Is AMLO destroying the Mexican economy with his pet projects?

The Dos Bocas refinery has a couple of things in common with the Santa Lucia airport: it has a green light despite the construction risks and the financial problems it may cause to the country

New refinery is a bad idea; its probability of success is 2%: IMCO

The construction of the new refinery proposed by the government of President Andrés Manuel López Obrador is a bad idea because it has a probability of success of only 2%, according to an analysis by the Mexican Institute for Competitiveness (IMCO).

“In 97% of the scenarios modeled, the Dos Bocas refinery project destroys value for Pemex and therefore should not be carried out,” said the organization led by Manuel Molano in the analysis document.

The Mexican think tank gave five reasons why the project will not be profitable:

  • The increase in the use of clean energies while decreasing the demand for hydrocarbons.
  • With the current refineries, the production of fuels can be increased.
  • Crude refining is the least profitable stage in the value chain.
  • Investment costs and construction times are very high and volatile.
  • Crude production has fallen in the last 18 years, if it continues, Pemex would have to import oil to supply the new refinery.

None of the four construction companies convened by the government could guarantee the construction of the Dos Bocas refinery in three years, with a budget of 8,000 million dollars. Therefore, the contest was declared void. The project could have been canceled, but the government decided to double the bet: Dos Bocas continues and Pemex will do so, under the leadership of the Energy Secretariat.

The peso lost a few cents after the announcement, while the cost of insurance against the defaults of the Mexican oil company became more expensive. Why do markets react like this? Pemex is a highly indebted company and is clinging to a project that has high chances of failing. Yesterday’s reaction is a cachetadita, compared to what can come: low in the rating of Pemex debt and Mexico’s sovereign debt. Turbulence in the markets.

The refinery does not like it for many reasons, starting with the construction process. Pemex will take over the work, even though it is not a construction company nor does it have an area specialized in construction, since the one that had been dismantled more than 25 years ago. Can you do it with better times and costs than the best construction companies in the world? AMLO thinks so.

Beyond construction, the most important risks have to do with the operation. In the world, the most profitable business for oil companies is the production of crude oil. It generates two or three times more profits than refining in the world. In Mexico, the thing is worse: refining only generates losses. Here the refineries use 10 times more personnel than in Texas. They have costs 30% higher than in Colombia or Brazil. To justify the decision to continue with the refinery, Secretary Nahle did not present feasibility studies that justify the investment of 8,000 million dollars, nor did she make this decision in the context of Pemex’s business plan.

Why present a business plan, if we have a narrative that excites those who voted for us, I guess Secretary Nahle thought. The refinery marks the rebirth of Mexican petroleum engineering … it’s about leaving behind that lazy mentality that said we can not and should not, explained Nahle in an interview with Joaquín López Dóriga.

In the conversation, Rocío Nahle made a defense of the decision that deepens doubts, rather than clearing them. The term of three years is justified because the Cadereyta refinery was made in that time … 40 years ago. The cost compares it with that of the Ethylene XXI plant, made in Coatzacoalcos by Idesa and Braskem (subsidiary of Odebrecht). The official did not spend a minute on the characteristics of the terrain, which is different from Cadereyta’s. The chosen place is terrible to build the refinery, prone to flooding. So bad, that the experts estimate that the project will cost more than 12,000 million dollars and will take at least five years to build.

Throughout the day, there was not a single statement from the Treasury. We know that Undersecretary Arturo Herrera does not want to talk about refineries again, but a voice is needed to explain how they will handle the financial risk that comes with this B plan for the refinery. Markets have questions and it is clear that silence is not an answer.

Source: Forbes, El Economista

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