Mexico presses ahead with multibillion-dollar bet on fossil fuels

Many energy groups have been closing refineries in recent years as they attempt to manage the transition to greener forms of energy — but Mexico is making a multibillion-dollar bet the other way.

Pemex, the state-owned oil and gas company, formally declared its vast Dos Bocas refinery in the country’s south-east open on Friday.

President Andrés Manuel López Obrador, who has promoted the landmark infrastructure project as an idiosyncratic expression of the country’s sovereignty and energy self-reliance, called it a “dream come true”.

“There’s an energy crisis that we’re suffering at the moment, but we have our gasoline and diesel and we can maintain prices to benefit Mexicans,” he added.

López Obrador’s nationalist vision harks back to a bygone era, when state-sponsored megaprojects and petroleum production were drivers of the country’s economic development, but has been given a fresh jolt amid soaring fuel prices and a global energy crunch.

However, analysts say Pemex and Mexico are unlikely to benefit from the project, even as refining margins reach record levels due to shortages stemming from the Russian invasion of Ukraine.

“By the time Dos Bocas becomes fully operational the market conditions could be completely different,” said Juan Carlos Rodríguez Arguelles, an analyst at OilX. “Even if refinery margins remain at these levels, it will take time to recover the initial cost.”

The project — officially named Refinería Olmeca, but commonly known as Dos Bocas after its coastal location in López Obrador’s home state of Tabasco — has proven controversial.

Originally forecast by Pemex to cost $8bn, it has arrived vastly over budget, although by how much is contested. López Obrador has disputed media reports saying the bill had swelled to $18bn, but acknowledged the cost was likely to be in the $11bn-$12bn range. That will weigh on Pemex, whose debt pile was about $108bn at the end of the first quarter.

Dos Bocas is projected to produce 340,000 barrels per day, adding to Mexico’s existing system of six underperforming refineries. Pemex also bought out its joint-venture partner Shell in a Texas refinery last year.

Yet although it has now been declared open, the refinery has only entered the commissioning phase and there are doubts it will produce large quantities of petroleum products before López Obrador’s term ends in September 2024. The president says Mexico will stop importing petrol in 2023, but analysts argue there are already many refineries on the US Gulf Coast able to produce at low cost.

“It’s not clear that the Gulf Coast needs new refineries; there are plenty of them up there on the US Gulf Coast,” said David Shields, an energy analyst specialising in Mexico. “This refinery is being built at a time when Mexican oil production in the south-east is declining,” he added.

Environmentalists have also challenged it, with campaigners at Greenpeace arguing construction on a site covered in mangroves began prior to the completion of a proper environmental impact plan. Another activist filed a legal challenge against the project, claiming it was built on flood-prone, environmentally protected land. Pemex did not respond to a request for comment.

“The most relevant thing about Dos Bocas is there has been very little transparency,” said Pablo Zárate, senior managing director at advisory group FTI Consulting.

Dos Bocas forms part of a suite of megaprojects promoted by López Obrador, including a planned train circling the Yucatán Peninsula and an underused airport north of Mexico City.

The president has cut public spending but ploughed funding into these schemes. “Public spending on infrastructure is down,” said Jorge Andrés Castañeda, a consultant in Mexico City, “but it’s concentrated in his pet projects.”