(Bloomberg, Amy Stillman, 6.Dec.2018) — In the tropical heat of southeastern Mexico, bulldozers prep the site of a massive new crude refinery on the outskirts of Paraiso, an impoverished oil town that’s never quite lived up to its name — “Paradise.”
The Dos Bocas refinery is the new government’s flagship energy project, a 160 billion-peso ($7.8 billion) promise to create jobs, lower gasoline prices and jumpstart the country’s slumping refining industry.
It’s only the beginning, according to freshly inaugurated president Andres Manuel Lopez Obrador — nicknamed AMLO. He has vowed to rehabilitate Mexico’s energy sector, in part by abandoning the free-market reforms of his predecessor in favor of protectionist policies that harken back to the 1980s.
“Neoliberal economic policies have been a disaster,” Lopez Obrador said at his inauguration, lambasting the energy reforms engineered by former President Enrique Pena Nieto.
Such rhetoric won the hearts of voters, but raised the eyebrows of investors. Critics say the president’s plans — which include gradually ending oil exports and suspending auctions of oil leases to foreign companies — will reverse hard-won gains from the previous government’s energy opening, which lured the world’s biggest oil companies to Mexico.
Potential Pitfalls
Much of what Lopez Obrador has proposed could effectively halt Mexico’s oil trade, which would hit the state-owned oil company, Petroleos Mexicanos, especially hard.
“The nationalistic bent may sound great on paper, but Pemex has $106 billion of debt, a large percentage of that is dollar denominated and that is being implicitly collateralized by the export of crude,” said John Padilla, managing director of energy consultant IPD Latin America LLC.
Fixing Pemex would be a monumental undertaking for any president. The company is on track for its 14th consecutive year of declining oil production. Its pipelines are routinely tapped by thieves who siphon off billions of dollars of fuel each year. Meanwhile, its six refineries are operating at their lowest levels in three decades and are in such poor shape they lose money when they process more crude.
The notion that Lopez Obrador could transform Mexico to be self-sufficient in fuel production during his six-year term is hard to believe, said Robert Campbell, head of oil products research at Energy Aspects Ltd. in New York. The task would require “a colossal investment” in the refining sector, which has so far attracted only a smattering of deals.
The president’s promise to lower gasoline prices also would be tough to fulfill.
“Mexico is dependent on international markets for fuel so the only way consumer prices can be lower is if the price of oil declines, the peso appreciates significantly or if the government subsidizes fuel costs,” Campbell said.
“The government could choose to have Pemex absorb losses on fuel imports but this would only worsen its financial situation, which is deteriorating due to the decline in Mexican oil output.”
Falling Production
Oil production this year is poised to fall 88 percent from 2004 levels due to aging fields and wasteful spending. Pemex doesn’t even pump enough light crude to feed its six refineries, half of which aren’t equipped to process heavier grades. As a result, Pemex this year started buying U.S. crude for the first time, and most of the gasoline it sells in service stations is imported.
While Lopez Obrador has pledged 75 billion pesos ($3.7 billion) to increase production by 600,000 daily barrels over two years, investors fear that drilling will be neglected in the president’s refinery push.
It’s still not clear whether Pemex, or the government, will foot the bill for the new Dos Bocas refinery, slated for Lopez Obrador’s home state of Tabasco. That raises concerns that the project will divert money away from exploration at a time when Pemex is developing a massive, 1.3 billion-barrel oil reserve in Veracruz.
Mexico also faces a serious problem with fuel theft, which costs Pemex billions of dollars each year. Pipeline taps more than doubled to 41 a day in the first nine months of 2018 compared to the same period a year ago. The government has yet to propose a plan to combat the crime, which is now causing supply shortages for international companies that have opened gasoline stations in Mexico, including BP Plc and Total SA.
Refinery Specter
Even Dos Bocas, the linchpin of Lopez Obrador’s energy platform, seems more fantasy than fact at this early stage.
“Building a refinery in three years is an ambitious goal in many countries, even China,” said Campbell. “Pemex’s track record with delivering refinery investment on time and on budget has not been that good.”
It’s not the first time Mexico has sought to solve its refinery woes by building a costly new facility. Mexico’s former government scrapped the $12 billion Bicentenario refinery in Tula, Hidalgo, several years ago after almost a decade of work and billions of dollars in accrued expenses. Critics of the Dos Bocas plan say it is likely to face a similar fate.
Even if the plant is built, Pemex still has an uphill climb. Its refineries are operating at just 30 percent of their installed capacity, the lowest since December 1990, as the company has postponed billions of dollars of upgrades and maintenance due to budgetary woes.
Lopez Obrador has said he wants those refineries operating at full capacity, but “there’s no scenario in which Mexico could achieve those levels under the way the system is set up now,” said Padilla. “You are losing money every step you move in that direction.”
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