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Mexico President-Elect’s Vision for Pemex A Reality Or Fantasy?

The price of the international Mexican export mix of crude, as reported by the state oil company Petroleos Mexicanos (Pemex), was $76.34/bbl on Monday (Oct. 1), compared with a year ago when the price was $47.60. Is that a good omen for President-Elect Andrés Manuel López Obrador?

Critics of the future president of Mexico, known nationally as AMLO, have long claimed that he is not a believer in markets. Yet those very markets appear to be smiling on him. Or are they? In fact, the very opposite could well be true.

At least for now, as prices continue to rise, it may be reasonable to assume he will be able to raise the $4 billion he wants to spend to raise Mexico's crude output from its current level of 1.8 million b/d to 2.5 million b/d by Pemex and the private sector.

These figures are only in the ballpark, a concept well understood by the future president, an avid Los Angeles Dodgers baseball fan. However, assuming the money is spent with care and attention -- not attributes that are usually associated with Pemex -- the results could amount to $700 million extra of annual income to be shared between Pemex and the government for each dollar increase in the market price of crude.

There are other figures on the opposite side of the nation's energy balance sheet, and not all of them are positive; in fact they are nearly all negative.

Almost six years ago, imports amounted to 45% of gasoline imports of 360,000 b/d. Now gasoline consumption has risen to nearly 600,000 b/d, of which fully 75% is imported.

Worse still, through July this year, Mexico’s hydrocarbon trade balance showed a $12.6 billion deficit, based on imports of $30.4 billion, mainly of natural gas, gasoline and diesel.

Juan Carlos Zepeda, president of the upstream regulator, the Comision Nacional de Hidrocarburos, told reporters in Acapulco at the recent annual Pemex congress that López Obrador's plans to boost output are "technically viable.” But he said that they would require $20 billion to achieve fruition, without taking into account the $10 billion Pemex already has to pay to service its debt.

Zepeda has consistently maintained that Pemex should have an investment vehicle that provides access to capital markets.

Since the 2013-14 energy reform, more than 70 oil companies have established themselves in Mexico, Zepeda said recently, "but there's only one company that is unable to raise capital from the markets. And that's Pemex."

Even so, López Obrador aims to use an estimated $8 billion from the federal budget to build an oil refinery at the oil port of Dos Bocas in his native state of Tabasco in an effort to reduce the massive deficit in petroleum products. He also is planning reconfigurations and other updates for the existing six Pemex refineries.

In principle that may appear to be a good idea, but many analysts have pointed out that a new refinery could make matters worse, given a long history of Pemex refinery updates, which have doubled their original cost and taken twice the scheduled time because of poor planning and over-manning because of a long history of labor union featherbedding.

Given the extremely tight margins of U.S. Gulf Coast refineries, including the Pemex joint venture with Shell Oil Co. at the Deer Park refinery southeast of Houston, they could offer a much more economic and efficient alternative to the Tabasco project.

Energia a Debate editor/publisher David Shields said López Obrador and future Energy Secretary Rocio Nahle have their eyes on a refinery model for Tabasco. The refinery they want to copy is similar to India's Reliance Industries in Jamnagar in the Indian state of Gujarat.

The Jamnagar refinery is immense, with a 1.24 million b/d processing capacity. Nahle has made clear that the Tabasco project, at perhaps 400,000 b/d, would be much more modest but the biggest by far in Mexico, where the Salina Cruz on the southern Pacific Coast holds the crown at 300,000 b/d.

U.S.-based Bechtel Corp. designed and built Jamnagar. Shields said "people from Bechtel have already held talks with López Obrador on the Dos Bocas project. Bechtel is  the only company in the world capable of constructing the refinery that López Obrador wants and within the three-year time-frame that he is looking for."

Shields said he understands López Obrador's plight. "He's inherited a Pemex in ruins.

"But does he really need such a pharaonic project in Tabasco, when he might have opted for a much smaller modular option."

 

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