Mexico president Andrés Manuel López Obrador said Wednesday that the U.S. Treasury Department has approved Shell plc’s sale of its 50.005% stake in the Deer Park, TX, oil refinery to Mexican state oil company Petróleos Mexicanos (Pemex).

Deer Park

The 340,000 b/d refinery currently operates as Deer Park Refining LP, a joint venture between Shell and Pemex.

The transaction, valued at $596 million and expected to close in early 2022, “means more capacity to process our crude oil, the primary material extracted from wells in our country, both from onshore wells and shallow waters,” the president said during his morning press briefing.

Foreign Secretary Marcelo Ebrard displayed a letter from the Treasury Department’s Committee on Foreign Investment (CFIUS) indicating the approval. CFIUS did not immediately respond to a request for comment from NGI’s Mexico GPI.

Shell in May announced the planned sale of its Deer Park stake, saying that while it had not planned to market its stake in the refinery, it welcomed the unsolicited purchase offer from Pemex. 

The Deer Park acquisition, along with a 60 billion peso ($2.89 billion) coking unit under construction at the Tula refinery in Hidalgo state, and the 340,000 b/d Dos Bocas refinery under construction in Tabasco state, will increase Mexico’s refining capacity by about 700,000 b/d, López Obrador said. 

In addition, Mexico is currently undertaking a $10 billion investment to rehabilitate Pemex’s existing fleet of six refineries in the country. 

The investments are part of López Obrador’s mandate to achieve self-sufficiency in fuel production, and to “rescue” Pemex and state power company Comisión Federal de Electricidad (CFE).

Pemex refineries processed 695,000 b/d of crude oil during the third quarter, up 14.9% year/year. The refining system’s utilization rate, meanwhile, was 42.4%, up five percentage points from the year-earlier period.

Deer Park’s utilization rate has averaged above 80% in recent years, according to Pemex.

“While many may question Pemex’s move at a time when several national oil companies and international oil companies are reducing their exposure to refining, the acquisition is strategic in many respects — and can hardly be viewed as a thoughtless decision, at least from Pemex’s standpoint,” said the Baker Institute for Public Policy’s Adrian Duhalt, postdoctoral fellow in Mexico energy studies, in May. “Deer Park may offer valuable advantages to Pemex. 

“For example, it provides an opportunity for greater volumes of Pemex crude oil production to be processed there and displace current suppliers, lessening in that way any uncertainty in terms of export market access.”

Is Refining Profitable for Pemex?

Critics have highlighted that the refining segment is a perennial lossmaker for the heavily indebted state oil firm. 

Pemex’s exploration and production arm posted operating income of 317.7 billion pesos ($15.3 billion) during the third quarter, versus operating losses of 93 billion pesos ($4.49 billion) for downstream unit Pemex Transformación Industrial.

Environmental groups and renewable energy advocates also have said that a proposed overhaul of power sector rules is designed to provide a market for Pemex’s high-sulphur fuel oil, an increasingly difficult product to market internationally due to limits on the allowed sulphur content of shipping fuel. 

Pemex fuel oil production has averaged 245,400 b/d this year, up 39.4% from the 176,000 b/d averaged in 2020.

By comparison, Pemex production of liquid hydrocarbons has stayed essentially flat at about 1.9 million b/d.

U.S. energy companies and legislators, meanwhile, have accused Mexico’s Comisión Reguladora de Energía (CRE) of unjustly denying and/or revoking permits for private sector firms to import and market refined products in Mexico, in order to cement Pemex’s leading role in the space.

López Obrador said Wednesday that Pemex hopes to refine all of its oil production domestically by 2023, rather than exporting it.

The United States is the primary destination for Pemex crude oil exports, which totaled 936,000 b/d in October.

To ensure natural gas supply for the Dos Bocas refinery and southeastern Mexico in general, Mexico’s state power utility Comisión Federal de Electricidad (CFE) and Canada’s TC Energy Corp. are in talks to develop a new offshore gas pipeline that would require investment of more than $4 billion.