Analysis - A new hope or false dawn for Mexico's oil refiners?

By David Alire Garcia

TULA, Mexico (Reuters) - Mexico's oil refining industry, saddled for years with bloated costs, chronic underinvestment and generous government fuel subsidies, ought to be on the verge of a bright new dawn.

A shake-up last month dismantled the state-run Pemex oil and gas monopoly, ending decades of stubborn self-reliance and potentially opening the door to foreign oil companies. At the same time, U.S. energy producers are looking for new ways to sell a glut of light, sweet shale oil, a variety of crude that could immediately improve Mexican refinery operations.

Yet experts say Pemex's aging, ailing downstream sector, which suffered an estimated record $10 billion loss last year, remains far from salvation.

The wave of excitement that followed the opening of Mexico's vast oil fields has failed to translate into optimism for refineries like the one near the city of Tula, 45 miles (72 km) north of Mexico City.

Named for the priest who led Mexico's independence struggle, the Miguel Hidalgo refinery is the country's second-largest refinery - and also its worst performing.

For every barrel of crude it processes - around 292,000 barrels each day - $1.23 is lost, according to data from Mexico's national chemical industry association ANIQ.

"Our priority is to reverse the losses," said Pemex Chief Executive Emilio Lozoya, who has pledged major upgrades at the country's three biggest refineries. "Given limited budgets, we have to modernize the plants that are losing money."

At most, 60 percent of the crude processed at the Miguel Hidalgo refinery is converted into higher value fuels, Pemex says - making it about one fifth less productive than refineries along the U.S. Gulf Coast. It has some 3,200 full-time employees; top U.S. refinery Valero Energy Corp, which has 16 refineries, employs between 480 and 800 full-time workers at five similar-sized plants.

Valero, one among many foreign companies that the energy reform opens the door to, does not "have any plans to invest in Mexico," said spokesman Bill Day.

For a graphic on Mexico gasoline production and imports, click on http://link.reuters.com/juk75v

NEEDED UPGRADES

On a tour of the Miguel Hidalgo refinery, engineering superintendent Gustavo Grande showed off the site where a new coking plant will be built - currently an empty field dotted with bushes and cactus.

It is one of three major projects under a nearly $11 billion, three-year plan to squeeze more valuable gasoline and diesel out of Mexico's increasingly heavy crude slate.

All told, Lozoya says Mexico must invest $40 billion in refining capacity in the next five or six years.

"It will give us more light fuels, boost liquefied petroleum gas, gasoline and diesels," said Grande. "The refinery will become more profitable."

Pemex, which can refine about 1.54 million bpd, says the upgrade will boost output of gasoline and diesel by more than a quarter from 134,000 bpd today, while production of less valuable fuel oil will drop from 88,000 bpd to about 6,000 bpd.

But past upgrade projects have fallen short.

Pemex completed a coking upgrade of its Minatitlan refinery in eastern Mexico last year after multiple delays. But the company's goal of increasing capacity to 310,000 bpd fell short by more than 20 percent as the $2.5 billion project failed to deliver expected processing capacity.

"It would make more sense for (Pemex) to associate with someone who would do a better job," said Francisco Labastida, a former Mexican energy minister.

Mexico's refineries consume about 42 percent more energy compared with international averages, Labastida said. They also suffer 12 times the number of non-scheduled work stoppages, according to figures from the Mexican Energy Ministry.

THANKS, BUT NO THANKS

Thanks to the energy overhaul, companies will be allowed to invest in pipeline infrastructure or even apply for permits to build new privately-owned and operated refineries.

In theory, new investment makes sense. Demand in Latin America's second-largest economy has already outstripped capacity, and gasoline use expected to increase by more than 5 percent annually through 2020, according to government data.

U.S. gasoline exports to Mexico, the world's tenth biggest crude producer, have nearly quadrupled since 2000.

"I've heard of company interest to put a refinery near the Pacific coast, close to Mazatlan or Guadalajara, and another one near the Gulf of Mexico, in Tuxpan," said Juan Bueno, a federal lawmaker and former chief executive of Pemex's refining arm.

But few share his optimism. U.S. fuel exports have risen to record highs thanks to the availability of cheaper shale crude and the erosion in U.S. demand.

"U.S. refiners are already supplying Mexico with products without having to build a multi-billion dollar refinery," said Chi Chow, a refining sector analyst with Macquarie Capital.

Some have speculated that Pemex might consider purchasing a refinery beyond Mexico's borders to boost output.

In an interview published December 9 in the trade journal Rigzone, Pemex's Houston-based procurement chief Arturo Henriquez said the company was "looking at refining capacities in the U.S., Europe and Asia."

Henriquez's office said he was not available for comment.

Since 1993, Pemex has held a 50 percent stake in the Deer Park oil refinery, located just outside Houston, the sixth-largest such facility in the United States.

It is operated by joint venture partner Royal Dutch Shell and is more profitable than any of the six refineries in Mexico, earning on average $7.31 per barrel processed.

NEW REFINERY WISH

Pemex says it still hopes to build a brand new $10 billion refinery next door to its Miguel Hidalgo facility.

Announced with great fanfare in 2008, it would be the first to be built in 35 years. But the refinery was not included in Pemex's last business plan, prompting talk that it had been canceled.

A perimeter wall, high voltage lines and underground water tunnels have been built at the site, but nothing else.

Pemex officials privately say plans for the new refinery are on standby as the company prioritizes the coking plant upgrade and awaits the impact of the landmark reform.

"Maybe they'd build it but it's probably not going to be before the turn of the decade," said Alfred Luaces, leader of global refining research for business consultancy IHS.

The best short-term fix for the sector might simply be doing more "logical things" such as importing light crude, Luaces added -- allowing existing refineries to operate more efficiently, and freeing up more domestic oil for export.

Pemex has long rejected the idea of importing its crude, preferring to remain self-sufficient by relying solely on its own production. But with domestic output increasingly heavy crude, which is harder to process, refineries have suffered.

In November, a Pemex official signaled the firm was considering light crude imports to boost output of higher-value refined products. And would-be U.S. oil exporters may be able to gain export permits to Mexico, as they already have for Canada, with relative ease, analysts say.

Pemex itself hopes that subsidy cuts will help refining.

Subsidies have fallen this year, and more cuts would boost revenues from the sale of refined products, said Miguel Tame, head of Pemex's refining unit.

Subsidies were worth nearly $8 billion in 2013, and this year are due to fall to $332 million, according to budget forecasts. But post-reform, future subsidy levels are unclear.

With Pemex's oil monopoly ending, Tame says the refining division is determined to cut costs to become more efficient. "I'm worried," he said. "There will be big pressure to do better."

(Editing by Dave Graham, Jonathan Leff and Grant McCool)