(Ft.com, Jude Webber, 9.May.2019) — Andrés Manuel López Obrador, Mexico’s president, has stepped up his commitment to an $8bn refinery project, rejecting three private sector bids as too costly and vowing that state oil company Pemex will build the plant.
The leftist nationalist president batted aside concerns about the ability of the government and Pemex to deliver on a tight budget and timeline, where private companies could not. “We’ll work harder,” he told his daily morning news conference on Thursday.
“We’ve done it before,” he added, referring to the construction of an upper tier to urban highways during his time as Mexico City mayor from 2000-05.
Pemex is highly indebted and the need for the refinery is contested, with critics believing the project makes little financial sense. Arturo Herrera, deputy finance minister, told the FT recently that the project would be postponed because of spiralling costs.
“It’s clear [Mr López Obrador] is all about fulfilling his campaign promises at whatever the cost,” said John Padilla, managing director at IPD Latin America, an energy consultancy. “Politically, he believes that is what gives him credibility.”
Mr López Obrador said he had scrapped an invitation-only tender after one of the four companies asked to take part declined to bid and three others submitted offers with higher price tags than the austerity-focused government could entertain.
Before taking office he scrapped a partially built $13bn Mexico City airport over similar concerns.
Launching the refinery tender in March, Mr López Obrador hailed the chosen firms as the best in the world for this type of project. On Thursday, he said they were “overcharging” with bids as high as $12bn, and could not deliver within the stipulated three years.
Among the firms invited to tender, Paris-based TechnipFMC declined to take part. The rejected offers came from Bechtel of the US, in partnership with Italo-Argentine firm Techint; Australia’s WorleyParsons with US-based Jacobs; and KBR of the US.
“This is hardly a surprise — there was no way any firm that wanted to make a profit could build a refinery like that for $8bn,” said Duncan Wood, head of the Mexico Institute at the Wilson Center, a think-tank.
The government said it would start construction of the Dos Bocas refinery in the president’s home state of Tabasco in southeastern Mexico on June 2, and finish in May 2022.
The national oil company, which is already struggling to revert 15 years of declining production and is hobbled by a high tax burden, has not built a refinery for four decades. It has $106.5bn debt.
Rating agencies are increasingly negative on Pemex’s finances and concerned for government finances if the state has to step in to bail it out. Mexican public finances are already squeezed and the economy contracted in the first quarter.
“Pemex is clearly not the ideal candidate to deliver this mega project,” said Pablo Medina at Welligence, an energy consultancy. “It already has financial woes. This increases the challenges it faces . . . The execution risk is huge.”
Ramses Pech, an energy analyst, said it was important to build a new refinery in Mexico but “not a 340,000 barrel per day capacity plant. One of 100,000 barrels, yes.”
Pemex already has six refineries, the oldest a century old, producing at just one-third of capacity. The government plans to invest in upgrading them. Carlos Urzua, finance minister, last week announced fresh public sector cuts and said the savings would be poured into Pemex.
***