Mexican Candidate's Plan to Build Refineries Raises Eyebrows

(Bloomberg) -- Industry observers have serious doubts about the Mexican presidential front-runner's plan to build new refineries that could cost $6 billion to $10 billion.

Leftist leader Andres Manual Obrador's proposal comes as the country was forced to import 75 percent of the gasoline it consumed in January while state-owned Petroleos Mexicanos's refineries are crippled from a series of natural disasters. Last year, the plants were operating at less than half of their crude processing capacity, raising the question of the necessity for new plants when the existing ones have the potential to produce much more fuel.

Abel Hibert, economic adviser for Lopez Obrador, told Bloomberg last week that new refineries could cost in the range of $6 billion to $10 billion. Industry analysts point to high costs and political challenges as obstacles to lure investment for a new refinery in Mexico.

“I don't think anybody on earth would want to start a refinery in Mexico,” said Robert Campbell, head of oil-products research at Energy Aspects Ltd. in New York. “Grassroots refineries are extraordinarily expensive and the political uncertainty in Mexico makes that sort of investment impossible. The country does not need new refineries, it needs to have its existing refineries upgraded.”

For now, at least, the state-controlled oil company is on the same page.

Pemex's strategy is to reconfigure existing plants to produce higher-quality gasoline and petroleum products for less investment, according to a Pemex spokesmen who asked not to be identified, citing internal policy.

The plants would likely be operated by Pemex and financed by the state or through public-private partnerships, though sources for the extensive financing required are yet to be defined, according to the opposition party leading in the polls for the upcoming election.

A spokesman for Lopez Obrador didn't respond to a request for comment.

“It's a very high investment in a business with very low margins,” said Alejandra Leon, an analyst at IHS Markit in Mexico City. “It doesn't make much sense economically or politically.”

Pemex's plans to bring in private investment have been slow to materialize, with only a handful of deals for refinery units announced. The firm's annual refining output in 2017 was at its lowest in 27 years. That combined with low oil production helped push the company to a loss of 352.3 billion pesos ($19 billion) for the first quarter, the company's second-worst on record.

“It will be difficult for a greenfield project in Mexico to compete against the U.S., one of the most efficient markets in the world in refining,” said Pablo Medina, vice president at Welligence, a Latin America-focused oil consultancy in Houston. “So far, no one has raised their hand.”

--With assistance from Adam Williams and Nacha Cattan

To contact the reporter on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net.

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Mike Jeffers, Tina Davis

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