La Semana: Sunday, July 10
The week in inauguration of a mega-project
Welcome to the Sunday edition of The Mexpatriate.
In tonight’s newsletter:
Dos Bocas and Mexico’s Energy Policy: Part I
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“The plot twist of the sexenio just happened.”
—Tweet responding to announcement of the FGR (Attorney General’s Office) investigation into former President Enrique Peña Nieto
“An airport without flights, a refinery without gasoline. Next comes a train without passengers.”
—Tweet responding to the inauguration of the Dos Bocas refinery on July 2
Dos Bocas and Mexico’s Energy Policy: Part I
On July 1 2018, Andrés Manuel López Obrador won the presidency of Mexico in a decisive victory, twelve years after his first campaign and controversial loss in 2006. On July 1 of this year, AMLO proudly celebrated the phase one completion of one of his signature “mega-projects”, the “Olmeca” refinery in the port of Dos Bocas, Tabasco, which he described as “a dream come true”. Located on what was once 600 hectares of mangrove forest and named in homage to the Olmec “mother culture”—which flourished in the region from 1200 BCE to 200 AD—the refinery, along with the new Felipe Ángeles International Airport (AIFA) and the “Tren Maya”, is emblematic of the president’s statist vision.
The reaction from critics has been a resounding mockery of the pomp of a ribbon-cutting ceremony when, according to expert estimates, the refinery will not begin to actually refine any crude oil until 2023 or 2024. According to the Secretary of Energy, Rocío Nahle, the first barrel of refined crude will be produced by December 2022 and the projected capacity (eventually) will be 340,000 barrels per day.
While some of the opposition’s disdain may be unwarranted—as his supporters point out, the president is not claiming the project is completed yet—it is hard to find data to support the glowing government rhetoric about the PEMEX-built refinery and the achievement of energy “self-sufficiency” on Mexico’s horizon.
As the world wrestles with setbacks in the clean-energy transition spurred by the Russia-Ukraine conflict, Mexico appears blithely committed to expanding extraction, refinement and importation of fossil fuels. In the short term, this might seem a cunning strategy as refineries rake in record profits, but unfortunately, Mexico is not able to take advantage of the windfall. Current production capacity at the six existing refineries is estimated to be between 40%-50%, and PEMEX carries the highest debt burden of any major oil company in the world. Pemex Transformación Industrial (PTRI), the subsidiary in charge of refining and petrochemicals, has reported losses of on average 116.7 billion pesos per year since 2011.
Predicting even the next six months on the energy markets is difficult, let alone longer term, but there are some trends that can be forecast. In order to make the decision to commit massive investment to a project like Dos Bocas, one would expect the government to present a detailed cost-benefit analysis. According to a report by Mexicanos contra la Corrupción e Impunidad (Mexicans Against Corruption and Impunity), none has been made available. “After reviewing all of the sources of information, we still do not know how much the project will cost, how much has been spent until now or how much has been paid to contractors. In short, we know nothing about the refinery beyond what the president and his government want to show and tell us.”
The administration’s original projected budget for Dos Bocas was $8 billion dollars, but it went over its allotted budget for 2021 by 578% and the administration has acknowledged it will surpass their initial estimate. While AMLO has been evasive about the final cost, analysts have concluded that it could be up to $18 billion dollars by the time it’s completed. As a reference, that is equivalent to 26 years of the INE (National Electoral Institute) annual budget. In one feasibility study by IMCO (Instituto Mexicano para la Competitividad) that modeled 30,000 different scenarios, the project has a mere 2% odds of being profitable. Just over a year ago, Mexico purchased the Deer Park refinery in Texas (to be precise, Pemex bought the remaining 50% of shares, as owner of 50% since 1993) which was valued at $1.2 billion dollars. While there are disadvantages to transporting refined oil from the U.S., it seems hard to reconcile the difference in costs. Of course, the administration would defend this injection of capital as a way to bolster the country’s economy by creating jobs—as of today, around 35,000 Mexicans are employed at Dos Bocas, though the government has admitted that once it is operational, the refinery will only employee 1,200.
Dependence on fossil fuels is not going anywhere in the near future, especially in developing economies like Mexico that have not invested intensively in alternative technology. In 2021, just 4% of cars sold in Mexico were hybrids or electric and 10% of electricity is generated from renewable sources. For AMLO and the morenistas, there is an acknowledgement that clean energy is the future, but it’s a distant one. In the meantime, they insist that Mexico must reap the economic benefits of the energy market as-is, dominated by fossil fuels, while also seeking energy “sovereignty”. So how far is Mexico from being energy independent?
Mexico is a significant exporter of crude oil (51% of which is purchased by the United States), but a net importer of refined petroleum products and of natural gas. In electricity, Mexico ranks #14 globally in total annual consumption, but far lower comparatively in per capita kWh per year. The average demand for gasoline in the first 22 weeks of 2022 was 749,000 barrels per day and 498,000 b/d were imported. According to the administration’s energy plan, once Dos Bocas begins to refine 170,000 b/d of gasoline (the remainder will be diesel), in addition to the production from Deer Park and the other refineries—at improved capacity—PEMEX will be able to refine 781,000 b/d. But there are many pesky “ifs” in this ambitious plan: “the self-sufficiency scenario promised by López Obrador is frankly improbable for technical and economic reasons, owing to the quality of the crude produced in Mexico as well as the financing options available to PEMEX,” notes energy analyst Jesús Carrillo.
In part II of this series on Mexico’s energy policy, I’ll look more closely at the government subsidies of gasoline to combat inflation and the environmental impacts of the refinery.