Pemex's new refinery in Mexico still needs major work, far from ready

Mexican state-owned energy company Pemex will probably not produce commercially viable automotive fuels at its new Olmeca refinery before the end of the year, despite pressure to have it ready before the end of the outgoing president's term.

Mexican state energy company Pemex will probably not produce commercially viable automotive fuels at its new Olmeca refinery before the end of the year, according to five sources, despite pressure to have it ready before the end of the outgoing president's term.

President Andrés Manuel López Obrador, a resource nationalist, inaugurated the 340,000 barrel-per-day refinery in July 2022 in his home state of Tabasco, deeming it crucial to Mexico's energy self-sufficiency.

However, delays in the refinery at the port of Dos Bocas, whose cost has more than doubled to US$16.8 billion, mean that it will be his successor Claudia Sheinbaum who will try to make the dream a reality when she takes office on October 1.

As recently as last Thursday, Pemex CEO Octavio Romero insisted during an industry event that the refinery would "operate at full capacity next month."

Now, five sources familiar with the operations said that it was impossible to meet these targets and that progress had been exaggerated before the June presidential election.

Two sources with detailed knowledge of the operations said engineers were still working on individual parts of the refinery and will then face the even greater challenge of linking them together.

One of the sources, an engineer, described this last step as a hugely complex and "agonizing" trial-and-error process that takes months.

The other source, also an engineer, said that in the most optimistic scenario, the first of the refinery's two production lines would be ready between October and November.

"Technically and operationally, the refinery is fine so far, but the problem is the expectations that have been created," the source said.

the information shared publicly by officials "does not take into account more technical criteria" on how a refinery works.

Pemex officials had attempted to demonstrate that the refinery was operational by bringing a shipment of high-sulfur diesel to the Olmeca refinery to convert it into ultra-low sulfur diesel, but this did not occur from crude oil, as is the plan.

Parts that still need work include the fluid catalytic cracking plant, where heavy oil fractions are converted into lighter products, and the hydrodesulfurization plant where sulfur is removed under high pressure and high temperature.

Another challenge for engineers will be the coker plant that converts and processes residual fuel oil, the source said.

NATIONAL PRIDE

The refinery is by far the largest of several energy projects that are behind schedule, and the two sources said Mexico would not go ahead with export cuts of hundreds of thousands of barrels of crude, but would continue to import diesel and gasoline instead.

None of the sources said that the refinery construction was inherently flawed and that it is too early to determine how the delay will affect public finances because refining margins are not known.

Independent experts have long argued that Pemex, a matter of national pride for most Mexicans, should have invested in much more profitable exploration and production rather than refining.

There were also concerns about how rushed the project was, the sources said, and how its progress had been exaggerated for political reasons, which has unsettled markets.

In March, Pemex ordered its commercial arm to cancel exports of 436,000 barrels of crude oil it said it needed for domestic refineries. In April, it announced export cuts of another 330,000 barrels, only to backtrack shortly thereafter.

Then, Pemex ordered only 16,300 bpd of crude for the new Olmeca refinery in mid-May, approximately 1% of what the state-owned company produces and less than 5% of its capacity.

One of the sources, a trader familiar with the export schedule, said that the refinery was so far behind schedule that it was now not even capable of receiving such a small cargo.

Despite being a crude oil producer, Mexico imports most of its automotive fuels. Last year, it exported crude oil worth more than US$31 billion and imported various types of hydrocarbon products, including gasoline and diesel, worth just under US$31 billion.

López Obrador, who has staked his legacy on rescuing debt-laden Pemex and making Mexico self-sufficient in energy, had promised shortly after taking office in late 2018 that the refinery would be built in a record three years.

Proposals from several private companies were considered too expensive, and López Obrador argued that savings from his fight to eradicate corruption would make the refinery cheaper. However, the final price will be much higher than those proposals.

In another setback to its agenda, new coker plants intended to improve the efficiency of two older refineries, Tula and Salina Cruz, are also not ready, two separate sources said.

Other dilapidated Pemex refineries, including one that came online 118 years ago, struggle to efficiently process the heavy, sour Mayan crude that Pemex produces. They leave the country with volumes of highly polluting fuel oil that are so large that they exceed gasoline and diesel production.

Sheinbaum plans to invest in Pemex refineries to reduce production of low-value fuels and by-products, including fuel oil that the state-owned CFE uses to generate power, and instead increase production of automotive fuels, one of her advisors said.

Collaboration: Grupo Auge | Reuters (International).