Shell and Mexico's state-controlled oil firm Pemex have extended their US refining joint venture with a ten-year agreement for reduced Maya supply at a fixed price.
The agreement reduces the joint venture supply of Maya to 70,000 b/d while shifting the crude to a fixed $59.35/bl for 10 years beginning in 2023, according to a source familiar with the deal.
Such an arrangement would allow for more crude options at the 340,000 b/d refinery at the heart of the JV in Deer Park, Texas, and some stability for a formula-priced feedstock rocked by wild swings in West Texas Sour (WTS) prices.
The companies' subsidiaries confirmed extending a 25-year-old joint venture agreement at Deer Park to 2033, and a separate agreement on Maya supply to the facility. Neither company would comment on the crude arrangement or other new terms as part of the joint venture extension. The original joint venture split supply and product output evenly.
PMI, Pemex's trading arm, prices Maya crude based on a formula that includes West Texas Sour (WTS) and sweet crudes, fuel oil and monthly adjustments called K-factors. Every $1/bl change in WTS moves the price of Maya by 40¢/bl.
K-factors reached a more than five-year high this month as pipeline constraints helped force WTS to its widest discount to the Nymex Cushing benchmark since 2014.
Pipeline bottlenecks connecting booming Permian light sweet production to larger markets have helped to depress prices for the sour crude. A fixed Maya price of $59.35/bl would mark a nearly 3pc discount from prices so far this year. Maya prices to the US Gulf coast over the past decade reached a peak of $114.67/bl in March 2012 and fell to $20.01/bl in early 2016.
Mexican crude exports to the US Gulf coast have fallen as production subsided and competition from Canadian and Opec exporters increased. Deer Park reached a peak of 260,000 b/d of Mexican imports in 2004, trailed below 200,000 b/d in 2011 and averaged 152,122 b/d last year, according to Energy Information Administration data. The agreement calls for Maya supply to ramp down into the 70,000 b/d volume beginning in 2023.
Maya faces growing competition from Canadian heavy blends struggling to reach the US Gulf coast market. Deer Park began importing steady volumes of Canadian crude in late 2015, and averaged roughly 20,000 b/d last year.
Shell chief financial officer Jessica Uhl said in a quarterly earnings call the joint venture "decided to improve the crude flexibility of the refinery," though the company declined to elaborate on how.
"This will allow us to take full advantage of Shell Trading's global reach and access to a wide range of crude and feedstocks to deliver additional value," Uhl said during the call.
