In recent issues of our alert series covering U.S. Crude Oil Exports we have reported on the possibility of the U.S. Congress removing the export ban that has been in place since the 1970’s. The approval of “swaps” of light U.S. crude oil for heavy crude oil from Mexico, under an existing statutory exemption, is interpreted as a first step to the United States allowing exportation of U.S. produced crude oil. Such a move would have repercussions not just in the U.S., but also in the international oil market.
Since crude output from Mexico’s state-owned oil company, Pemex, has been falling during the last decade (down from 3.38bpd in 2004 to 2.3bpd today), Pemex’s imports of light crude oil from the U.S. will allow it to produce higher-quality fuels like gasoline and diesel. Mexico’s six aging refineries cannot keep up with the domestic demand for motor fuels and other products since they are designed to process light oil instead of the heavy oil that makes up an increasing proportion of the nation's crude oil production. As they continue to age, these assets have also experienced an increasing number of mechanical woes. On the same note, Pemex produces heavier and sour crudes which sell at a discount in international markets because they are harder and more expensive to refine.
There is demand from the U.S. for Mexican heavy crude oil as the shale boom in the United States has created an overabundance of light oil, resulting in an inability to utilize all existing production with local markets having reached capacity for acceptance of light oil. In addition, U.S. refineries were originally designed to process heavy crude oil and for years have been processing heavy oil imported from a variety of sources, including Canada and Mexico. As a consequence, the request by Pemex for an exemption under the current ban could be seen as a win-win for both countries.
As of February 2015, Mexico announced a US$4.1 billion cut in the budget for upgrading its refineries because of falling oil prices, with the result being light oil imported from the U.S. will likely temporarily become a cheaper option for Mexico. Although there will be some impact, on a larger scale, it is likely the trade between U.S. and Mexico will ultimately have only marginal effects for Mexico’s petroleum and petrochemical sectors given Mexico would be importing 100,000 barrels of light U.S. oil per day (1 percent of U.S. output) whilst Pemex refines approximately 1.5 million barrels of light oil per day.
Further impacting the Mexican energy reform, it is becoming increasingly clear that the overabundance of oil in the U.S. makes the U.S. a less attractive buyer of Mexican oil imports. In fact, U.S. imports of Mexican oil has fell 42 percent in the last four years from 1.2 bpd in 2011 to 700,000 bpd now. As a result, Mexico is left looking for other countries that are willing to buy the oil exports it is no longer able to sell to the U.S.
Compounding this, if the U.S. export of crude oil ban is eliminated, Mexico may then need to find other customers for its heavy oil (although there should continue to be some demand in the U.S. for heavy Mexican crude oil for the reasons given above), whilst competing with the approximate 1.8 million barrels per day of light oil estimated that could be exported by the U.S. by 2017. To the extent OPEC countries continue with their policy to maintain or even increase production levels, the surplus offer of crude oil may simply continue to weaken prices. Add possible additional output from Iran if sanctions are lifted, and a continued easing of economic growth in the larger Asian economies, and the low prices may stay low for a prolonged period of time (absent any significant and sustained supply shocks).
Net importer countries of crude oil could immediately benefit from continued low cost crude. A newfound ability to export crude oil out of the U.S. may also make investments into the U.S. upstream more appealing for companies (including national oil companies) looking to invest into a vertically integrated supply chain to import oil to their home country. In the current low oil price environment, and with some producers financially strained, this could trigger acquisition activity.
Net exporters, on the other hand, may experience a compounding effect to the downturn already hitting their economies, particularly in those countries whose public expenditure depends on revenues stemming from the sale of crude oil rather than internal taxation systems. Alternative methods of raising sovereign debt will come to the fore in order to 'fill the gap' left by retreating oil revenues, however that may not address the ripple effects (such as unemployment) caused by cuts in capital expenditure and a contraction of operations.