Extending an Olive Branch?

 

While politicians promote defiant nationalism on both sides of the border, recent developments suggest a more collaborative approach to the challenges of trade between the United States and Mexico. Meanwhile, an Eagle Ford veteran is heading south for the second time, and Pemex is faced with yet another blow to their handicapped refining operation. Keep reading to get our take.

 

Neighborly Relations

Tensions between the US and Mexico appear to have cooled somewhat following the announcement of three new trade accords between the countries. Designed to expedite cross-border traffic through joint inspections of cargo, the agreements provide for the use of better technology to monitor the $500 billion in goods that pass between the countries each year. From a security standpoint, the pacts should also help to curb the trafficking of guns, drugs, and people.

And this is just the beginning. The Department of Homeland Security and several other agencies are expected to announce up to 20 additional agreements of cooperation in the areas of energy, infrastructure, and economic development. However, questions remain as to the future of President Trump’s proposed border wall and the renegotiation of NAFTA. Still, these accords serve as an encouraging sign that Mexico and the US will support legislation to address the economic and security concerns of the masses.

 

Drilling the Eagle Ford en Mexico

A subsidiary of San Antonio-based Lewis Energy has signed an exploration and extraction contract with Pemex. The contract covers portions of the Olmos basin in Mexico, an extension of the prolific Eagle Ford field that runs through central Texas and into Laredo and northern Mexico.

This is not Lewis Energy’s first E&P dance in Mexico. In 2004, Lewis signed a 15-year agreement with Pemex to drill gas wells in Mexico, a monumental achievement at the time. As the Eagle Ford surged to prominence, Lewis Energy has been one of its major players, drilling some 500 wells on the US side.

The new Pemex contract calls for more than $600 million in investment to develop the Olmos field in the state of Coahuila. Mr. Lewis and company will proceed with eyes wide open to the prevalent challenges posed in Mexico. In addition to the logistical concerns associated with servicing the new drilling operation, Lewis will have to navigate a business environment that includes cartels and corrupt politicians. Given the company’s track record, however, we expect the partnership will prove to be a win-win for Pemex and Lewis.

 

Another Refining Headache

In 2016, the International Marine Organization passed a new standard for marine fuel sulfur emissions. The change lowers the acceptable sulfur content from 3.5 percent to 0.5 percent, and will go into effect in the year 2020. The move leaves vessel owners/operators with a choice: purchase high-quality, high-cost marine gasoil, or install costly “scrubbers” to treat the emissions produced by lower grade fuels.

It’s expected that few owners/operators will be willing to shell out the cash for expensive scrubbers, which will in turn lead to a divergence in prices for the higher demand gasoils and displaced fuel oils. This, of course, is material news in the refining world. Downstreamers who have invested in complex molecule cracking and can produce high volumes of distillate grade product will be sitting in the catbird seat drawing stronger margins. Underinvested refining units, on the other hand, will be left seeking a home for products that are no longer in demand.

This transition is yet another blow to Mexico and the six refineries operated by Pemex. Fuel oil is a sizable component of the refining yield in Mexico today. With just 21 months until implementation of the revised standard, Pemex stands to be on the losing end of the conversion.

Inspired to jump into the Mexican market? Click here to contact our international markets team.

Best,

Chad Smith
Senior Vice President of Terminal Services