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.