Mexico to cut ribbon on refinery despite delays

Mexico's top officials will inaugurate the 340,000 b/d Olmeca refinery in Dos Bocas, Tabasco, tomorrow,

but when the first gallons of gasoline will flow from the highly anticipated facility is far from certain.

The ribbon cutting ceremony to be led by President Andres Manuel Lopez Obrador on Friday from 11am-1pm ET will mark the start of trial runs of crude through the facility. But the event comes after a 24 June energy ministry (Sener) progress report that showed construction work still underway on the refinery's 184m (600-foot) main fluid catalytic cracking (FCC) unit. As late as 17 June critical equipment continued to arrive at the facility, based on Sener's status report.

The government has pledged that Olmeca will produce the first commercial batch of gasoline in early 2023, about six months after trial runs start, taking a step toward the president's goal of making Mexico self-sufficient in fuels. But non-government analysts predict commercial production may not happen until late 2023 or even until 2024.

Limits on crude supply are among the key reasons for delay. The refinery is near a port capable of receiving crude, but expansions of roads, rail lines and pipelines are well behind schedule, said Gonzalo Monroy with GMEC consulting.

Work has not started on a $300mn, 93-km (58 miles) rail line connecting Olmeca to the national rail system, according to the executive summary of the project. Lopez Obrador said this week the rail line is not vital to the refinery operations as most of the crude and products will be shipped through the Dos Bocas port.

But a cost-benefit study from the energy ministry says that by 2023 just 240,000 b/d of crude will be able to reach the refinery, 267,000 b/d by 2025, and 340,000 b/d by 2026 — putting full capacity four years into the future.

Leaving low-hanging barrels

While the ribbon-cutting will nominally let the president meet his long-promised completion date, by neglecting its existing refineries Mexico is leaving roughly 785,000 b/d of nameplate capacity — more than two Olmeca refineries — of existing crude processing capacity on the table.

Pemex's six current domestic refineries processed an average of 830,000 b/d for January-May, only 51pc of their 1.615mn b/d nameplate capacity. The refining system hit its peak in the fourth quarter of 1994, with a high of 1.385mn b/d, according to Sener's data, showing an almost continual decrease in processing capacity since the 1990s.

Crude throughput in the system averaged 612,000 b/d in 2018 — the last year of former president Enrique Pena Nieto's administration, before Lopez Obrador took office in December 2018.

Crude processing has increased on average to 640,000 b/d so far in nearly three years of the Lopez Obrador administration, which has boosted spending on maintenance programs to improve capacity. But accidents have still prevented higher processing rates. Pemex's industrial accidents rose by 56pc in the first quarter of this year from the same first quarter of 2021, including fires and explosions at refineries.

A lack of cokers has also prevented Pemex from processing an excess of high sulphur fuel oil (HSFO), a lower-value product harder to sell in international markets, after the International Maritime Organization sulfur cap regulation took effect in 2020. The high inventories of fuel oil have at times shut refineries, as the product occupies storage that is needed for more valuable products as gasoline and diesel.

Pemex has also routed money to Olmeca that could have gone to existing refinery maintenance and cokers. Olmeca's official budget has ballooned to $8.9bn from an original $8bn, but Pemex has indicated the final cost may be closer to $12.4bn, and independent estimates put it closer to $14-16bn.

Besides the cost and tight construction time-frame, environmental studies made prior to the start of the construction also warned of the high flooding risks. The president largely discounted the risks in an effort to deliver the promised refinery to his home state of Tabasco.

This is the first time Mexico has inaugurated a new refinery since the 330,000 b/d Salina Cruz in 1979.

The purchase of the 340,000 b/d Deer Park, Texas, refinery from its joint-venture partner Shell earlier this year expanded Pemex's dedicated capacity, but that deal pales in comparison to the point of pride that the new facility brings.

Yet the inauguration comes as Lopez's Obrador's refining goal seems even more quixotic than it did in 2018, when many countries looked at paring back capacity as part of the global move toward cleaner fuels. About 3mn b/d of refining capacity globally was lost since the start of the pandemic, followed by a surge in demand and sanctions on Russia. These conditions have put upward pressure on gasoline and diesel prices, and even pushed US president Joe Biden — a clean energy advocate — to call for an increase in refining output.

By Sergio Meana