Mexican government to run construction of new oil refinery

Mexican President Andrés Manuel López Obrador said Thursday that international companies invited to bid on the construction of a new oil refinery did not meet requirements for cost and time, so the government will take on the project.

Energy Secretary Rocío Nahle will run the project along with the state-owned oil company, Pemex, López Obrador said. Construction of the $8 billion refinery in the port of Dos Bocas, Tabasco will begin June 2 and be completed in three years, he added.

Mexico had invited four companies to bid on the project. One decided not to make a bid and the other three said they could do it for $10 to $12 billion in four to six years.

"We are not going to do any project that we can't finish during this six-year term," López Obrador said, a refrain he has used for the administration's other fast-tracked major projects, including the Mayan Train and a new airport for the capital.

Octavio Romero Oropeza, Pemex's chief, said that last year that Mexico consumed 1.2 million barrels of fuel per day, while Mexico's production was only 360,000 barrels, leaving imports to make up the difference.

"We are going to produce in Mexico what we consume and we are to be self-sufficient in gasoline production," López Obrador said.

The president said a new refinery is critical to Mexico regaining its energy independence.

Mexico has not built a new refinery in 40 years, but the president said that certain parts of the project will still be put up for bidding by Mexican and foreign companies.

Asked why he thought the government could build the refinery faster and at a lower cost than international companies specialized in refinery construction, López Obrador said companies always pad their costs.

The refinery's construction will produce 100,000 jobs, he said.

Critics say the refinery does not make financial sense and will only increase the financial instability of the deeply indebted Pemex.

The Mexican Institute for Competitiveness, a public policy think tank, published a report last month recommending that the government cancel the project.

"Construction of the Dos Bocas refinery is a project that almost certainly will destroy value for Pemex and Mexico," the report said. It noted that Mexico's oil production has been on a downward slide during the past 18 years and if it continues the government would have to import oil to keep the new refinery running. It also said refining is the least lucrative piece of the value chain and the money would be better invested in exploration and production.

On Thursday, Jorge Andrés Castañeda, the institute's project coordinator, explained that only 2% of the scenarios they had run through a financial model for the project had indicated it could be successful. Those analyzed the project from Pemex's perspective considering capital expenditures, time, refining margins and operating costs.

The 2% of scenarios where it could be successful depended on proper execution.

"Now that is even more unlikely," Castañeda said, noting that without the capabilities of an experienced project management company, the chances of proper execution go down.

"No one has ever built a refinery of that size in three years," he said. He noted one project in India where construction took three years, but only after five years of planning. There hasn't been a major refinery built in North America since 1979, he said.

López Obrador said that Pemex possesses the necessary expertise. He also said there has already been a small increase in production at the company since he took office in December.

"We're going to move Pemex forward and we're already achieving it," he said.