• UPDATE: Pemex to Buy Shell's Interest in Deer Park, Texas, Refinery for $596 Million

  • UPDATE: Pemex to Buy Shell's Interest in Deer Park, Texas, Refinery for $596 Million

    (Adds details on Mexico's perspective on the deal as well as comments on
    potential challenges Pemex might face with the acquisition.)

    Shell Oil Co. has inked an agreement to sell its 50% share of the Deer Park,
    Texas, refinery to its joint-venture partner Mexico state oil company Pemex for
    $596 million, parent company Royal Dutch Shell said Monday.

    The Anglo-Dutch oil major hadn't planned on shopping the 340,000-b/d refinery
    located along the Houston Ship Channel, it said in a statement, but it received
    an unsolicited offer from Pemex. Shell will continue to work with Pemex "in an
    integrated way" including operation of the on-site chemicals facility at Deer
    Park, the statement added.

    The Deer Park refinery's crude slate includes grades from Mexico, Canada, the
    U.S., Africa and South America, and its products include gasoline, aviation
    fuels, diesel, ship fuel and petroleum coke.

    The transaction is expected to close in the fourth quarter of this year. Pemex
    in statement said the transaction will be financed via savings and taking on
    existing debt from the joint venture. As part of the transaction, Pemex will
    take on nearly $300 million in crude and fuel stocks.

    "As part of the negotiation, (Pemex) will maintain the integration and close
    relationship with Shell's petrochemical complex with the objective of capturing
    synergies and economies of scale," Pemex said

    Mexico's Fuel Self-Sufficiency Plan

    Mexican President Andres Manuel Lopez Obrador said Monday that the purchase of
    Deer Park will allow Mexico to be fuel-self-sufficient. Further information on
    the purchase will be given on Wednesday during the president's daily morning
    press conference. Lopez Obrador said buying Deer Park is a key element in its
    plans to ensure Pemex produces all the fuel Mexico requires using domestic
    crude oil.

    The announcement was given after Lopez Obrador criticized the joint venture on
    May 6. "Since it was built, there have been no benefits for Mexico, barely the
    processing of Mexican crude," the president said at the time.A source aware of
    refinery operations said Deer Park has become a key piece to enable the ramp-up
    of Mexican refineries. The Houston refinery has been processing Pemex's excess
    high-sulfur fuel oil output, the source added. The refinery is also a focal
    point of Pemex's crude oil marketing strategy, locking in demand from one of
    the largest refineries in the U.S. Gulf Coast for its Maya heavy crude oil
    blend. According to Pemex data, the company exported nearly 110,000 b/d of fuel
    oil in 2020 abroad. (Data doesn't show to which country it exported the fuel
    oil).

    According to Pemex, Deer Park is currently producing 110,000 b/d of gasoline,
    90,000 b/d of diesel, and 25,000 b/d of jet fuel. Historically, Deer Park has
    been operated with a utilization rate above 80%, the state company added.

    As part of its fuel self-sufficiency plan, Pemex is planning to finish the
    construction of a coking plant at its 315,000-b/d Tula refinery. The facility
    will allow Pemex to also process excess fuel oil from its 215,000-b/d Salamanca
    refinery, which is 227 kilometers (about 142 miles) away.

    Pemex said it will be a priority to maintain competitive salaries at the
    refinery as well as to actively support the local community. President Lopez
    Obrador as part of his austerity program capped all government employees'
    salaries, including Pemex, to be under the president's salary, which was
    161,560 pesos (USD 8,128) per month in 2020.

    The refinery is connected to a rail fuel loading terminal in Deer Park. The
    facility will allow Pemex to ship product from the facility into northern
    Mexico and the Bajio region.

    Moving Against the Trend

    This is a surprising and interesting announcement, said Felipe Perez, refining
    and marketing director for the Americas with IHS Markit. While majors are
    downsizing their downstream portfolios amid the energy transition, Pemex will
    have full control of Deer Park while building its new 340,000-b/d Dos Bocas
    refinery, he added.

    Pemex will have full operational control of one of the U.S. Gulf Coast's
    largest and most complex refineries. "The years of partnership with Shell gives
    Pemex a great operational model and maintenance best practices," Perez said.

    However, Pemex faces the challenges of how to integrate Deer Park with the rest
    of its refining portfolio as well as whether Pemex will be able to maintain
    operational levels at the facility considering the struggles it has with its
    refineries in Mexico, said Perez.

    "Although Deer Park is a very healthy and smart kid, it is a new mouth to
    feed," said Perez, adding there is a concern that Pemex won't have enough
    resources for all its refining ambitions.

    A source close to Pemex said it is concerned about the long-term crude supply
    prospect Pemex has for its growing refining portfolio.

    Lopez Obrador has said Mexico won't import crude oil and it will produce only
    the crude Mexico requires to satisfy its fuel demand.

    With the addition of both the under-construction Dos Bocas refinery and Deer
    Park, Pemex will have total refining capacity of nearly 2.3 million b/d.
    However, Pemex produced 1.66 million b/d of crude oil in 2020 of which 1.04
    million b/d was heavy crude oil.

    Shell Downsizes Refining Footprint

    Shell has been divesting its oil refineries over the last several years, aiming
    by 2025 to have just six refineries worldwide integrated with its chemical
    facilities. The energy and chemical "parks" are focused on production on the
    U.S. Gulf Coast, northwest Europe and Singapore, the company said in October
    2020. At the time, Shell was operating 14 refineries globally.

    In 2016, Royal Dutch Shell and Saudi Refining Inc. divided the assets of their
    Motiva Enterprises joint venture. More recently, Shell has let go of its plants
    in Martinez, California (158,000 b/d, to PBF Energy) and Anacortes, Washington
    (149,000 b/d, to HollyFrontier) and has been searching for buyers for its
    refineries in Mobile, Alabama (90,600 b/d) and in Sarnia, Ontario (77,000 b/d).

    The 260,000-b/d Shell Convent, Louisiana, refinery -- put on the sales block in
    July 2020 -- was idled by the end of the year due to lack of a buyer, although
    sources tell OPIS expectations are that the plant will sell when industry
    conditions improve. In February, the company's Danish subsidiary announced the
    sale of its downstream business, including the 68,000-b/d Fredericia refinery.

    Today's statement says the U.S. will remain a "key manufacturing hub globally
    for Shell" through its facilities in Texas and Louisiana; Gulf of Mexico
    operations; midstream infrastructure and branded retail presence. It will
    continue to invest in its Pennsylvania chemicals project.

    Shell will maintain its marketing presence and honor branded wholesale
    agreements within the Gulf Coast region, the company said.

    --Reporting by Beth Heinsohn, bheinsohn@opisnet.com, Daniel Rodriguez,
    drodriguez@opisnet.com; Editing by Michael Kelly, michael.kelly3@ihsmarkit.com



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