Mexico's plan to boost domestic refining capacity through privately run plants could put U.S. oil imports at risk.

Mexico is the third-largest foreign supplier of crude to the U.S., and many U.S. refineries are specifically made to process Mexico's heavy grade of crude. But Mexico, which currently imports 41% of its gasoline, wants to process more of its oil at home to avoid costly imports of refined products.

Deputy Finance Minister Alejandro Werner said in meeting with reporters Friday that advantages of having the oil refined in Mexico, even by third parties, would include savings in transport costs, the economic-development impact of having the refinery in Mexico, and the refineries being specifically configured for the kind of crude that would be processed.

He said that with Mexico's current low refining capacity, it's very unlikely that Pemex would be unable to meet crude supply commitments in the foreseeable future.

The export crunch will not happen for at least five years - the minimum state-run Petroleos Mexicanos says it would take to build an oil refinery. Regardless, the U.S. would become increasingly dependent on Middle Eastern and African exports if Mexico bolsters its downstream oil industry over the next decade.

"If Mexico is able to refine more of its heavy crude, then naturally the amount of oil for export would decrease," said Enrique Bravo, a Latin America analyst at Eurasia group.

The proposal involves allowing outside firms to build and operate Mexican oil refineries for a fee, as well as opening the oil pipeline, storage and transport businesses to private capital.

Mexico says it needs a new refinery every three to four years over the next two decades to phase out imports. Pemex is already drafting plans for a new plant with two separate refining trains that would produce 300,000 barrels a day by around 2015.

Next year, Pemex's Minatitlan refinery will add 100,000 barrels a day in new capacity, and the company plans similar expansions at the Salamanca, Tula and Salina Cruz refineries.

The push for more domestically made gasoline comes as oil production and exports are already declining, eroding Mexico's exports on two separate fronts. Pemex will have to nearly double spending on exploration and production just to keep crude production at currently levels over the next two decades.

To ramp up refining capacity and maintain exports at current levels Pemex "would need a major (oil) discovery," said Eurasia's Bravo.

More than 80% of the country's oil fields are nearing or have already reached peak production, forcing Pemex to develop more complicated oil reservoirs where production costs are higher.

Refining Plan Politically Difficult

Oil consuming countries can take heart that the refinery plan will meet stiff resistance in Mexico, which would force Pemex to try and revamp the downstream industry on its own.

Pemex currently refines around 1.5 million barrels a day, with the remaining 1.4 million barrels a day of oil production heading to markets in the U.S., Europe and Asia.

Left-wing parties in Congress have already accused President Felipe Calderon of looking to privatize the country's refineries under the reform bill, which he sent to Congress this week.

In a report, UBS Investment Research said the Pemex oil union will probably challenge the initiative to prevent being sidelined from any growth in downstream operations.

"On the flipside, if unionized labor were a condition for the operation of private refineries, we believe the returns on these projects could be unattractive and investment could be constrained as is currently the case," said UBS.

Copyright (c) 2008 Dow Jones & Company, Inc.