Mexico’s state-owned oil company Pemex has faced challenge after challenge, following scrutiny over its poor safety standards and low production levels and now it’s likely to miss the scheduled launch of its new refinery.
The indebted oil firm was expected to open the new Olmeca refinery last December before it announced it was postponing the opening until July this year due to construction delays. Mexico’s once-thriving oil and gas industry has faced several setbacks in recent years, with Pemex being hit hard. But, with several new projects in the works, can it get back on track?
The launch of Pemex’s new Olmeca refinery is expected to once again be delayed according to an internal audit report. The report stated that the target of a July launch was “not feasible”. The facility, located at the Dos Bocas port in Tabasco, was set to start producing 170,000 bpd of processed oil next month. However, the report suggests that the construction of the refinery’s coking plants, required to process Pemex’s heavy crude, is “not yet finished.” When the media outlet Reuters asked Pemex about the delay it was redirected to the Energy Ministry, which AMLO has put in charge of the project, to which it received no reply.
The refinery is set to transform Mexico’s oil industry, with a projected processing capacity of 340,000 bpd of oil. It will be the biggest of Pemex’s seven facilities. President Andres Manuel Lopez Obrador, known as AMLO, has pushed for the nationalisation of the country’s energy since he came to office in 2018. He has since approved several new oil and gas projects and hoped the Olmeca refinery would provide a much-needed boost in the domestic production of motor fuels, thereby decreasing reliance on foreign supplies. He aims to replace the country’s foreign gasoline supplies with domestic production by 2024.
There has been much criticism around many of AMLO’s energy nationalisation plans in recent years. The Olmeca refinery has gone over its initial budget several times, with a final price tag of nearly double the 2020 projected cost of $8.9 billion. It is now also expected to have a lower processing capacity, of around 280,000 bpd. One Pemex executive stated of AMLO’s aim for fuel independence, “It’s really more of a political statement than a reachable goal.”
While oil production has been rising, standing at an average of 322,000 bpd in April, the highest since July 2010, gasoline output has dropped. Production of the fuel averaged 291,000 bpd in April, down 4 percent from last year and 10 percent from 2016 levels. The challenge mainly centres around difficulties in processing Mexico’s heavy crude. Refining the oil requires the use of a coking plant to extract high-value fuel, such as gasoline and diesel. At present, Pemex is only using around 54 percent of its 1.6 million bpd crude processing capacity across six refineries. ALMO had hoped that investments in upgrading the facilities would help boost production, but this has yet to be seen.
Critiques have also been made over AMLO’s decision to purchase a 50 percent stake in the Deer Park refinery in Texas from Shell. One Houston-based oil and gas sector expert, George Baker, believes the move to purchase the refinery was purely symbolic. He explained that the financial reports from 2021 show the facility had cumulative losses of $360 million. Baker stated, “It continues to lose money, why should that be true, and that actually makes you ask the question: Why is Pemex buying a money-losing operation?… The whole notion is just generally for the symbolism of it.”
Experts believe that the purchase of Deer Park and the upgrading of Mexico’s existing refineries will do little to boost the production of Pemex’s heavy crude. Processing the oil is highly contaminating and bad for air quality when burnt to generate electricity because of its high sulphur content, which has decreased its market value. Further, the majority of Mexico’s refineries were designed to process lighter grades of crudes, when that was what Pemex produced, and are not well suited to refining heavy crude.
While AMLO’s nationalisation plans appear to be less effective than initially hoped, Pemex has been able to gradually rise its out output, against all odds in light of its $108 billion debt at the end of 2022. The firm saw its sixth consecutive month of increased production in April. And while it may continue to rely on exporting this crude to foreign powers for processing, it is a major turnaround from the failures seen in recent years. ALMO may not succeed in his aim for fuel independence by 2024, but his investment in oil and gas has somewhat revitalised Mexico’s flailing industry, and foreign partnerships could help to keep the industry afloat.
By Felicity Bradstock for Oilprice.com
