April 26, 2017

Mexico Continues to Face Low Average Refinery Op Rate: SENER

HOUSTON -- The average refinery utilization rate in Mexico remains challenged so far in 2017, with that relatively low operating rate seen mostly unchanged from last year, according to Rosanety Barrios, chief of industrial transformation policy at the Secretaria de Energia (SENER) on Wednesday.

Barrios was speaking at the OPIS Mexico-U.S. Summit being held in Houston on Wednesday.

By pointing out the relatively low refinery rates, she highlighted the close trading relationship between the U.S. and Mexico as well as the opportunities to invest in energy infrastructure and import capabilities in Mexico.

Barrios pegs the current average refinery runs in Mexico at 57% of its maximum capacity due to a high number of refinery shutdowns.

Pemex has six refineries in Mexico, with a total capacity of 1.6 million b/d. The 57% refinery utilization rate is close to 960,000 b/d.

The efficiency and reliability of Mexican refineries vary from site to site. The highest average operating rate of 78% for an individual refinery is at Salamanca, followed by Salina Cruz 76%, Tula 63%, Cadereyta 43%, Minatitlan 39% and Madero 38%.

Barrios highlighted the important oil trading relationship between U.S. and Mexico, and this relationship has become more important than ever due to a strong U.S. fuel import demand from Mexico.

She said that in 2016, Mexico imported 87% of its gasoline and almost 100% of diesel from the U.S. on average.

The exports of gasoline and diesel from the U.S. to Mexico represented 60% and 16% of U.S. total exports, respectively, she said.

Exports of propane and jet fuel from the U.S. to Mexico represented 12% and 19% of U.S. exports, respectively, in 2016, Barrios said.

Mexico imports 97% of its propane and LPG and almost 100% of jet fuel from the U.S. on average, she added.

OPIS notes that the strong fuel export trend in the U.S., backed by an insatiable Mexico demand, was one of the key contributors to propping up U.S. refining margins last year.

April 19, 2017

U.S. Propane Wholesalers Struggle with Tighter Margins amid Growing Exports

Growing natural gas liquids exports on the U.S. Gulf Coast and East Coast have dominated the headlines in the past year, but the less-talked-about story so far has been a huge squeeze on U.S. Midcontinent propane sales, and profit margins at the racks and retail levels.

For at least three years in a row, Midcontinent propane distribution companies have endured a squeeze from the tightening supply on strengthening export flow and plunging retail sales amid relatively mild winter weather. This scenario of burning a candle on both ends has put some propane companies in financial turmoil, and it may lead to a stronger push for industry consolidation in the next few years.

"Three years of (relatively) warm winters in the Midwest have taken its toll on the propane industry," a wholesaler told OPIS.

"Unless you are in the Pacific Northwest or Western Canada, there was no real winter weather," he said in reference to the trend of mild winter weather.

In February, Minnesota had 18 consecutive months of record-high seasonal temperatures, the source said, adding that seasonal temperatures in Minneapolis on some days were 68 degrees when it should have been about 32 degrees.

Some sources said that the second half of January and February of 2017 were especially tough on propane wholesalers in terms of tight margins. The first source said that there was no room for error in that precarious operational environment.

OPIS reported Fauser Energy, a Midwest distributor, is divesting its wholesale products and NGLs business assets due to a financial liquidity crunch.

Besides facing less-than-stellar sales, wholesalers' margins were crushed by high prices stemming from a tight propane inventory at Conway and "less-than- full" stocks at Mont Belvieu and Canada.

"The huge price spread between Conway and Mont Belvieu has every barrel heading down to the Gulf Coast for exports," he said.

The first source said that some NGL plants in North Dakota were down earlier this year, contributing to a tighter supply in the Midcontinent.

Also, a consolidation move at the refiner and producer level led to fewer supply sources, and lower competition could lead to higher prices, he added. This contributed to less wriggle room for wholesalers amid a squeeze from lower retail sales.

Some larger propane distributors have been and will continue to buy out smaller and struggling companies, sources said.

A second source said that the U.S. propane demand is down, but strong exports are driving prices higher. The Ferndale terminal in Pacific Northwest is also exporting propane to Asia, in addition to strong outflow from the Gulf Coast and East Coast. Mexico's appetite for U.S. NGLs is also growing as the market south of the border is now liberated.

According to the latest data issued by the Energy Information Administration, U.S. monthly NGLs export has risen consistently for at least the past 10 years to a record high at 43.449 million bbl in January 2017. This is compared with 1.09 million bbl in January 2005.

The disparity between export and domestic supply also caused sharp price volatility, with some players getting burnt by a sharp domestic price drop in a short time span of a few days while expecting a price hike, sources said. "There are fewer trading opportunities for an uplift in the market," the second source said.

Meanwhile, some sources said that relatively cheaper Canadian barrels offer a lifeline for some Midwest wholesalers, who are able to source these northern barrels via rail. However, this may not be a long-term solution.

They also said that this arbitrage flow across the border may not remain open for long as Canadian suppliers may raise prices in response to higher demand and stronger prices in the U.S.

It is bad business for propane wholesalers in the U.S. as the industry continues to consolidate, but the stronger competition is expected to make this sector more efficient, sources said.

April 11, 2017

DCP Midstream to Join Kinder Morgan in Gulf Coast Express Development

DCP Midstream will be joining Kinder Morgan Texas Pipeline (KMTP) in developing the Gulf Coast Express Pipeline Project, a natural gas pipeline offering an outlet for the massive production growth in the Permian Basin, KMTP parent Kinder Morgan Inc. (KMI) announced today.

The pipeline would transport up to 1,700,000 dekatherms per day of natural gas through 430 miles of 42-inch-diameter pipe from Waha, Texas, to Agua Dulce, Texas. Depending on shipper commitments, the pipeline could be in service by the second half of 2019, KMTP estimated. KMI would build and operate the pipeline, and DCP is expected to be a partner and shipper.

The Gulf Coast Express project would connect natural gas production in the Permian Basin to growing markets along the Texas Gulf Coast, including export markets via liquefied natural gas and deliveries into Mexico.

A binding open season for pipeline capacity kicked off March 22 and will continue through April 20. Kinder Morgan Natural Gas Midstream President Duane Kokinda said thus far the pipeline has seen a "tremendous level of interest ... during this open season."

KMTP hopes to leverage DCP's expertise in production and midstream transportation, citing its 1.3 billion cubic feet per day (Bcf/d) of processing capacity already centered in the Permian Basin. DCP also operates the Sand Hills NGL pipeline, which extends from the Permian Basin to Mont Belvieu and is currently being expanded to 365,000 b/d from 280,000 b/d.

"This opportunity presents a welcome competitive alternative that adds diversity to the market and is complementary to our recently announced Sand Hills expansion," said DCP's Chairman, President and CEO Wouter van Kempen.

Like other parts of the country, the Permian Basin has seen considerable production growth of late. The Energy Information Administration (EIA) recently estimated April crude oil production at 2.3 million b/d and natural gas production at 7.9 Bcf/d, both up 15% from the same period a year ago.

March 22, 2017

Kinder Morgan Plans Gulf Coast Gas Pipeline; Targets LNG, Mexico

Kinder Morgan Texas Pipeline (KMTP), a subsidiary of Kinder Morgan (KMI), has launched a nonbinding open season for firm natural gas transportation service on its proposed Gulf Coast Express Pipeline Project.

This project would connect the increased natural gas production in the Permian Basin to growing markets along the Texas Gulf Coast, including export markets via liquefied natural gas and deliveries into Mexico, KMI said.

The project is designed to transport up to 1,700,000 dekatherms per day of natural gas through approximately 430 miles of 42-inch pipeline from the area near Waha, Texas, to Agua Dulce, Texas. The pipeline will be in service in the second half of 2019, subject to shipper commitments.

Natural gas supply will be sourced into the project from multiple locations, including existing receipt points along KMI's KMTP and El Paso Natural Gas pipeline systems in the Permian Basin, a proposed interconnection with the Trans-Pecos Pipeline, and additional interconnections to both intrastate and interstate pipeline systems in the Waha area, KMI said.

Deliveries of natural gas into the Agua Dulce area will include points into KMTP's existing Gulf Coast network, KMI-owned intrastate affiliates (KM Tejas and KM Border pipelines), the Spectra Valley Crossing pipeline, the NET Mexico header, and multiple other intrastate and interstate natural gas pipelines.

The open season bid period begins on Wednesday, and ends at 5 p.m. Central Time on April 20.

February 02, 2017

Mexico's Controlled Propane Prices Could End Private Imports

In early January, when the Mexican government pushed through price hikes of 14% on gasoline and 16.5% on diesel as part of its plan to move consumer prices of petroleum prices as rapidly as possible toward market pricing, the move sparked nationwide demonstrations and disorder.

Initially, the government had in mind a similar price hike for LPG on Feb. 1. But several executives of major propane supply and distribution firms told OPIS on Wednesday that the government evidently got cold feet about triggering a similar reaction.

These executives told OPIS that the Comision Reguladora de Energia (CRE) had planned to put through a price increase of 14%-15% on propane nationwide. On Monday, Jan. 30, these executives say, word came down from the Secretaria de Hacienda y Credito Publico (Mexico's Treasury Department) instructing CRE to put a discount of 13% on their proposed February prices for LPG.

Complete information on the new prices being charged by Pemex can be found in the price schedules on the Pemex website at this link: Distribuidores.aspx.

The Pemex price schedules are in pesos per kilogram. The column that counts is the third from the right, "Precio por punto de entrega (sin IVA)." This is the dealer price paid at the Pemex terminal where the dealer picks up his product. In February, this dealer price at Tepeji del Rio, the main pipeline terminal serving Mexico City metro area, was 9.86 pesos/kg, up from 9.66 pesos in January.

To convert prices to cents per gallon, multiply by 1.92 kg per gallon, divide by 20.7 pesos per dollar at the latest exchange rate, and multiply by 100 for cents. In cents/gal terms, the Tepeji price inched up from 89.6cts in January to 91.4cts in February.

These executives told OPIS that the current price decrees from CRE and Hacienda make a mockery of the time and expense (in the hundreds of millions of dollars) they put into their investments. That is because, as reported by OPIS, the average Mont Belvieu propane price in the first week of January was roughly 70cts/gal at the three main storage locations. Coming forward to Monday-Tuesday of this week, the last two days of January, that price average had risen 20% to around 84cts/gal. Yesterday, Feb. 1, saw propane surge over 90cts for at least part of the day.

Here is what is so out of line with the latest price decree, one executive vice president told OPIS. In January, the dealer price at Tepeji was 89.6cts/gal, almost 20cts above the Belvieu base price in the first week. That 20ct difference is the legitimate cost of all the logistics to get a Belvieu barrel to Tepeji -- the Belvieu terminal fee, ocean freight, shipping on the Pemex LPG line to the central market, said the source.

The source explained that if your base price for February went up 14cts to 84cts, the 20cts in logistics costs stays about the same, so the Tepeji price should go up by the same amount to about $1.04. But the Tepeji price is now 91.4cts, and the importer is being asked to eat a loss of 12-13cts on every gallon sold. The executive says no importer can run his business on this basis. Once the cargoes on the water or in transit reach their destination, there will be no more import deliveries to private entities under current price structure, said this source.

Well, how is Pemex going to muddle through such an impasse? That's the part of the current scenario that especially incites the private executives, they all said. They told OPIS that, in calling for the 13% discount off CRE's planned prices, Hacienda promised to keep Pemex whole. Several sources confirmed the same amount: a $20 million subsidy to Pemex in the month of February so that they can keep LPG prices low to final consumers.

OPIS contacted the Pemex press office for an official explanation of how the February prices were derived. As of presstime, Pemex has made no comment.

Private importers tell OPIS they believed Energy Reform was for real and made the investments to take some of the load off of Pemex. They are particularly upset that Hacienda would make this decree because that could happen only if the department had received an order from the president, they allege. No one except Hacienda, with the backing of the president, has the authority to order Pemex to take a loss or to order a direct payment from the government to compensate for the loss, they say.

"Pemex is paying the international price for propane at Mont Belvieu, with all the logistics costs to bring it to Mexico. They can't maintain a subsidy of 12- 13cts/gal. All the investments others have made in import infrastructure will go up in smoke," said one chief operating officer.

"Pemex will be by themselves, again. But they don't have the resources to repair or replace their own crumbling infrastructure. The Pajaritos terminal is falling apart, and only runs on two of the four tanks originally in place. Much less does Pemex have the money to plug all the holes in the 20-inch Cactus- Guadalajara LPG mainline. Pemex and the government must take their hand off the market. There is no other way," the COO continued.

The private investments in oceanside terminals at Tuxpan and Manzanillo in the past 10 years, and in the pipeline from Tuxpan to a terminal near Mexico City, were supplementing the Pemex infrastructure, and in the long run had the potential to replace it, sources said. But, there will be no more of it, said the COO. By intruding the hand of government into the market in midwinter, the president undermines his signature achievement of major energy reform, sources said.