Mexican presidential candidate Andrés Manuel López Obrador's proposal to build five refineries during his administration as a means to reduce fuel imports makes political sense, but lacks economic coherence, Eurasia Group analyst Carlos Ramírez told BNamericas.
As part of his energy policy proposal, López Obrador - who represents a coalition of the left-wing PRD, PT and Convergenia parties - called for construction of the US$11bn-plus Tula refinery in Hidalgo state, for which state oil company Pemex is already tendering for engineering, as well as another refinery in Guanajuato state where the NOC currently plans to expand the Salamanca refinery. Additional projects are a refining train alongside the current Salina Cruz refinery in Oaxaca state, another refinery in Dos Bocas, Tabasco state for light and super-light crude, and a fifth refinery in Atasta, Campeche state.
Ramírez said the vast infrastructure projects would naturally provide political benefits related to wide job creation.
"The problem is that economically is makes no sense. If López Obrador wins, the most likely scenario is that he'd confront a series of problems along the process. He'd run out of money. He'd find out that it's not easy to build one [refinery], and now imagine three at the same time and two configurations. Pemex doesn't have the capacity to do this and the margin of error is enormous. If he wins and starts doing this, it could end in disaster," Ramírez said.
Ramírez highlighted low margins in the refining business make it difficult to recoup huge construction investment. For this reason, and due to idle refining capacity in the US, Pemex last year announced it was actively evaluating several US refineries for potential acquisition.
Pemex's six refineries have a combined crude refining capacity of 1.5Mb/d, which is insufficient to supply domestic demand for crude products. Gasoline imports account for close to 50% of sales.
Pemex's CEO Juan José Suárez Coppel said last year that, with the 2016 startup of the new Tula refinery's 250,000b/d processing capacity, the company aims to reduce imports to 34% of sales by that year. Demand is expected to grow at an annual rate of 4.5% through that year.
"López Obrador has always had this view that the role of the state should be much higher in the economy. This is a 1970's view. Pemex built three refineries at roughly the same time in the 1970's and the country collapsed economically, because paying for those refineries was very expensive and corruption was rampant. At the end of the day, Mexico ended up with very costly refineries," Ramírez said.
Mexico holds presidential and congressional elections in July 2012.
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(Originally published April 11, 2012, by Business News Americas.)