INSIGHT: Mexico’s petchem imports to grow as feedstock woes persist

HOUSTON (ICIS)–Mexico will likely become a growing destination for exports of plastics and petrochemicals unless it can reverse its chronic decline in the production of oil and ethane.

Even if Mexico does produce more feedstock, growth in petrochemical demand will likely be slow.

Demand typically rises at multiples of GDP, and forecasters expect Mexico’s GDP to grow by less than 2.5% over the long term.

PETCHEM FEEDS FALL WITH OIL OUTPUT
All of Mexico’s crackers rely on ethane as a feedstock, and Mexico gets most of its ethane from the associated gas produced from its oil wells.

Mexican oil production has fallen over the years, as shown in the following chart; figures are in thousands of bbl/day.

Source: Secretary of Energy (SENER)

The following shows ethane production over the same period; figures in thousands of bbl/day.

Source: SENER

Mexico once had a surplus of ethane and Pemex even contemplated increasing ethylene production.

But that surplus has turned into a deficit, and Mexico now relies on imports from the US to supplement its domestic production of ethane.

The following shows US ethane exports to Mexico; in kilograms.

*Figures for 2021 runs through June.
Source: US International Trade Commission (ITC)

Those imports are still not enough to supply Mexico’s crackers with enough ethane to run at full capacity.

Mexico’s two ethylene producers, Braskem Idesa and Pemex, are in talks to build an import terminal that would allow the country to accept more shipments from the US.

PROSPECTS OF RAISING OIL OUTPUT
Mexico attempted to address the decline in oil production by adopting energy reforms in the middle of the last decade.

The reforms allowed companies other than Pemex to produce oil. With more companies exploring and producing oil, the expectation was that crude output would rise faster.

Mexico’s president, Andres Manuel Lopez Obrador, commonly known as AMLO, has paused the reforms after assuming office in 2018. Oil and gas bidding rounds were placed on hold.

Such resource nationalism will continue to shape Mexico’s energy policy during the rest of AMLO’s term, said Adrian Duhalt, postdoctoral fellow in energy studies at Rice University’s Baker Institute for Public Policy.

With that, any new oil production would have to come from Pemex.

For its part, Pemex has placed great hopes in developing new fields, and it has set ambitious targets for oil production.

According to Pemex, crude output should reach 1.80m bbl/day in 2021, 1.97m bbl/day in 2022, 2.12m bbl/day in 2023 and 2.19m bbl/day in 2024.

If those forecasts come true, then it would bring Pemex’s oil production back to levels last seen 2016.

It is unclear whether Pemex can meet its ambitious goals. The company has large debts, and it posts regular losses. Moreover, Mexico’s government has a record of overestimating oil production.

That said, AMLO’s administration has consistently expressed its desire to increase Mexico’s oil production.

“President Lopez Obrador is determined to help Pemex by any means,” Duhalt said.

“AMLO appears more than ready to aid Pemex financially, even if that means affecting spending in other areas.”

Even if Pemex does successfully increase oil production, that would not automatically increase domestic ethane supplies, because the energy major would still need the capture the associated gas produced from its oil wells and deliver it to natural gas processing plants.

These plants would extract the ethane and other natural gas liquids (NGLs) from the raw natural gas. The NGLs would then need to go to a fractionator, which would separate the ethane and other individual NGLs.

PROSPECT FOR REFINERIES
Because all of Mexico’s crackers rely on ethane as a feedstock, the petrochemical industry is even more heavily reliant on refineries to provide it with domestic supplies of propylene and aromatics.

All of Mexico’s refineries are owned by Pemex, and these typically run well below 50% of their throughput capacity.

Mexico’s president has made the country’s refineries another priority. He has called for the rehabilitation of all six of Pemex’s refineries and the construction of a new one in Dos Bocas, Tabasco state.

That new refinery will have a capacity of 340,000 bbl/day, making it Mexico’s largest. Back in October 2020, the government gave a completion date of 2022 for Dos Bocas.

As far as Mexico’s existing refineries, increasing their run rates has proven to be more challenging and expensive than expected, Duhalt said.

“If the focus is to allocate scarce resources to lift oil production, it is not unlikely for the deterioration of Pemex refineries to linger all the way to 2024.”

GROWING DESTINATION FOR PETCHEM IMPORTS
Unless Mexico can improve its refinery operations and increase domestic ethane production, its petrochemical industry will lack the feedstock to meet growing demand and will have to rely increasingly on imports, making Mexico a growing market for foreign shipments.

That has been the trend for more than a decade.

The following chart measures the level of imports and exports of four classes chemicals and polymers, as organised by the harmonised tariff schedule (HTS).

Chapter 28 covers inorganic chemicals. Chapter 29 covers organic chemicals and petrochemicals. Chapter 39 covers plastics and Chapter 40 covers elastomers; figures in dollars.

Source: National Service for Trade Information (SNICE)

CHEM DEMAND TO FOLLOW SLOW GDP
Demand for plastics and chemicals typically rises and falls at multiples of GDP.

Mexican GDP growth has been slow over the years, and the nation was in a recession even before the pandemic.

Its COVID-19 downturn was especially sharp because policy makers spent relatively little on stimulus.

The following shows the annual change in quarterly GDP over the past several quarters.

Source: Mexican State Statistical Agency (INEGI)

Mexico’s economy has since rebounded, because of rising vaccination rates, the gradual reopening of its economy, and the large amount of stimulus spending adopted by the neighbouring US.

Forecasters surveyed by Mexico’s central bank expect GDP to grow by 6.10% this year.

The spurt will be temporary. By 2022, GDP should grow by 2.90%, according to the forecasters. In 2023, growth will slow to 2.20%, its long-term trend.

One of the challenges holding back Mexico’s economy is public safety, which is frequently ranked as a top concern by analysts polled by the central bank.

The other is arbitrary government policy, as illustrated by the recent cancellation of an airport expansion project after a referendum.

More recently, Mexico had designated Pemex as the operator of the Zama oil field instead of Talos Energy, the company that drilled the initial wells.

Duhalt also noted the lack of competition in Mexico’s economy.

Even if the country’s economy continues expanding at 2.20% per year, that still represents growth, which will raise demand for petrochemicals.

Unless Mexico can produce more feedstock, that demand will continue to be met by imports.

Insight article by Al Greenwood