Late last week Jack Hanks, president and CEO of MMEX Resources, met in Midland, Texas, with midstream operators and crude aggregators. The immediate topic was the $450 million, 50,000 barrel per day (Mbbl/d) refinery that his company proposed building at Sulfur Junction, 20 miles northeast of Fort Stockton, Texas, at the southern end of the Permian Basin. Construction is slated to begin in early 2018, following the permitting process, and the facility is projected to begin operations in 2019.

In absolute volume terms, 50 Mbbl/d is a rounding error against the basin’s current production of 2.2 MMbbl/d. MMEX plans to bring crude in by pipeline, rail and truck, so the ‘what’ and the ‘how’ of the project were easy questions for the suppliers to answer. The matter of ‘why,’ however, poses a broader question to the Permian midstream.

“We have worked in Latin America, focused on terminals and refineries in Brazil,” Hanks told Midstream Business. “When we started looking around at Latin America’s needs for crude and refined products, we started thinking about ways to get Eagle Ford production to Brownsville either for export or for a refinery. We noticed that everything seems to go east to Cushing, Oklahoma, or to the Gulf Coast refineries. Then we got to thinking about going to West Texas, building a refinery there, and paying producers higher prices because transportation costs are lower.”

The key, Hanks said, was the Texas Pacifico Railroad. It is owned by the State of Texas and is operated under a long-term lease to Mexico’s FerroMex. It runs from Fort Worth through Fort Stockton and on to Presidio on the Mexican border. From that interchange, there is direct access to Chihuahua and ultimately Topolobampo, a deepwater port on Mexico’s west coast. Hanks said MMEX plans to ship fuels to local markets in northwest Mexico by rail, and through the port of Topolobampo to markets on the entire Pacific coast of Latin America.

“Peru, for example, where I’ve worked for several years, imports 150,000 bbl/d of crude and products,” Hanks said. “Once the midstream guys and crude aggregators understood the plan, they said they’d build a pipeline to the gate, and asked me why I was only building a 50,000 bbl/d refinery. I should go to 100,000 bbl/d.”

Hanks invoked the walk-before-you-run philosophy, and also noted that 50 Mbbl/d is an amount as big as a refinery can get that still qualifies as a “minor source” of air emissions. That classification means all permitting can be handled within the state, rather than by federal regulators.

He also has his eye on domestic markets. “While the west coast of Latin America is a prime market, there are others even closer, notably Phoenix and Tucson. A lot of fuels that are made in California but don’t quite meet specification for that state are moved to Phoenix. There is no reason we could not supply that market, too. From Fort Worth, the Texas Pacifico makes connections to the rest of the country.”

The last consideration is crude quality. Gulf Coast refineries are mostly large, highly complex, deep-conversion facilities designed to refine heavy and sour crudes, such as Mayan from Mexico and Orinoco from Venezuela. The lighter, sweeter shale crudes are just a blending component for those refineries’ feedslates. There is a touch of karma in a plan to build a refinery in the Permian to supply fuels to the west coast of Latin America, even as the east coast of Latin America is supplying crude to the bigger U.S. Gulf Coast refineries.

Hanks told Midstream Business that he has begun talks with private-equity interests, and that any deal is likely to be in the range of 80% debt to 20% equity, but that discussions are still at an early stage. Purchase of the 250 acres for the refinery is also underway.

“We are a little out ahead on this one,” Hanks said, “but in time, I think there will be other refineries in the Permian and in other basins as well. The crude is there; it just needs a new approach to getting to market.

“Is this a challenge to the midstream? No, more of an opportunity,” he continued. “Producers are extremely happy about the idea of higher prices for their oil. We are working with midstream partners to get some of that to our refinery. I definitely think this project could be a model for other, similar developments.”

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