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The Dos Bocas refinery under construction in Tabasco. The Dos Bocas refinery under construction in Tabasco.

Market conditions adding to cost of Dos Bocas refinery project

Contractor pulls out because of cost increases

The depreciation of the peso and higher steel prices are among the factors that could drive up the cost of the new Pemex refinery, according to an independent energy analyst.

In an interview with the newspaper Milenio, Ramsés Pech said the cost of the Dos Bocas refinery, currently under construction on the Tabasco coast, could increase by 20% to 35% due to the lower value of the peso compared to when the project was conceived and contracts were signed, as well as higher steel costs and higher costs for equipment the facility needs.

In a report published in April, the newspaper El Financiero also warned that the cost of the refinery could increase due to the peso’s decline in value compared to the U.S. dollar. The peso has appreciated since then but still remains lower than when contracts were awarded.

President López Obrador, who announced in May 2019 that the state oil company and the Energy Ministry would take charge of the project because bids submitted by private companies were too high, has pledged that the refinery won’t cost more than US $8 billion.

But Pech disagrees, noting that United States engineering and construction company KBR has withdrawn from the project because it couldn’t comply with the costs set out in its contract.

When it was awarded the contract, the exchange rate was 19 pesos to the U.S. dollar, the analyst said, whereas one greenback now buys about 21.5 pesos.

Pech said the departure of KBR is not a problem because other companies have stepped in to take its place but warned that they too could have trouble meeting the costs they agreed to in their contracts.

He said the government should reassess the costs it calculated when it first conceived of the project. At its current cost, the project is becoming “unviable,” Pech said.

“Pemex is given its budget in pesos; when the project was drawn up in 2018 it was with an exchange rate of 18 [pesos] to the dollar,” he said, explaining that the price in pesos will be higher because its value is now lower.

Pech also said that there is uncertainty about how the coronavirus pandemic will affect steel prices.

Given the uncertainty, the government should change its plan and build a refinery with a capacity to process 100,000 barrels per day (bpd) of crude, the analyst said. That amount is less than one-third the 340,000 bpd capacity the Dos Bocas facility will have.

By entering into a public-private partnership, the government could build a 100,000 bpd facility in less than two years, Pech said, adding that he doubted that a 340,000 bpd refinery could be completed by 2023, as López Obrador has pledged.

However, reducing the facility’s capacity by 70% is not a suggestion to which the president is likely to be amenable given that he has pledged to make Mexico self-sufficient in gasoline by 2023.

Jonathan Health, deputy governor of the central bank, said earlier this month that Pemex, which has in excess of US $100 billion in debt, could become an “incurable cancer” if the government doesn’t come up with a structural solution to its financial problems.

But a more expensive refinery would only add to the financial pressure the state-owned company is under. Even at its current budgeted price of US $8 billion, many analysts have been critical of the refinery project, arguing that it is using funds that would otherwise be spent on Pemex’s more profitable oil exploration business.

Source: Milenio (sp) 

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