AMLO Dreams of a New Refinery for Mexico
(Bloomberg) -- Mexico’s future energy minister was looking for inspiration two years ago when she toured the world’s largest refining complex, a 7,500-acre maze of industrial plants and pipes in India where more than a million barrels of oil can be turned into fuel and petrochemical products each day.
Rocio Nahle, who became energy minister under Mexico’s new government in December, thinks the country can replicate Reliance Industries Ltd’s Jamnagar refining compound. But there are a few snags.
Mexico is proposing to build a new refinery for $8 billion in three years, the amount of time and money it took Reliance to complete just a single phase of its complex. And Mexico plans to do so without using private funds, creating a strain on public coffers and calling into question the efficiency of a state-owned facility when the country’s six refineries are already losing more money the more fuels they produce.
Investors and analysts aren’t impressed. “It doesn’t make sense,” said Lisa Viscidi, director of the Energy, Climate Change & Extractive Industries program at Inter-American Dialogue, a Latin America-focused think tank in Washington.
But for President Andres Manuel Lopez Obrador, it is a mission.
He has been deaf to the pleas of bondholders who want Pemex to focus on the core business of drilling rather than diverting its attention to the construction of another refinery -- widely viewed as an expensive symbol of the president’s goal to curtail the involvement and influence of foreign companies and countries in Mexico’s oil business.
Mexico’s own refineries are operating at about 35% of their capacity because Pemex hasn’t had the funds to invest in them, making the country reliant on foreign fuels to meet domestic demand. About 65% of the gasoline that Pemex sells in Mexico is imported, mostly from the U.S.
As plans go forward for the Dos Bocas refinery -- in Lopez Obrador’s home state of Tabasco -- questions about the viability mount. Pemex is expected to report further declines in oil output in its second-quarter results Friday. The company has recorded a loss in adjusted income every year since 2013, and production has been sinking for 14 years.
It’s five-year business plan the company released this month didn’t go over well with investors. The worry is that without help from the private sector, Pemex is on track for another downgrade after Fitch Ratings Inc. cut its bonds to junk last month.
That came after Lopez Obrador dialed back energy reforms enacted by the previous administration, and moved to freeze oil auctions and joint-ventures that had enabled Mexico to develop fields with private partners.
According to the business plan, Pemex won’t get added funds to drill in 2021 and 2022 but will receive as much as $3.9 billion for the Dos Bocas refinery. It is envisioned as having capacity to process 340,000 barrels a day, making it the biggest refinery in the country.
Nahle toured Jamnagar in late 2017 while she was a national lawmaker sitting on the energy committee in Congress. Lopez Obrador named her as his pick for energy minister a few months later in the lead up to elections. Nahle thought that Mexico could replicate part of what she saw in India, with the help of foreign expertise. But that was dashed.
In May this year, Lopez Obrador handed the project to Pemex because six international companies that were invited to bid failed to meet his budget and demands that construction be completed in three years.
“Those companies didn’t want to pretend that something can be done in a timeline it can’t be, or for a budget it can’t be,” Viscidi said.
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