On the construction of airports and refineries in Mexico

Recently, the continuation or not of the investments in the New Mexico International Airport has been discussed, while the future construction of two oil refineries is being discussed. In both cases, it is essential to understand what kind of business Mexicans are getting into, in order to make a decision that favors our prospects for economic growth and job creation. That is why I allow myself to share some data that can enrich the reflections on these topics.

The oil industry, and in particular the refining industry, needs resources, both technical and
economic, to be able to develop. In addition, the refining industry has many competitors worldwide; so many that in the US there is unused capacity in many refineries. It is an industry that costs a lot and leaves little profit. The operating margins of the refineries companies, that is, the percentage of profits left to the companies of all their sales, are extremely low. In 2017, for example, out of every $ 100 that US refineries sold, they only received $ 4.9 per year on average. In this sense, refining is an extremely risky business. Imagine: if approximately half of the cost of a liter of gasoline corresponds to the crude oil needed to produce it, a 10% increase in the price of the same would these margins disappear. The latter has given the difficulty that exists to increase the costs of gasoline to the public to maintain margins. Boosting a refining business in Mexico would face additional obstacles. On the one hand, Pemex has one of the highest rates in the world of the number of employees per barrel produced; also its subsidiary of Industrial Transformation, which includes the 6 refineries of its property, was the one that had more losses of the whole company, with almost 50 billion pesos in 2017, that is the equivalent of 100 times the annual budget of Sectur . Another element to consider is that, while the cost of building a large-capacity refinery like the ones proposed (of around 300 thousand barrels per day) is not less than 5 billion dollars, today Pemex could buy a similar refinery in operation in the United States and from there supply the Mexican market, for less than a fifth of what it would cost to build it from scratch.

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In contrast, airports are very profitable projects in most of the world. On the one hand, they represent a quasi monopoly, since they only compete indirectly with nearby airports, when they are small, or with other international hubs, in the case of large airports. This means that airport owners can charge high prices for their products.
In addition, airport revenues are diversified between passenger transportation services, cargo services, maintenance operations, general aviation, commercial concessions, parking lots, and many other services. Thanks to these characteristics, the operating companies, which in many cases belong to governments, have profit margins that an oil company can not even dream of. Last year, the average margin of the four airport operators in Mexico was 43.3%, that is, out of every $ 100 they sold, they had a profit of $ 43.3. Almost 10 times more than the most recent refineries in the world. The main European operators, for example, achieved a slightly lower average, but still managed margins of 30.2% on average. In addition, a large airport such as the NAIM is an important generator of employment. The airport in Los Angeles, California, generates more than 50 thousand direct jobs, while an average renery generates around one thousand jobs. I think that all this should lead us to a deep reection: why if a project already so advanced and with so many proven benefits as the NAIM case is thought to put to consultation of the population, there should be no further reflection on the convenience to invest the resources of taxpayers in oil refineries?

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By Enrique de la Madrid Cordero holds a degree in Law from the National Autonomous University of Mexico, with a Master’s Degree in Public Administration from the John F. Kennedy School of Government at Harvard University. He has been General Technical Coordinator of the Presidency of the National Banking and Securities Commission, Federal Deputy in the period 2000-2003, Executive President of Con Mexico and General Director of Financiera Rural. Between 2010 and 2012, he held the Corporate Institutional Relations and Corporate Communications of HSBC for Mexico and Latin America. As of December 2012, he was appointed General Director of the National Foreign Trade Bank.

 

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