If it can be used somewhere in place of other oil, then they can send the compatible oil to the reserve. So is this what Trump means by US oil companies returning 1.25 barrels for each 1 they take? Doubt he's really thought it through.

There's already US infrastructure to process sour crude from Mexico. Who said this is a problem? When I search this, I see that Exxon's CEO called it uninvestible due to geopolitical risks, but Chevron claimed to be ready to go ahead.

US is actually really good at processing that type of crude. Much better than the oil we drill domestically. Don't forget that US oil companies used to dominate Venezuela. In 1976, Venezuela bought out the companies and paid them what they claimed they were worth on their financial/tax ledgers. Ofc all the companies massively deflated their worth to avoid taxes so this angered them and they've never really stopped complaining about it.

Trump has basically enacted their revenge for that.

You have your facts backward. The US refineries are famous for being some of the best in the world at refining sour crude. It is why so many countries ship their sour (and other difficult) crudes to the US for refining.

US refinery capacity is much larger than its world-leading oil production. Oil refining is a major export business for the US.