Author: Mexico English Library

What’s Up with Pemex Gas Stations in Houston?

While lots of folks are watching private branded gas stations open for the first time in Mexico, Pemex officials are carefully watching their very first Pemex branded gas stations in Texas. Five of the iconic Mexican gas stations opened in the Houston Texas area this past December. These were the first to open outside of Mexico in the company’s 80 year history.

The Houston stations sell United States gasoline, and though the attached convenience stores do include a Taco Shack, they also sell all-American style convenience-store-fare too.

Pemex intends these five stations as a market testing venture, primarily. Although they do plan to open more, you can bet a lot of what they’re doing is struggling to learn how to compete in the newly competitive Mexican market.

Private companies are only now opening non-Pemex branded filling stations. The Coca Cola bottling giant announced plans recently to rebrand some 300 Pemex stations under their own OXXO brand. OXXO is a 13,000 strong chain of convenience stores with locations all over Mexico. Gulf Oil also plans to open some 100 filling stations in Mexico before the end of this year.

All this comes in the wake of an 80-year monopoly on all things petroleum in Mexico, and that wake is not pretty. The former pride of Mexican industry is staggering under the weight of pension obligations from a very bulky workforce, and suffering from the collapse in world oil prices.

While Pemex has a run a Houston refinery, in Deer Park, for years, the Houston gas stations won’t be selling their gasoline.  Pemex opened in Houston in large because of the population of Hispanics and especially those of Mexican descent. It’s a retail operation, but probably more than that, it’s a market research operation. Still, with hundreds of thousands of Mexican descended people in the US, it could be a retail operation that’s ripe to take off.

Pemex is increasingly encouraging infrastructure investment that is intended to support all those new privately owned and operated stations opening in Mexico. Re-investment and badly needed infrastructure upgrades have suffered as world oil prices tanked out and the oil giant has faced government bailouts and worse.

But all of the reforms necessary to fix the aging petroleum behemoth have taken significant political muscle too. Sweeping energy industry reforms that would be all but impossible today took place between 2012 and 2014. But even despite the current administration’s political woes, progress on the reforms staggers forward – and foreign investment is slowly shoring up the industry. Auctions for exploration and extraction of the country’s oil reserves have met with significant success and similar auctions have opened up the country’s electricity markets to outside, private and foreign investment too.

The Mexican energy market and the technical standards it demands are very much in line with the best in the industry, even despite language and business culture differences. And as the reforms take root, so too, does the new spirit of investment and opportunity.

Private Gas Stations Are Coming to Mexico

Pemex stations have been one the quintessential signs you crossed into Mexico for decades. There’s simply been no other brand of gasoline visible anywhere in the country. That’s all about to change. In just the past month, the ban has been lifted and private brands of gasoline are allowed to return to the Mexican market.

Private investors can open all new gas stations, or partner in with existing franchisees, many of which are leased directly from Pemex. Pemex has held a total monopoly on the petroleum industry for nearly 80 years, and these changes are only happening at the result of fairly sweeping energy reforms passed by the current administration between 2012 and 2014.

With about 12,000 gas stations in Mexico, it’s a good opportunity and lots of consumers are none to loyal to the Pemex brand. And possibly more interesting still, in June of this year, gasoline vendors will finally be able to import gasoline and diesel fuels.

Keen interest in the Mexican retail gasoline market has come from Femsa, the big Coca Cola bottler that already operates some 13,000 OXXO convenience stores all over the country. They’ve already announced plans to convert some 200 to 300 existing Pemex stations to OXXO branded filling stations.

Some of the more common complaints from Pemex customers are with poor service and over-charging for gas. The Mexican consumer protection agency has launched multiple complaints with franchise owners.

Gulf Oil LP is the first non-Mexican company to announce plans to enter the market and though they aren’t likely to move quickly, their plan calls for some 100 filling stations to open before the end of 2016. Most of these are, again, expected to be re-brandings of existing franchises. New gas stations will face environmental other impact studies before they can open for business.

Pemex is encouraging the development of infrastructure to support supplies to these new filling stations, in the hopes of returning to profitablility. The oil giant has slipped in recent years, not least because of flagging world oil prices. Money for re-investment and upgrades to existing infrastructure has been hard to come by as the oil giant has struggled with mounting debt and pension obligations as well as what is probably an outsized workforce. Narco traffickers also continue to put a dent in Pemex operations with ever more sophisticated methods of siphoning off petroleum from the country’s aging pipeline network.

At the same time, foreign investors sometimes face a byzantine regulatory environment that discourages investment and further deprives Mexican consumers of the service and quality they’re coming to demand. Mexican technical standards are largely in line with those you’ll see in other developing economies, and the vast majority that would be necessary for any serious investment in Mexican petroleum or energy are available in English and suitable download, sharing or bidding for one of the available slots. There’s simply too many opportunities for growth in Mexico to pass them all up.

A Brief Fascinating History of Pemex and the Mexican Petroleum Industry

The history of Petroleos Mexicanos, the Mexican state-owned oil and petroleum monopoly, needs to be understood with its beginnings during the complicated, protracted and very long Mexican Revolution. Most history books will try to set the dates of the revolutionary war between roughly 1910 and 1920, but the long period from 1920 until 1940 is also considered a phase of the revolution in which many of the many of the unsettled disputes and disagreements of the earlier war flared, and re-flared into both hot and cold conflicts. That’s a 30-year period to consider, and aspects of it still confound scholars and historians who argue over its significance even to this day.

Oil and gas resources were nationalized and, for all intents and purposes, made the property of the Mexican state with the Constitution of 1917. As this was still very much the hot part of the revolution, it took many years afterward to consolidate and implement the laws established in that constitution. As increasing numbers of oil and gas companies from foreign countries were exploiting these resources – indeed, foreign companies were the only ones exploiting them – conflicts led to ever more involvement by the still shaky Mexican government.

As these conflicts continually took the form of labor strikes, and interruptions to services that the now young Republic was relying on by 1938 they became simply intolerable. President Lázaro Cárdenas came down hard on behalf of workers striking, now against nearly all foreign-based oil companies. Article 27 of the Constitution of 1917, was famously implemented by President Cárdenas who nationalized all of the companies that had been owned by companies from the US and other countries.

Today’s Pemex actually developed from a state company called Petromex, establish by the federal government in 1933. It was intended as a regulatory body to control the domestic market, produce downstream derivative products and to recruit and train personnel. By 1936, workers at nearly all oil companies were united into one big Petroleum Workers Union (STPRM: Sindicato de Trabajadores Petroleros de la República Mexicana). Contracts negotiated were binding with nearly every company in the country. By March 18, 1938, when Cardenas expropriated the property of the remaining foreign owned and non-governmental oil companies, there was very little left for them anyway. By 1940, Pemex, despite being boycotted from most of the world’s oil markets was completely vertically integrated and on its way to becoming the premier company in Mexico. Compensation to foreign oil companies who’d lost property in the nationalization process was completed within two subsequent years.

By the late 1940s, Pemex was expanding and despite a turbulent market and always changing industrial conditions the company proved resilient over the next several decades. Reforms in 2012 and subsequently in 2014 have opened many aspects of the oil industry and landscape to outside, private and even foreign-owned oil and gas companies. These compete for increasingly lucrative shares in the state’s oil and gas resources and for rights to explore, extract, refine and sell those petroleum products.

Pemex Shipping Crude Oil to South Korea

Pemex, the Mexican oil and gas giant is shipping crude oil to South Korea. January 2016 exports were up 11% over the previous month despite the lowest production levels since August of last year. All of this is happening in atmosphere of increased, maybe incredible, scrutiny, as Pemex struggles to adapt to low world oil prices, skyrocketing pension obligations and a very rocky road to reform.

 

Crude oil exports to South Korea began last year as part of Pemex’s diversification into other international markets. Those sales have continued throughout the past year, most of them going to Hyundai Oilbank Co. Ltd., with about a fifth going to GS Caltex Singapore Pte. Much of this diversification effort was made in anticipation of sliding oil prices provoked by the boom in U.S. shale gas which heavily affected the Gulf market where Pemex has been slowly losing dominance.

 

In 2014 Pemex exported an average of about 100,000 barrels a day to all of Asia. January of 2015 saw exports of 211,000 barrels a day to Asia, but that volume has continued to climb intermittently. Exports to Europe have also increased. January 2015 saw about 275,000 barrels a day bound for Europe.

 

Total exports this past January though, have been much higher, at about 1.12 million barrels per day to all destinations. Importantly, much of this crude is leaving from Salina Cruz Maritime Terminal and refinery on the Pacific coast, and not from the Gulf as had been the case with previous shipments. Asia shipments were scheduled for Japan and Korea. This was the first delivery to Japan’s Cosmo Oil in more than ten years.

 

Gulf coast refineries in the United States have long been the primary recipients of Mexico’s Gulf of Mexico crude oil production facilities. But flagging prices and changes to the way Pemex does business have necessitated a strategy of broad diversification and new business models.

Pemex has been struggling to remake not just its image but its long debilitated infrastructure in order to better compete with world oil suppliers. Pemex is also slated to deliver one million barrels of crude to GS Caltex in South Korea in May of this year. Luring investment into the company and into the petroleum industry more generally will require a much more competitive and leaner Pemex. That means a Pemex that can not only compete, but react quickly and effectively to fulfill orders from much more far flung places.

 

Mexico’s oil market continues to attract attention as Pemex shakes off its moribund reputation under new and promising political reforms. 2012 energy market reforms and this past year’s successful auctioning of Gulf of Mexico oil-field contracts have all met with promising results. As increasing numbers of private and foreign investors enter into the market the technical and engineering challenges continue to be met, and more strident and responsive moves are expected for the coming year.

In the Pipeline: More Cross-border Gas

As Mexican and US trade increases, an increasing number of cross-border natural gas pipelines are being built, and exports are way up. All of these pipelines, and there are more than 20 in operation now, are regulated by the Federal Energy Regulatory Commission (FERC) which is part of the US Federal Department of Energy. They also review and authorize all of the US’s liquefied natural gas terminals, and interstate pipelines within the United States.

In general, these pipelines have proceeded through the qualification process without much controversy. There are rising murmurings about the extent to which low priced natural gas is actually delaying the development of cleaner and renewable energy sources but at this writing the controversy is considered minimal.

US-Mexico pipelines doubled their capacity in less than the past ten years. About 4.9 billion cubic feet of natural gas could be moved per day, in export to Mexico (at capacity). And that capacity will likely double again by the end of 2016. Though some 60 private companies have had proposed pipeline projects approved, again, by and large they’ve met little resistance in the regulatory process.

Transnational oil pipelines are another story. A bit more colorful history routes crude oil through the U.S. Department of State and Presidential permitting. The recent Keystone XL pipeline controversy is likely to color similar projects for years to come. Although, the US does, again, export a very limited amount of crude oil after years of federally enforced prohibition, a trickle has been seen meeting the high hurdle in recent years.

Two pipeline currently deliver refined petroleum back into Mexico from the US and there has been some talk of lifting the Presidential requirement altogether. A sharply divided congress is not likely to review the issue again although a number of related bills did move through the Senate and the House during the 114th congress.

Natural gas piplines, though, are full steam ahead. One new project will connect the Waha gas hub to electricity generation plants in southern Chihuahua, Mexico. Similar 200 mile long project will connect Coyanosa, Texas and cross at a new international border-crossing near San Isidro, Texas. Most natural gas being exported to Mexico is used to fuel cogeneration power plants constructed (or under construction as an alternative to abandoned plans for nuclear power plants.

Mexico’s and Pemex & CFE standards are being translated and updated to better work with US and internationally contracted firms, not only on these pipelines, but in some cases, to better serve refineries such as those at Minatitlan, Salamanca and Tula. These refinery projects are also building separate and purely domestic pipelines. In most cases, their being retrofitted either to run off of cleaner fuels, but also to produce cleaner fuels for the expanding Mexican market. In every case, international firms are needing to familiarize themselves with the details of the Pemex contracts, and the Mexican Official Standards (Pemex Normas de Referencia) and many of these are available in translation.

Mexico and the US: Energy Partners?

Mexico is one of the US’s biggest trading partners, all the way around. The two cultures live almost entirely independently of one another (in Mexico, the relationship is characterized sometimes as like “brothers with their backs to each other”), and yet trade, in oil and gas, and in many, many other things is more important to both sides than ever before in history.

It’s not only a trade issue, but sometimes a political issue too. Cooperative geothermal energy projects that straddle the border have been in the works for almost 40 years. And the geothermal electricity is used on both sides of the border, though not everyone knows it. Joint projects in all kind of other renewable energy sources come up and require serious policy consideration – again, on both sides of the border.

Presidents Obama and Calderón signed a little-known (outside the industry) Bilateral Framework on Clean Energy and Climate Change in 2009 with the intent of further developing clean and renewable energy sources and combatting climate change. The framework set goals for strengthening the transnational electricity grid and for further developing green energy in both markets. Some of those projects will also be cooperative. Further taking advantage of oil and gas deposits that lie on or across borders also needs to be done in a way that protects environments again, on both sides.

Cities along the border are driving demand as they are some of the fastest growing in both countries. Both countries are also working to reduce greenhouse gases and to that end, are extending significant loans to both sides to end deforestation and to further develop wind and solar energy. Both the US Department of State and the Interior Department are already advising Mexico on the multiple pipelines now entering the country and on regulating hydraulic fracturing that is producing so much of that lower-cost natural gas that Mexico is buying. Similarly, advances in spill containment now standard in the US are making their way to Mexican offshore wells and rigs.

A 2012 agreement also intends to further cooperation on the development of “transboundary resources.” These have been essentially off limits to both sides as they really do straddle the border, mostly along the continental shelf within the Gulf of Mexico.

In all of these kinds of cases, the meeting of markets is as important as the coalescence of policy agreements and technological standards. Many of the technical standards on both sides of the border are similar, or of parity, but using completely different standards of weights and measures. That’s just the beginning. Smaller American firms are bidding against new, and exploratory Mexican firms, all of them over oil and gas fields being watched by investors and policy makers on both sides. Environmental and technical standards take the front seat to cultural and language barriers that once drove the agenda. In all these cases, you can only expect the field to get more complex, more cooperative and more, yes, even more interesting!

Pemex: What to Watch for in 2016

Some of the 153,000 employees of Mexico’s state petroleum interest will be looking for new jobs in 2016. Hoping to closer match up with some of the international firms now competing to profit from remaining Mexican oil resources, Pemex announced in December that job cuts in 2016 would be a part of the ongoing changes at all levels of the petroleum stream. Pemex has also been partnering with private companies and opening bidding on exploration, and construction projects to firms beyond the nation’s borders.

Falling international oil prices have left the petroleum monopoly with the lowest budget it’s had since 2007 and the process of “farming out” more contracts is well under way. 2016 will see the first ground-breakings on many of these projects.

Production of the company’s premier product is also expected to the lowest in a quarter century as Pemex continues to struggle to re-organize in the wake of accidents, lower yields on existing wells, and as already mentioned, a glut in global supply that’s left prices hovering below US$40 a barrel.

One of the biggest downstream contracts awarded went to the engineering unit at South Korean firm, Samsung Group. Their US$550m contract is for extensive engineering for the second phase of the Antonio M. Amor Refinery in Salamanca, Mexico. This is also one of the most closely watched of the private contracts being awarded, in part because refineries history and stature. The contract calls for an expansion of the plant capacity by some 53,000 barrels and it’s to be completed by the end of 2018. Samsung also completed the first phase of the project which was awarded in 2014.

Finally, after increasing interest in Mexico’s deep-water oil-field auctions, a fourth auction has been announced for ten more deep sea oil fields. This auction follows three previous auctions that stumbled out of the gate in 2015, but which picked up in interest and terms before the end of the year. But importantly, these contracts are under a license contract model something like a concession model.

The ten fields are very near to the US maritime boundary where Royal Dutch Shell is already operating a project in partnership with Chevron and BP. Oil or gas discovered in the Mexico side of the Perdido Fold in the Gulf of Mexico would still fall under the auspices of the Mexican regulators.

Pemex is expected to continue making major changes as it struggles to get back on its feet, after the worst fiscal year in the company’s history. To do that, it’s relying on partnerships, both domestic and international at all levels of the petroleum production stream.

Another important aspect of protecting a national oil industry for some 70+ years is that very few foreign engineers are familiar enough with the country’s technical and official standards for engineering and normas de referencia. This particular problem is easily remedied though as most Mexican standards and technical documents are translated and available for download online.

Mexico Refinery Upgrades to Continue in 2016

After fits and starts and multiple cancellations of plans, Pemex has issued an investment plan worth some US$23 billion for much needed upgrades to Mexico’s aging oil refineries. The new plan replaces much more ambitious plans that had been released prior to the worst fiscal year in a quarter century for the former Mexican state oil monopoly.

The new investment plan was announced in December nearly simultaneously with announcements of job cuts that are also to be part of the 2016 Pemex budget. The oil giant has been struggling to bring its workforce down from the nearly 153,000 employees to a level closer to the numbers of similar private companies in the world market.

Pemex and the energy regulatory agency of the Mexican government had previously outlined goals for increasing refinement capacity as well as for upgrading its capacity for producing cleaner burning fuels.

The current proposals are something of a refinement to earlier and more expensive projects, the contracts for some of which had already been granted. Among the most notable was a two-phase upgrade project to the Salamanca Refinery, both parts of which were awarded to South Korean firm Samsung.

Many similar projects were actually cancelled or seriously revised prior to opening to bidding. This was in part due to lower global oil prices, but also in response to several expensive accidents that dampened the company’s near-term prospects. Total budget cuts were some $4 billion prior to budgetary 2015, which necessitated the disappointing revisions to plans.

The newer projects include a US$5 billion retrofitting of the petroleum refinery in Tula, in the Mexico State which borders Mexico City. This upgrade will increase the plant’s refining capacity to some 340,000 barrels a day.

The Salina Cruz refinery, the third of Mexico’s big-three of refineries, is also part of the revised investment plan. All of the refinery upgrades are intended to decrease sulfur in the gasoline being produced, but they range in complexity in part due to the varying ages of the refineries.

Still, exploration has led to announcements of new oil fields, rights for which will also be on the auction block in the coming year. 2015 saw the first ever auctioning of oil extraction rights to private and international firms in the Mexican oil giant’s history. Reserves of some 180 million barrels of crude oil could provide Pemex with an additional 40,000 barrels a day of crude oil in addition to extensive natural gas resources. Rights to similar oil fields sold with great interest toward the end of 2015, and in the government’s favor, though the first auction was met with very mixed interest.

Interest in Pemex’s technological and engineering standards and documents are expected to peak as increasing numbers of international and private firms compete for these lucrative contracts. And an increasing number of the documents themselves are being prepared and translated for the use of those interested in presenting contract bids over the coming years.

Refinery Spotlight: Salina Cruz Refinery

As Pemex Contracts increasingly go to international and private energy firms, it’s worth taking another look at Mexico’s existing energy infrastructure. Refining capacity remains one of the key areas for investment and recent years have seen some very important moves toward increasing Mexico’s overall capacity. The Mexican government, and Pemex have also signaled an intent to go ahead with cleaner, and low-sulfur fuels and for overall reduced emissions of greenhouse gases.

Over the past year, one of the most important refitting and upgrade projects was at the Salina Cruz refinery on the Pacific coast. In operation since only the 1980s, the plant has produced about 290,000 barrels of Gasoline, middle distillates and fuel oil products per day.  Current plans call for a total investment of about ten billion pesos, more than US$600 million, and for extending the current pipeline capacity in the surrounding state of Oaxaca. This project is also to include 22 tugboats to better serve the port of Salina Cruz with towing, maintenance and emergency operations.

The refinery upgrades are Pemex’s plans for more diesel fuel production which is part of an investment of US$2.8 billion at Salina Cruz and four other refineries. The fuel quality portion of the upgrade is intended to lower Mexico’s greenhouse gas emissions by some twelve thousand tons per year while increasing refined fuel output by 139,000 barrels per day across Mexico. The refinery upgrade includes work on four diesel hydro desulfurization units, hydrogen production units and sulfur recovery. Upgrades are being made at the plant’s main facility and at several offsite locations. The Mexican firm, Arendal, was contracted for engineering much of these upgrades, for construction of the water treatment plant, sulfur recovery units and for the hydrogen production plant. They’re also remodeling the intermediate distillation hydro desulfurization unit.

Natural gas is used in the Oaxaca plant to power boilers and burners used in the refining process. The 247 km, twelve inch pipeline came online this past January and connects from the Gulf Coast state of Veracruz at Jaltipan.

Salina Cruz is still Pemex’s biggest refinery operations and the entire rehabilitation will increase production by about 30,000 barrels per day when work on the project finishes in about two more years.

Energy reforms in Mexico has sought to free Pemex from 100% dependence on the Mexican government for investment. The resulting industry is more flexible and responsive and economically efficient.

Pemex is still seeking outside investors for work on the coking capacity at Salina Cruz as well as at refineries in Tula and Salamanca, though details have yet to be released. This is in part because, as with just about everything that has happened since major energy reforms were announced in 2013 and 2014, working partnership schemes are still being drawn up. The coking facilities are another part of the overall mission to produce more and cleaner fuels with fewer emissions.

Even with recent halting stops to refinery investment due to budgetary concerns on the part of the Mexican government, Salina Cruz remains a key part of the Energy Reform process.

Three of 2015’s Biggest Pemex Contracts

Pemex Standards in English took on new importance as a variety of international bidders took on Pemex at auction this past year. Though bidding got off to a rocky start in July, with only two of 14 blocks actually sold, by September, Pemex seemed to have gotten some of the kinks worked out of their new auctioning procedure and sales were much more up to expectations.

July’s two blocks were purchased by a new Mexico City company called Sierra Oil and Gas, one of the only bidders willing to put up with the too-short lead time and basic lack of geological information on offer in July. Still, as the fields have already been discovered, the lack of risk is just one more incentive.

Come September, Pemex – and presumably the powers that be in the Mexican government – had come up with adequate information for the auction take place in a more transparent process, with enough time to actually look things over and information about the lowest acceptable bids that the government would consider. September bidding was widely considered a much more successful sale. Nine of fourteen pre-qualified bidders actually made nods towards the available fields, all off the coasts of the states of Campeche and Tabasco.

Among the biggest buyers were the Italian group, Eni, marking their first entry into the Mexico marketplace. Eni offered 83.75 percent back to Pemex for access to the Amoca, Mizton and Tecoalli fields, all shallow water fields. At just about 21 square miles, the fields are holding a combined 107 million barrels of light oil and 69 bcf of natural gas. That’s in Pliocene sand and beneath 33 meters of water.

Block four in the bidding went to a consortium led by Houston-based Fieldwood Energy and Mexican start-up, Petrobal, part of Grupo Bal the silver mining outfit. The consortium purchased rights to five more shallow water blocks in the Ichalkil and Pokoch fields. The Fieldwood/Petrobal bid offered the Mexican government 74 percent participation in the project.

Finally, Argentina’s Pan American Energy led another group that included Mexico’s E&P Hidrocarburos y Servicios. They purchased rights to some 15.5 square miles called the Hokchi field. They’re expecting 61 million barrels of light oil and another 29 bcf of natural gas under just 28 meters of water.

These are just three of the most important private contracts signed since the far more successful bidding took place at the end of September. Pemex undoubtedly has a ways to go to fix up its refining capacity and get a hold on all of its outstanding pension obligations. But these auctions do represent an important step in the right direction at least for getting a handle on working with private and non-Mexican companies.

Production on any of the fields mentioned above could begin as early as 2018. But round one of the auctions is still promising bids for onshore reserves, deep-water reserves and some non-conventional fields too including some shale-rock natural gas.