OREANDA-NEWS. Political and environmental objectives appear to trump economics as the biggest drivers of heavy-for-light crude swaps that Mexico's Pemex will begin with US counterparties this month.

Pemex has received a license from the US Commerce Department to import 75,000 b/d of US light crude in exchange for heavier Mexican crude. The first deliveries are expected to arrive this month. The light crude would be blended with domestically produced oil supplying three of Pemex's six refineries, allowing them to stop producing lower quality fuel oil and produce higher margin products like diesel and gasoline. Pemex said the swap could add nearly $2/bl to Mexico refineries' margins.

But the spreads between US light crudes and Mexican heavy crudes are much wider than $2/bl, ranging between $5/bl and $10/bl depending on a number of factors.

US domestic light sweet crude West Texas Intermediate (WTI), which Pemex has expressed specific interest in importing, was valued yesterday at $40.54/bl at Cushing, Oklahoma, and would cost between $3.14/bl and $4/bl extra in pipeline tariffs to get to a terminal for export. If purchased directly from the Magellan East Houston terminal, WTI would cost only $40.14/bl. Crude tanker rates from the US to the east coast of Mexico are then estimated at about 75?/bl, bringing the total cost of the US crude to between $40.89/bl and $44.54/bl.

Mexico's heavy sour Maya crude traded at $33.16/bl yesterday, and freight rates were estimated at about $2/bl for crude tankers traveling from Mexico to the US Gulf.

For the crude exchange to work, the $5.70-$9.30/bl spread in the overall cost for both grades would need to be eliminated or Mexico would have to pay the difference.

"It makes no sense," Adrian Lajous, former chief executive of Pemex, told Argus regarding the economics behind the transactions. He said Pemex would do better by running Mexican domestic light sweet crude Olmeca instead of importing WTI, although much of the country's Olmeca output is committed to export contracts and for diluting other heavy grades.

Part of Pemex's need for the US light crude is driven by Mexico's own environmental laws, however, said Bill Brown, a senior analyst at the US Energy Information Administration (EIA). A 2006 law calls for the production of hydrocarbons that averaged no more than 2pc sulphur by 2009. In metropolitan areas, gasoline can contain only 0.05pc sulphur.

Pemex "repeatedly missed those targets, and presently only the major metropolitan areas — Mexico City, Monterrey, Guadalajara — and border areas are following those rules," said Brown, meaning Pemex is out of compliance with Mexican laws. Even within those limited areas, most of that product is being met through imports, he said.

"They're actually only producing about 25pc domestically, and one of the reasons for that is just that most of the Mexican crudes are fairly sour," said Brown.

The Mexican refineries that would receive the imported feedstock are the 430,000 b/d Tula in the central state of Hidalgo, the 245,000 b/d Salamanca refinery in the nearby state of Guanajuato, and the 330,000 b/d Salina Cruz refinery on the Pacific coast. Those three refineries currently produce only limited amounts of lower-sulfur products and are not well-configured to process heavy crude, the EIA said in August.

Light US crude supply would also save Pemex billions of dollars on refinery reconfiguration work to comply with the existing law, money that Pemex's refining business has traditionally had trouble raising, Brown said.

"This deal gives them one more additional piece to get some of these clean products into their country without having to import it directly, which has some advantages that may in fact be beyond economics," Brown said.

Taking US crude would also help Pemex prove it is serious about recent reforms aimed at opening up the country's energy sector, Brown said, since previously crude imports were limited.

Neither Pemex or the Commerce Department has indicated which US companies would participate in the heavy/light exchange, but the US Bureau of Industry and Security (BIS) said yesterday that the crude exchange could involve multiple US parties.

According to Brown, Pemex and Shell joint venture Deer Park Refining in Houston, Texas, was able to revise downward its contractual imports of Mexican Mayan crude last year from 200,000 b/d to 170,000 b/d. Similarly on 1 May, the Pemex contract with Chevron's Pascagoula, Mississippi, refinery was adjusted from a firm commitment of 95,000 b/d to 51,000 b/d. Those two contract adjustments leave enough space for about 75,000 b/d of incoming Mexican Maya crude that is not already committed — a requirement of the Commerce Department's licence to swap the heavy and light crudes.

Shell and Chevron declined comment on refinery operations.