April 30, 2020 / 4:12 PM / 25 days ago

REFILE-Mexico resists oil output cuts but scrambles for storage space as glut grows

(Corrects headline to read "scrambles" instead of "scrounges")

By Adriana Barrera and Marianna Parraga

MEXICO CITY, April 30 (Reuters) - With oil still gushing from its fields and no immediate plans for substantial output cuts, Mexico's state company Pemex is considering storing crude in salt caverns and depleted wells, sources familiar with the matter said.

The plan could double state company Petroleos Mexicanos' 11 million barrels of crude storage capacity, according to a former company executive. But it could take more than a month to prepare the new storage sites, and available space could run out within days.

Global oil prices have crashed as demand has tanked during the coronavirus epidemic. Producing nations have slashed output either with planned cuts as with OPEC, Russia and their allies; as drilling has become unprofitable as it has for many U.S. shale producers; or after energy companies have exhausted all storage options.

Mexico has resisted serious output cuts, agreeing at OPEC+ meetings a few weeks ago to keep back 100,000 barrels per day (bpd) for two months from the 1.75 million bpd it pumps. That was far less than the 25% reduction accepted by other members.

After weeks of the price crisis, Pemex coped by sending more crude to domestic refineries, but that just fed the growing glut of excess fuel during the economic lockdown. Now, the company is looking at refurbishing never-used caverns in salt deposits on Mexico's Gulf coast and elsewhere, one current and one former Pemex official said.

Pemex has also resorted recently to storing crude at two floating storage and offloading systems in the Gulf and at tank farms at its Madero refinery and the Tuxpan port, the Pemex official and an industry source said, but those facilities are now full.

Due to its very limited storage capacity, Mexico is at a high risk of forced or unplanned output cuts, consultancy IHS Markit said in a March report.

"Pemex is literally storing everywhere it can. It has so far avoided exporting big volumes at such low prices, said Gonzalo Monroy, a Mexico City-based oil analyst. "Its best option in the medium term is to store at caverns."

Several countries have adapted cavities in salt deposits to store oil, because salt does not directly interact with crude and such spaces provide cheap long-term storage possibilities. The most well known such facility is on the U.S. Gulf coast and used for the country's Strategic Petroleum Reserve (SPR).

Pemex has some experience with salt caverns. Since 2017, it has rented saline domes on the coastal state of Veracruz from chemical firm Cydsa to store liquefied petroleum gas.

Pemex's Industrial Transformation unit is conducting studies to replicate the model at salt caverns in Nuevo Leon and Veracruz, said Monroy, who was briefed on the matter this week by Pemex executives.

Storing oil in new caverns would take at least 45-90 days as the site must be prepared and chemicals injected to their walls to avoid contaminating the crude, he said. A portion of crude deposited there would be lost after storage due to sediments.

Mexico's current 11-million-barrel storage capacity is equivalent to about six days of output. The caves could almost double that, the former Pemex executive said.

Another shorter-term option is to store oil in depleted wells at Mexico's Cinco Presidentes producing region, Monroy said. Pemex and Mexico's energy ministry did not respond to requests for comment.

Currently available storage is expected to fill up in the coming days, Monroy and other analysts said, unless Pemex reduces the pace of production at its mature shallow-water oilfields, which make up for the lion share of output.

Most of the company's in-land crude tanks are located at the Dos Bocas terminal in the Gulf, an active port for oil exports.

"We are running out of storage space," a Pemex worker told Reuters, adding that Dos Bocas' tanks were filled at over 40%. "What's next is to shut oilfields". (Reporting by Adriana Barrera and Marianna Parraga; Editing by David Gregorio)

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