Mexico’s upstream outlook sours as Dos Bocas gets off the starting block

Nigeria’s Dangote refinery has been ramping up operations throughout 2024 to date, however the baton of market interest will now pass on to Dos Bocas. Mexico’s quest for self-reliance, as manifested by the 340 kbd Olmeca refinery, has been making great strides lately. The Dos Bocas plant has largely disappeared from the media landscape for several months, right after Pemex’s crude export cuts of April-May that ultimately were only a fraction of the market impact they could have been. However, a flurry of news from Dos Bocas has indicated that this year still is set to see a notable improvement in Mexican runs by Q4.

First, Pemex’s chief executive Octavio Romero announced that Dos Bocas was running at half capacity last month, putting the estimated throughput rate at 170 kbd (which we disagree with, it’s much lower than that). Second, Pemex’s global trading arm PMI has issued a spot tender for petroleum coke from the 340 kbd Dos Bocas refinery in late August, suggesting that Pemex might in fact experiment with heavy sour Maya crude intake. Third, flaring has returned to the Dos Bocas plant, with customary flares appearing from August 05-06 onwards after a three-month hiatus, indicating that attempted primary runs were back on track. Whilst the impact on crude exports has been so far muted, the overall environment in which Olmeca starts operating is far from usual, with Pemex struggling on almost all fronts – be it maintaining production, improving the upstream outlook or cutting debt.

Mexico's seaborne crude exports by country of destination, kbd.

Source: Kpler.

Mexico’s national oil regulator CNH reported crude and condensate output in July at 1.832 Mbd, the lowest monthly reading since April 2022. In today’s Mexico, both crude and condensate production has been on a declining trend. Crude has averaged 1.565 Mbd in July, down 5 kbd from June and 80 kbd y/y, whilst for condensate the new range for the latter now being 260-270 kbd, shedding some 20 kbd y/y. Whilst upstream underperformance in Q2 could be extenuated by the fact that the Akal B platform witnessed a deadly incident in April, there were no explosions or force majeure events lately, suggesting the generally weaker output is first and foremost an objective reflection of the dire reality on the ground.

The election of Claudia Sheinbaum in the June presidential ballot has triggered a mixed bag of reactions. Initially believed to be a slightly more moderate version of outgoing President Andres Manuel Lopez Obrador, the outlook for the next six years might be even more tumultuous than before. Partly, AMLO is responsible for this as well as his Morena party finally managed to attain a two-thirds majority in the parliament, prompting the President to try pushing through his oft-mulled regulatory reform of the oil industry. This would see the country’s energy regulators CNH and CRE, dealing with the oil & gas and the electricity market respectively, dissolved, alongside anti-trust and competition watchdogs.

Mexico's crude and condensate production, Mbd.

Source: Kpler.

Additionally, the choice of academic Victor Rodriguez as the new chief executive of Pemex will raise eyebrows, too. He has been one of the most publicly outspoken opponents of the Pena Nieto-era liberalization of the oil industry, and has pledged not to repeat the „neoliberal” partnerships signed with non-Mexican upstream companies over the past 10 years.  Somewhat peculiarly, CEO-elect Rodriguez promised to cap the company’s oil output at 1.8 Mbd, overlooking the fact that crude-only production is at the lowest since 1979, edging even lower in July to 1.47 Mbd. The immediate future isn’t particularly brighter – Woodside’s Trion prospect will not see first oil until 2028 despite a FID taken already last year, whilst Talos Energy (the company that found Mexico’s largest untapped oil resource at the offshore Zama field) has been rocked by the sudden departure of its co-founder and CEO, with the confusion probably adding another layer of delay to Zama.

Pemex itself is arguably in its weakest form in many years. First of all, it was one of the very rare instances when an oil and gas producer posted a hefty Q2 profitability decline, with Pemex’s internal reporting showing a $14 billion loss in just three months of April-June. Lower liquids production, lower crude exports and consequently lower foreign exchange receipts have all added up to such a disastrous financial performance. Second, Pemex has been showing few signs of becoming a leaner organization – its official numbers indicate that the state-owned company continues to expand its workforce, adding more than 8,000 workers last year to a total of 128,616 employees at year-end 2023. That is roughly double of ExxonMobil’s workforce and triple that of Chevron.

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