Mexico's Pemex extends partnership with Shell in Texas refinery

Fuel Fix:
The 25-year partnership between Royal Dutch Shell and Mexico's state oil company in Deer Park is now extended at least until 2033, ensuring for Shell guaranteed supplies of heavy crude and for Pemex a strong refining presence along the Texas Gulf Coast.

Shell's nearly 90-year-old Deer Park refinery became a joint venture in 1993 when Petróleos Mexicanos, called Pemex, bought a 50-percent stake. The two companies expanded it from a facility that churned through 225,000 barrels of crude a day to 340,000 barrels today.

About half of the oil processed is heavy Maya crude from Mexico, but, after 2023, the volumes will fall from about 170,000 barrels a day down to 70,000 barrels. That change will give Shell more flexibility, while still safeguarding for Pemex a steady flow of oil exports and quality gasoline production, said Sandy Fielden, director of oil and products research at Morningstar.

"By extending the agreement, Pemex ensures sales of its flagship Maya crude to the U.S. as Canadian competition threatens, as well as retaining a profitable investment in the world's most sophisticated refining location on the Gulf Coast," Fielden wrote in a new report.

More than a decade ago, most Gulf Coast refineries were configured to process heavier and thicker grades of crude from countries like Venezuela and Mexico. But now Venezuelan outputs are cratering amidst the countries economic and geopolitical woes. Likewise, new export restrictions will soon kick in on heavy crude from Iran.

That leaves a greater reliance on Mexico and Canada for sources of heavier crude. However, more Canadian crude is expected in the coming years as more pipelines are built to transport Canadian crude to the Gulf Coast. And refineries also are working to process more lighter shale oil from areas like West Texas' booming Permian Basin.

"The shale revolution has reversed the tables by creating a surplus of light sweet crude, and Gulf Coast refiners find themselves paying higher prices for heavy crudes in the light of falling Venezuelan and Mexican production of these grades," Fielden added.

The revised Deer Park deal will let Shell use more Canadian oil, or shale oil, or whatever offers the best bargain in pricing markets. And Deer Park will keep sending gasoline to help meet Mexico's growing consumer demand in a country that lacks a strong refining system. About half of Deer Park's gasoline output ships back to Mexico.
The conversion to Texas shale light crude needs to happen quicker.  With dwindling supplies of heavy crude and fewer friendly countries selling it moving to light crude is an imperative.  This deal with Mexico apparently will allow that movement to happen.  If Mexico could find a way to defeat its criminal insurgency across the border with Texas, it too could be producing light crude to replenish its shrinking base of heavy crude.

This deal comes as Mexico and the US have reached a preliminary agreement on a replacement for NAFTA.  The Trump administration wants to move more toward bilateral agreements which would mean a separate agreement with Canada. 


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