Weekly Report - 07 July 2022 (WR-22-27)

MEXICO: A step towards energy self-sufficiency?

Mexico’s President Andrés Manuel López Obrador inaugurated his flagship Olmeca oil refinery, also known as Dos Bocas, in his native state of Tabasco amid much fanfare on 1 July. The president said the refinery was “a dream converted into reality”, using the occasion to highlight other achievements of his government. The refinery is an integral part of López Obrador’s plan for Mexico to become self-sufficient in fuel and reduce the need for imports of petrol and diesel. However, the refinery has proved controversial for several reasons, and many remain sceptical as to how useful it will ultimately be.

Olmeca is significant for President López Obrador’s government on multiple fronts. It is the first new refinery to be built in Mexico for over 40 years, following a failed attempt by former president Felipe Calderón (2006-2012). The refinery also marks the inauguration of another of López Obrador’s flagship infrastructure mega projects, following that of the Felipe Ángeles International Airport (AIFA) outside Mexico City (CDMX) in April [WR-22-12] and preceding the completion of the Tren Maya railway. Most importantly, the refinery represents a major step towards López Obrador’s energy self-sufficiency goals.

“We are getting ready to stop importing petrol, diesel, and jet fuel,” López Obrador announced at the inauguration ceremony. The idea is for Mexico to cease exporting crude oil and instead process it to produce all the fuel the country needs. Once fully up and running, the government states that Dos Bocas will process 340,000 barrels per day (bpd) of crude oil, from which it will produce 170,000 barrels of petrol and 120,000 of ultra-low-sulphur diesel (ULSD).

This will add to the petrol and diesel produced in the other refineries owned by the state-run oil company Pemex, of which there are six in Mexico: Tula (Hidalgo state), Salamanca (Guanajuato), Cadereyta (Nuevo León), Salina Cruz (Oaxaca), Minatitlán (Veracruz), and Madero (Tamaulipas), as well as the Deer Park refinery in Houston, Texas, which Pemex acquired earlier this year. Deer Park has the capacity to process 340,000 bpd of crude oil.

If all Pemex refineries were to operate at full capacity, Mexico would be able to count on a total crude oil processing capacity of 2.28m bpd, given Olmeca’s capacity of 340,000bpd and the joint 1.6m bpd capacity of the other six refineries. López Obrador believes the country could become self-sufficient as early as next year.

  • Deer Park

Pemex formally took over Deer Park on 20 January after it bought a 50% interest in the refinery from Anglo-Dutch multinational oil firm Royal Dutch Shell to become its sole owner. According to press reports, Pemex acquired the remaining 50% of the company for US$596m, using funds from the national infrastructure fund (Fonadin).

However, not all are convinced of this plan. Firstly, despite the inauguration, Olmeca is not yet finished. The refinery needs to undergo months of testing before operations can start. Production at the refinery will therefore not begin until next year at the earliest. Energy Minister Rocío Nahle García was reluctant to give a specific – or even approximate – date when asked by national daily Milenio when Olmeca could be expected to produce its first barrel. Nahle would only say that López Obrador had urged for production to begin at the refinery as quickly as was possible under safe conditions.

The cost of the refinery has also drawn criticism. Originally budgeted to cost US$8bn, López Obrador recently conceded that the true cost was likely to be closer to US$12bn. He defended the price increase in a press conference on 4 July, saying the original figure had been an estimate and the extra cost was due to the addition of taxes and extra works such as gas pipelines. López Obrador claimed that if work were to begin on the refinery today, it would cost as much as US$25bn.

López Obrador also used the opportunity to refer to the time and resources spent on Calderón’s failed refinery, which he said had been announced “with great fanfare” and ultimately amounted to little more than an unfinished fence.

  • Calderón’s refinery

Felipe Calderón, who won the presidency for the right-wing Partido Acción Nacional (PAN) in 2006, promised his government would build Mexico a new refinery. After a long process, which included individual states competing to prove they had the best conditions for the refinery, it was decided in 2009 that the refinery would be built in Tula, Hidalgo. However, the project was later cancelled after being declared unprofitable.

Another central question is whether Mexico would have the capacity to produce all the petrol and diesel it needs, even when the new refinery is operating. After reaching its maximum production level at the beginning of April, Mexico’s national refining system (SNR) reported a decline in production at the end of the first half of the year.

In a period of nine weeks between 11 April and 19 June, Pemex’s six refineries went from contributing 349,000 bpd to the market, to 178,000 bpd, the lowest level so far this year and a 49% decline in production from the previous nine weeks. In that period, national demand for automotive fuels averaged 807,000 bpd, which means that there was capacity to cover barely two out of every 10 litres of petrol purchased by Mexicans with national production. According to data from Mexico’s energy ministry (Sener), the issue was related to the crude oil processing capacity of the refineries, which ongoing modernisation works are aiming to address.

Finally, the inauguration of Mexico’s new oil refinery comes as many in the region and around the world are attempting to shift away from fossil fuels towards greener forms of energy. Indeed, on the day of the inauguration, the Mexican branch of international NGO Greenpeace and several local environmental organisations issued a statement accusing Mexico of having moved further away from fulfilling its climate commitments with the new refinery.

The US government led by President Joe Biden has repeatedly urged López Obrador to commit to transitioning to clean energy, but since he took office in December 2018 his government has been swimming against the tide on clean energy and combating climate change. This was already amply demonstrated by the long-running efforts to advance an energy reform crafted to give the state-run electricity firm, Comisión Federal de Electricidad (CFE), a pre-eminent role in the domestic market to the detriment of private renewable energy generators. The CFE has historically preferred electricity generation from fossil fuels.

López Obrador did announce a raft of - albeit mostly rehashed - measures to tackle climate change during a recent meeting of the Major Economies Forum on Energy and Climate (MEF). However, the new refinery and the fanfare that surrounds it indicate the government is not planning on weaning its reliance on fossil fuels any time soon.

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