping an eye out on Twitter for any announcements.
Notably, all of the planned shipments are expected to take place in November, right before Mexico has a new president take office on December 1. It’s possible that the stimulus for Pemex’s historic, yet long-awaited, deal was to ensure that the import was completed before the changing of the guard in Mexico City. While this movement of Bakken crude to Mexico reverses traditional crude flows across the Gulf of Mexico and adds a new source of supply for Mexican refineries, the new leadership may take a different stance when it comes to crude imports. In the next installment of this series, we’ll review Mexico’s shifting oil dynamics. And make sure to stay tuned as we closely track upcoming movements from Phillips 66’s terminal in the RBN Crude Voyager, and watch history unfold as tankers full of Bakken crude move to Mexico for the first time ever.
"Going to Mexico" was written by Steve Miller and Boz Scaggs, and appears on Steve Miller Band's fifth studio album, appropriately entitled Number 5. Released in November 1970, the LP reached #23 on the Billboard Top 200 Albums chart. Personnel on the record were: Steve Miller (lead vocals, guitar, bass and piano), Lonnie Turner and Bobby Winkelman (bass), Ben Sidran (keyboards), and Tim Davis (drums). "Going to Mexico" was the B-side to the single, "Steve Miller's Midnight Tango," and also appears on the Steve Miller Band double album Anthology, which was released in 1972.
Steve Miller Band, originally called Steve Miller Blues Band, was formed in San Francisco in 1966 by Steve Miller. Before signing a record deal with Capitol Records in 1967, the Steve Miller Blues Band backed up Chuck Berry on his Live at The Fillmore Auditorium album, and appeared at the Monterey Pop Festival. Before releasing their debut album in 1968, the band dropped "Blues" from their moniker.
Born in Milwaukee and raised in Dallas, Steve Miller started playing guitar at the age of six. His dad was good friends with Les Paul and Mary Ford, and Les Paul was his godfather. His popular high school rock band, "The Marksmen," included members Boz Scaggs and Dusty Hill, who would later become a hit solo artist and ZZ Top's bass player, respectively. Steve Miller Band has put out 18 studio albums, six live albums, seven compilation albums, and 30 singles to date. They have had 33 band members (including Miller) since their inception.
The band hit it big in 1973 with the platinum-selling album The Joker. Steve Miller Band went on to sell more than 24 million albums in the U.S. alone. Steve Miller Band's Greatest Hits 1974-78 has sold over 13 million copies. They have a star on the Hollywood Walk of Fame, and an ASCAP Golden Note Award. Steve Miller was inducted into the Rock and Roll Hall of Fame as a solo artist in 2016. Miller still tours to this day.