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Mexican President Andrés Manuel López Obrador said on Thursday Pemex will oversee construction of a new refinery, dismissing private sector suitors for the project and fueling fresh doubts about the financial health of the cash-strapped state oil firm.
López Obrador told his regular morning news conference that the firms invited to bid had balked at his $8 billion price tag for the facility and could not meet the government’s three-year construction deadline, while Pemex could.
The U-turn is a fresh setback for the president’s five-month-old administration, which had touted its decision to turn the refinery over to international firms with a proven track record of completing similar projects elsewhere.
“Today’s decision will worsen Pemex’s outlook because it commits resources to projects that are not the most profitable,” said Pablo Medina, a Houston-based oil analyst with Welligence , calling the three-year timeline “really, really optimistic.”
It also introduces “an immense execution risk for a company that doesn’t have an especially good record on big projects,” Medina said of Pemex, whose credit rating is dicing with a downgrade from rating agencies worried about its debt.
Pemex has financial debts of more than USD$106 billion , making it the world’s most indebted oil company. Rating agencies said earlier this year that the cost of the planned refinery had raised significant questions about the company’s health.
“The fact the project is moving forward under the supervision of Pemex and the Energy Ministry is another task for Pemex’s management team, which is already struggling to stop declining crude production and improve existing refineries,” said Moody’s Investors Service Senior VP Peter Speer.
“It also raises the risk of delays and rising costs that could add more pressure to the finances of Pemex or the government,” he added in a statement.
López Obrador has pledged to lessen Mexico’s dependence on fuel imports by revamping Pemex’s six existing domestic refineries, as well as building the new facility.
But he has done little to assuage doubts about his ability to manage the economy. Investors and companies alike were shocked by his Oct. 29 cancellation of a $13 billion partly built new Mexico City airport a few weeks before taking office.
Stung by U.S.-Chinese trade tensions , Mexico’s peso and its main stock index came under further pressure from the refinery move, market analysts said. Both stocks and the currency were at times down by more than 1 percent on Thursday.
The new refinery would be Pemex’s largest, with a planned processing capacity of 340,000 barrels per day of heavy crude.
It will be built “with the coordination, administration and supervision” of Pemex and the energy ministry, López Obrador told reporters. Construction will begin in early June and be finished by May 2022, he added.
Ixchel Castro, a Mexico City-based refining analyst with Wood Mackenzie, said many details remain unclear and that similar-sized facilities needed around six years to complete.
López Obrador has already pledged nearly $2.5 billion in this year’s budget to the project, plus another $245 million to improve Pemex’s refineries.
Energy minister Rocío Nahle told local radio the government is budgeting investment of 50 billion pesos (USD$2.6 billion) in 2020 and 64 billion pesos in 2021 for the project.
The firm’s refining division has been its biggest loss-maker for years, due in large part to insufficient maintenance and accidents at the aging facilities, which currently operate at less than 40 percent of capacity.
In March, the government invited international firms to bid on building the refinery in the Gulf Coast state of Tabasco at the port of Dos Bocas. On April 30, it said a winner would be announced this week.
The prospective bidders included two consortia: U.S.-based Bechtel with Italy’s Techint ; and Australia’s WorleyParsons with U.S.-based Jacobs Engineering Group . Two sole bidders were also invited: U.S.-based KBR and France’s Technip .
Bechtel said it was pleased it could participate.
“We remain available to support Pemex and the administration in the future,” said Hector García , Bechtel manager for business and project development, Americas, in a statement.
The other companies either did not respond to requests for comment or could not be immediately reached.
López Obrador said none met the requirements for the tender, especially the $8 billion budget cap .
“It will cost us much less than the companies estimate,” he said.
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