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The Market for Heavy Sour Crude Oil in the US Gulf Coast

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The Market for Heavy Sour Crude Oil in the US Gulf Coast The Market for Heavy Sour Crude Oil in the US Gulf Coast: The PEMEX/PDVSA Duopoly Juan Carlos Boué with Liliana Figueroa Oxford Institute for Energy Studies SP 13 January 2002 The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies or any of its Members. Copyright © 2002 Oxford Institute for Energy Studies (Registered Charity, No. 286084) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission of the Oxford Institute for Energy Studies. This publication is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher’s prior consent in any form or binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. ISBN 1 901795 20 9 ACKNOWLEDGEMENTS In the process of completing this study I have accumulated intellectual debts that are too numerous to mention. Nevertheless, I would like to express my gratitude to a number of individuals and institutions without whose collaboration the study would not have been completed, certainly not in its present form. As ever, it all began with an idea put forward by Robert Mabro: that I should try and express in academic terms the commercial experience that I accumulated during my stint as manager for Crude Oil Exports at PMI Comercio Internacional, the international trading arm of Petróleos Mexicanos (PEMEX). Given the composition and destinations of PEMEX’s exports, this suggestion inevitably meant writing about the market for heavy sour crude oil in general, with a focus on the US Gulf Coast in particular. Notwithstanding his very busy life, Adrián Lajous spent long hours reading four — as I recollect it — different drafts of this study, always displaying patience and understanding above and beyond the call of duty. His advice was invariably profitable, as was that of John Mitchell and Charles Henderson. The contribution of Liliana Figueroa to the study was decisive. She completed the statistical and modeling work that underlies the core chapter of the study by juggling her own very demanding research schedule, and she never betrayed any impatience at my inopportune and constant pestering. The same can be said for Gabriela Cano, whose computer wizardry enabled me to put together many time series and data bases in a hundredth of the time it would have taken me had I been on my own. My efforts at data collection were also made much easier by the disinterested collaboration of Raúl Manzo, César Covarrubias, Roberto Carmona, Sandra Hernández, Tere Martínez and Maricarmen Orozco. Sadek Wahba provided me with some extremely important and hard-to-find documents. Finally, Judy Mabro’s thorough copy-editing left my manuscript without errors of form. All of these individuals did their best to enlighten me and to improve the contents of the study. The errors that remain, whether through ignorance or obstinacy, are strictly my own. In a letter to Daniel Halévy that prefaces the first French edition of his Réflexions sur la violence, Georges Sorel wrote the following apologia pro obra sua: “I do not have an academic chair, I am not a populariser and neither do I aspire to be the head of a party; I am but a self-taught writer who offers some people the blocks of notes that have served for his own instruction”. These words describe my own situation well. Unlike Sorel, though, it has been my good fortune to count on a succession of excellent guides into the intricacies of the oil business: Adrián Lajous, Robert Mabro, Eduardo Martínez del Río, Pedro Haas, Raúl Cardoso, Xavier Trabia, Bernard Mommer, Miguel Bueno, Raúl Manzo, Paul Horsnell, Ernesto Estrada. I would like to thank my wife Sonia, my children José Miguel and Lucía, my sisters Michéle and Erika and my parents Celia and Juan for just about everything else. Miguel Moreno Sánchez is not here to thank him anymore, so I can only dedicate this book to his memory. I would also like to dedicate this book, with the greatest respect and admiration, to Adrián Lajous. THE AUTHORS Juan Carlos Boué was born in Mexico City, Mexico, in 1966. He took a degree in Public Administration at El Colegio de México. Between 1990 and 1999, he held various analytical and market intelligence posts at PMI Comercio Internacional, the international trading arm of PEMEX, Mexico’s national oil company. For a two-year period (1997–99), he was commercial manager for crude oil exports, as well as secretary to the International Petroleum Trade Committee (Comité de Comercio Exterior de Petróleo or COCEP), the collegiate governmental body that oversees PEMEX’s international trading activities and approves changes in the adjustment factors of Mexican crude pricing formula. In 1992, he spent a year as a visiting research fellow at the Oxford Institute of Energy Studies, on secondment from PEMEX. While on this assignment, he wrote a monograph on various aspects of the Venezuelan petroleum industry which was published by Oxford University Press as Venezuela. The Political Economy of Oil (1993). Between 1994 and 1997, he read for a D.Phil in Politics at Wolfson College, Oxford University. He has published articles on the political economy of petroleum as well as on trading and taxation in various international affairs and economics journals. Married, with two children, he currently lives in Oxford and works as Senior Research Fellow at the Oxford Institute for Energy Studies. Liliana Figueroa was born in Mexico City, Mexico, in 1970. She took a degree in Applied Mathematics at ITAM, in Mexico City, and a Msc. in Statistics at Warwick University. Between 1997–99, she worked in the oil market analysis section at PMI Comercio Internacional, concentrating mainly on oil price forecasting. She is currently reading for a doctorate in Statistics at Warwick University, on the subject of Bayesian time series. She is married and lives in Oxford. EXECUTIVE SUMMARY A study of the market for heavy sour crude derives its importance from the role this market plays in the supply of petroleum products to key consuming countries, particularly the USA. Imports of heavy sour crude account for around a quarter of all US crude imports; and this crude variety is probably responsible for a similar proportion of the total domestic gasoline output in the USA. The study of this market enables the author to investigate interesting issues of wide relevance: – What factors determine the institutional arrangements that govern supply relationships between a crude oil producer and its customers? – Why are some transactions internalised through vertical integration? – Why are many transactions governed by long-term contracts? – What determines the structure of such contracts and why are they used instead of simple spot transactions? The world oil market is segmented into two major and quite distinct sets: one for general-purpose crudes, the other for speciality grades. Heavy sour crudes are the most important in the speciality group. These crudes can only be transformed into light fuels in deep conversion refining plants. This means asset specificity that leads in turn to the emergence of bilateral monopolies. Thus, the commercial parties in the heavy sour crude market have to maintain long-term relationships that will always be under threat given the constraints on substitution arising precisely from this asset specificity. The maintenance of these relationships is further complicated by a number of facts. Firstly there is a relatively small production volume of heavy sour crude available, although this same volume is large when set against the global availability of deep conversion capacity. Secondly, production of heavy sour crude is highly concentrated in only a few countries (with Canada, Mexico, the USA and Venezuela being the most important) and even fewer countries make a meaningful volumetric contribution to the international trade of this commodity. Thirdly, rigidities on both the production and the processing side of the heavy sour trade limit arbitrage and lengthen the amount of time it takes for the market to adjust to a situation of excess supply (or demand). The book describes the market for heavy sour crude in the Gulf Coast (USGC) region, which is by far the largest of its kind in the world. This market is also of critical importance to the economic well-being of Mexico and Venezuela, since it absorbs a high proportion of their crude oil exports. Competition in this market takes place between only two players who place stringent non-resale conditions on their crudes: PEMEX and PDVSA. Although one would expect that participants in a market with problematic transactional characteristics would rely to a large extent on vertical integration, the study shows that the least integrated firm (PEMEX) seems to enjoy advantages over the more integrated firm (PDVSA), as revealed by a number of key indicators. The corporate motivations of PEMEX and PDVSA, and their commercial policies are described. They led both companies to include in their respective commercial policies very distinct safeguards against breakdown and premature breach of their relationships with customers. The effects of these behavioural patterns on the every- day business of these customers are also investigated. One of the book’s theses is that the two-tiered market for heavy crude in the USGC has been created and perpetuated by the marked differences in the commercial policies followed by the duopolists since 1986, and by the learning process through which their customers have gone.
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