INSIGHT: Mexican chems, short on ethane, await ’24 election for new policies

MEXICO CITY (ICIS)–No matter who wins Mexico’s presidential election in June 2024, she will have to address Mexico’s energy policy, which has failed to reverse the country’s chronic decline in oil production, leaving its chemical industry without the feedstock it needs to run its plants at full capacity.

• The current administration’s policies tied Mexico’s energy production to the state company Pemex, the world’s most indebted oil producer
• Pemex failed to significantly increase oil production, and chemical producers are turning to imports to supply its crackers with ethane
• It is unclear whether the current front runner will break away from Mexico’s current energy policy

FAILED POLICY
Mexico’s current president, Andres Manuel Lopez Obrador, commonly called AMLO, made Pemex the centre of the country’s energy policy by freezing the energy reforms passed by the previous administration.

Those energy reforms allowed companies other than Pemex to bid on exploration and production leases. The intent of the reforms was to attract outside money and expertise to Mexico’s oil and gas market, which would speed up the recovery of energy production.

While AMLO’s administration honoured the contracts issued by the previous administration, it ceased issuing new exploration and production leases to non-Pemex bidders. Pemex assumed nearly all of the burden of reversing Mexico’s decline in oil and ethane production.

Pemex did halt further declines in oil production, but it has failed to significantly increase output or even meet its forecasts.

By now, Pemex had expected to produce 2.08m bbl/day of crude oil, according an earnings presentation held in February 2021. Instead, output in Q3 2023 was 1.88m bbl/day, a figure that includes condensate and contributions from business partners.

Pemex has since stopped publishing forecasts in its earnings presentations.

If Pemex’s forecasts are a benchmark for AMLO’s energy policy, then it has failed.

NO MONEY, NO OIL
Pemex’s financial constraints have placed a huge burden on the company’s operations, said Adrian Duhalt, research scholar at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. He made his comments in an interview with ICIS.

Pemex now makes it a point to highlight its payments to suppliers and contracts during its earnings presentations.

Increasingly, Pemex is posing a risk to the country’s credit rating, according to Mexico’s central bank.

If unchecked, Pemex could become a liability for the government by 2026, consuming more funds than it contributes, according to Fitch Ratings, a credit rating agency.

FRONT RUNNER QUIET ON ENERGY POLICY
AMLO cannot run for re-election because Mexican presidents are limited to one term.

Claudia Sheinbaum, the candidate for his party, Morena, has yet to make any public statements about energy policy, Duhalt said. It is a delicate situation for the candidate.

“She needs AMLO on her side to win the candidacy, but also she needs AMLO on her side to win the presidency,” Duhalt said.

Sheinbaum is the frontrunner, according to polls.mx, which tallied the results of several presidential polls.

The other leading candidate is Xochitl Galvez, who is representing Frente Amplio por Mexico (FAM), an alliance made up of opposition parties.

Galvez has made statements that are generally more business friendly, Duhalt said. “She wants to increase participation of private actors.”

She has spoken in favour of renewables, the energy transition and the need to attract more private investment into the energy sector.

“The next government is going to be under great pressure to change things about energy policy,” Duhalt said. “The numbers tell you that Pemex cannot do it alone.”

It is still early in the election season  and the candidates may provide more details about their energy policies later in 2024, he said.

FALLING CHEM PRODUCTION
Because of Mexico’s depressed levels of oil production, Mexico’s crackers have lacked the feedstock needed to run at full capacity.

All of Mexico’s crackers rely on ethane as a feedstock, and the majority of the country’s domestically produced ethane comes from oil production.

Because of the shortages of domestically produced ethane, Mexico’s two ethylene producers, Pemex and Braskem Idesa, are developing terminals to import the feedstock from the US.

Moreover, Mexico cannot build more polyethylene (PE) plants because it lacks the ethane needed to produce the required ethylene. Consequently, Mexico has relied on imports to satisfy its growing need for PE and other ethylene derivatives.

One derivative that Mexico cannot import is ethylene oxide (EO). It is too dangerous to ship overseas. As a result, downstream consumers of EO in Mexico have had to make do with limited supplies.

LOW RUNNING REFINERIES
Because all of Mexico’s crackers rely on ethane, its chemical industry is even more reliant on refineries to provide it with domestically sourced propylene and aromatics.

Pemex’s refineries in Mexico run well below nameplate capacity. During the third quarter, utilisation rates fell below 50%.

Overall utilisation rates should increase once Pemex begins full operations at the new Olmeca refinery in Dos Bocas, Tabasco state.

That refinery will have a naphtha reformer and a fluid catalytic cracking (FCC unit.). Some of the propylene from the unit will be consumed by an alkylation unit.

It is unclear how integrated the Dos Bocas refinery will be to Pemex’s petrochemical complexes. Any available aromatics and propylene may need to be shipped by truck or rail.

Insight by Al Greenwood

Additional reporting by Jonathan Lopez
Thumbnail shows the Mexican flag. Image by Shutterstock.