Deer Park: what is Mexico looking for when it buys its first refinery outside the country in the United States

After four decades without having more of its own capacity to produce gasoline, Mexico took a step forward last week by acquiring 100% of a refinery that is not in its national territory.

Deer Park is one of the 20 largest capacity facilities in the United States and one of the oldest (founded in 1929).

Since 1992 it has been co-owned by the Dutch company Shell and the state company Petróleos Mexicanos (Pemex).

But the Mexican government launched a surprise offer to its partner this year, which received the go-ahead last week from the US government, which had to verify that there were no national security problems.

“It is historical”, celebrated the president Andrés Manuel López Obrador when making the announcement on Wednesday.

“Now we are going towards self-sufficiency. This will allow us, above all, to maintain low prices for gasoline, diesel, jet fuel and other oil products, because we have the capacity to process our raw material. That is the change in oil policy“, he pointed.

His government is paying Shell $ 600 million plus another $ 600 million to settle debts.

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Deer Park is located in the Houston, Texas area in the southern United States.

While Deer Park’s high efficiency will help solve the Mexico‘s fuel production deficit, which paradoxically is a country oil, the purchase occurs at the same time that the world moves towards the substitution of oil for other energy sources.

“López Obrador wants to resume a model of economic development that was successful in 1960. It’s a completely different planet Earth“Says analyst Rosanety Barrios to BBC Mundo.

Other industry experts consider that it is a good decision in the short term, but they find contradictions in the discourse of the government of seek energy sovereignty with a refinery located in another country.

“The Deer Park refinery is in the United States and López Obrador has always complained that Mexico depends on the United States. But it is not an unreasonable decision, in my view, “says Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute at Rice University (Texas, USA).

What does Deer Park bring?

Mexico’s golden years in the oil industry are long gone.

The country ceased to be one of the major oil exporters and lost fuel self-sufficiency for several decades. Currently it only has six active refineries, the last one opened in 1979.

These refineries have numerous operating problems – according to López Obrador they were intentionally abandoned by the predecessor governments – so today they only work at a third of their capacity.

However, Deer park opandra to 90% of its capacity, which is 340,000 barrels of oil a day.

“It is integrated into Shell’s petrochemical complex in Deer Park, which makes it easier for many of the additional gasoline, diesel and jet fuel products to be marketed in a very agile manner and with little in logistics because they are practically together,” said the director. of Pemex, Octavio Ramírez Oropeza.

The official stated that Deer Park, by being located on the coast of the Gulf of Mexico in the Houston area, near the borders and ports of Mexico, allows reducing fuel transportation costs.

Refineries and access points to Deer Park

Mexico has six active refineries and Deer Park is close to its ports and access points in the northeast of the country.

Why buy it? Is it effective?

Since he took office in 2018, López Obrador raised an energy model that favors the leadership of the State, a return to the model of the twentieth century, when Mexico emerged as an oil power.

His strategy seeks to reverse the energy reform approved in 2013 that opened investments to private companies, as the president defends that his plan avoid dependency of Exteriorand ensures sovereignty.

“We have more than 40 years without building a new refinery. Always because of the lie that it was not a business to engage in refining, that it was better to sell crude oil and buy gasoline. It is, as we have said many times metaphorically, sell orange to buy orange juice“, Stated López Obrador when announcing the purchase.

One of its great infrastructure promises is the construction of the new Dos Bocas refinery, which will cost more than US $ 9 billion and will have the same capacity as Deer Park. It ensures that it will be in operation before the end of its mandate, in 2024.

President López Obrador is betting on oil as the engine of the economy.

Government of Mexico
President López Obrador is betting on oil as the engine of the economy.

According to analysts, López Obrador made the decision to buy Deer Park out of your energy plan given the uncertainty of when the Dos Bocas refinery will be ready.

“It will cost Pemex US $ 600 million dollars, half of the refinery it is buying, versus more than US $ 9,000 million that Dos Boca costs. So it is seven or eight times cheaper in terms of the capacity they are buying, ”Monaldi points out, noting that building refineries in the Western Hemisphere is not the best idea.

Although Deer Park can make it easier for the Mexican government to cover the current demand for fuels, Rosanety Barrios warns that the government’s accounts are “very, very optimistic.”

Currently, the country consumes 1.43 million barrels of fuel per day. And its refineries, according to official data, generate just over 863,000 barrels a day. The other 690,000 are bought on the international market.

Adding the full capacity of Deer Park, the country would exceed 1.2 million barrels, but I’d still be in the red regarding demand.

The government’s bet is to add another 340,000 when the Dos Bocas refinery comes into operation and increase the production of the six that are already operating through modernization.

The Deer Park Refinery

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Deer Park has the same capacity as expected from Dos Bocas, but it only cost Mexico a fraction of the Mexican plant.

Barrios, however, points out that the government’s calculations are risky.

On the one hand, the analyst points out that it remains to be seen if the six Pemex refineries can expand their capacity (something that he considers “practically impossible”). And the government accounts must be subtracted for fuel oil, a residue from refining whose value is very low.

Technical problems in Mexican refineries mean that a third of what you refine becomes fuel oil, so the government accounts do not close, according to Barrios.

In addition, Deer Park already has contracts that it must fulfill, so there are no guarantees that 100% of its capacity will go to Mexico.

“This shows that the economic issue does not concern him [a López Obrador]. For him that is not relevant in order to meet the political objective, “says Barrios.

Sovereignty and / or energy security

The energy policy of the president of Mexico evokes the oil nationalism of the 20th century that led the country to self-finance and create its main social and infrastructure works.

Protesters against energy reforms

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In the past, López Obrador has led nationalist movements against the privatization of the energy sector.

The president says that it is a “change of mentality” that the neoliberals reject.

“Since the oil expropriation [una nacionalización de 1938] Until the 1980s, we were self-sufficient in gasoline, we did not buy. From the 80s to date, we buy fuels, that’s why the refineries were not built“, Maintains the president.

“So, turning again is a different policy that is being carried out at Pemex. And this means more work in Mexico, more independence ”.

For analyst Adrián Duhalt, the decision “strengthens, at first glance, the objective of increasing the production of petroleum products by Pemex.” But he points out that energy security and sovereignty are parallel objectives that may not be met.

“The first implies having access to energy supplies constantly at competitive prices, while the second, as expressed by President López Obrador, aims for Mexico to produce what it consumes,” he explains.

“In practice, it is hard for me to think that the purchase of the Deer Park refinery contributes to the issue of energy security given that petroleum products such as gasoline and diesel they are just part of that concept“.

And the fact that Deer Park is in US territory it does not add to López Obrador’s idea of ​​having sovereignty in the production of fuels.

A blast in Deer Park

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Deer Park has had environmental problems, such as an explosion that released benzene into the environment in 2019.

On the other hand, countries with advanced energy industries are already taking steps towards energy transition: substituting polluting sources such as oil for more “green” ones. Shell’s decision to sell Deer Park is part of that company’s journey.

Mexico, with the construction of Dos Bocas and the purchase of the Texas refinery, remains in the oil policy even though it has signed international pollutant reduction commitments.

“We have an energy model that in addition to causing economic losses in state companies, the cost of energy is increasing and completely set aside the whole issue of energy transitionBarrios maintains.

“Mexico is going to require clean energy and the best prices to take advantage of the Free Trade Agreement and increase its exports. Mexico is an exporting country, a manufacturing and exporting country. So, in order to take advantage of what we have and maximize them, we need two things: cheap and clean energy and private investment ”.

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