Refinery comments lay bare Mexican energy challenge

Dueling Mexican government accounts of funding for the planned refinery in Dos Bocas, Tabasco, highlights the myriad of energy challenges the new administration faces.

In a widely quoted interview with the Financial Times, deputy finance minister Arturo Herrera said $2.5bn earmarked for the refinery in this year's budget could be used instead for profitable Pemex exploration and production projects, leading to a possible delay in construction.

Energy minister Rocio Nahle responded by calling on Herrera to retract his statements, saying in a social media post the government has everything ready — including funding — for the refinery to move forward.

President Andres Manuel Lopez Obrador also said there would be no delays in the refinery construction plans.

"We are advancing really well and we will build the refinery," Lopez Obrador said in his daily press conference today. "It will be finished in three years as originally planned and it will have a $6bn to $8bn cost."

Differing messages from different members of the administration [are not new](http://direct.argusmedia.com/newsandanalysis/article/1764009), but market reaction to the comments highlights the challenges the refinery project faces: the Mexican peso rose against the dollar shortly after Herrera's comments were published, then dropped after Lopez Obrador contradicted the minister on the refinery.

The refinery was promised by Lopez Obrador during the campaign last year as a way to cut Mexico's dependence on fuel imports from the US. But it came as state-run Pemex's six existing refineries were running collectively below 40pc of capacity during 2018 because of maintenance issues following years of under-investment. Pemex is also unable to produce enough light sweet crude to feed the existing refineries.

Investors fear that neither Mexico nor debt-laden state-run Pemex have enough resources to pay for the new refinery, which analysts have told Argus could cost between $15bn-$20bn. This has lead to downgrades on Mexico's and Pemex's credit ratings or rating outlooks. Fitch Ratings, Moody's Investor Services and S&P Global all made negative comments about the government's plan for the energy sector.

Lopez Obrador said today that plans for the construction work auction process will be announced on 18 March. That is an iconic day for Mexico as it commemorates the 1938 Expropriation Oil Act, in which international oil companies were expelled and state-run Pemex was created as the sole monopoly holder of the industry.

In its last earnings call with investors Pemex said refinery site preparation would begin in the second half of 2019 and construction would start by the end of the year as preliminary studies are being prepared.