Mexican President Andrés Manuel López Obrador’s campaign promise of a refinery for his home state of Tabasco is being delivered this week. The 340,000 b/d Olmeca refinery in Dos Bocas will be inaugurated on Friday, July 1, exactly four years after López Obrador won the presidency.

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“With president López Obrador inaugurating his flagship Olmeca refinery, what we see is a move to keep reminding average Mexicans that self-sufficiency in fuels is a goal of the utmost importance and whose cost is a pill that the country must swallow,” Rice University’s Adrian Duhalt of the Baker Institute for Public Policy told NGI’s Mexico GPI

The refinery was delivered with a massive price. López Obrador said cost overruns could be in the range of 20-30% over the budgeted $8 billion. Other estimates put the total cost at closer to $16 billion.

By comparison, Mexico’s state oil giant Petróleos Mexicanos (Pemex) last year paid $596 million for Shell plc’s 50.005% stake in the 340,000 b/d Deer Park refinery in Texas.

The project is also going to end up taking longer than planned. The refinery will enter a six-month testing phase in July. Energy Ministry Sener has said the facility would then ramp up to about 240,000 b/d next year, and wouldn’t hit full capacity for another few years.

During construction, the project was also plagued by environmental and labor disputes.

Shrewd Foresight?

At a time of a global energy crisis and soaring fuel costs, the Mexican government is proclaiming new refining capacity as a major victory. Officials point to stress north of the border.

Earlier this month, U.S. President Joe Biden sent a letter to refiners urging them to lower prices and produce more. But U.S. refining capacity is squeezed and is dropping, with major companies shedding their refining portfolios and no new builds in decades.

Mexico meanwhile is adding 700,000 b/d of refining capacity. This is being done through Dos Bocas, the Deer Park acquisition, along with a 60 billion peso ($2.9 billion) coking unit under construction at the Tula refinery in Hidalgo state.

López Obrador has also pledged to keep energy prices unchanged. His government is using the higher proceeds from oil sales to subsidize domestic fuel prices.

“The inauguration of Dos Bocas comes at a time when global conditions exhibit that fossil fuels are a vital part of the world’s energy mix,” Duhalt said. He added that López Obrador is using the crisis to push his narrative “in favor of his energy policies, while ignoring that the transition to a less intensive carbon economy is rapidly gaining momentum amid this complex context in Europe, the U.S. and elsewhere.”

Through these investments, López Obrador has said Mexico will be able to get to energy self-sufficiency by next year. 

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But Will it Destroy Value?

Previously, analysts have said the refinery would be a loss-making venture for Pemex. Pemex refineries struggle to meet demand, with utilization rates of around 40%. The national oil company’s downstream unit has also been consistently unprofitable.

“Evidence suggests that in the case of Mexico, policies are frequently more important than Pemex itself when it comes to shielding the country’s consumers from a global energy crisis,” Duhalt said. “A prime example is the gasoline and diesel subsidy, whose value is likely to erase the company’s gains from crude exports. Energy pundits may regard this as a missed opportunity, but for millions of drivers, who have seen prices at the pump increase but not to the levels registered in other markets, it is of enormous help.” 

But, Duhalt said, “Given the losses of Pemex in its refining subsidiary, it remains to be seen if the Dos Bocas refinery, once in operation, will have the same financial fate.” 

The Natural Gas Angle

The refinery will require natural gas for operations in an environment of stagnant domestic production and soaring global prices.

Analysts have previously said that part of the reason utilization rates at the country’s six refineries average around 40% is because of natural gas shortfalls. Refining has been estimated to account for about 15% of Mexico natural gas demand.

Invenergy LLC’s Ignacio Castro Foulkes, director of commercial transactions, said earlier this month at an energy conference that Mexico gas demand “is inelastic, and there is no way to substitute” for natural gas. 

He said with six new combined cycle power plants planned in the country, “there are constraints and things to solve.” He added that there are “serious supply problems in the Southeast, in Baja, and then you have the new refinery.”

A Comisión Federal de Electricidad (CFE) official told NGI’s Mexico GPI last year that the extension of the 2.6 Bcf/d Sur de Texas-Tuxpan marine pipeline to the Yucatán Peninsula would provide “redundancy and operational flexibility” to the Dos Bocas refinery. That project is yet to begin construction.