Investors worried as AMLO hands refinery project to Pemex

Investors are shaking their heads after Mexico President Andres Manuel Lopez Obrador scrapped a bid round for an $8 billion refinery, instead handing the project to troubled Petroleos Mexicanos.

Outside offers to build the plant were too expensive, Lopez Obrador said Thursday, while some bidders suggested that the project couldn’t be done by the government’s 2022 target.

“It’s really pathetic,” said Alejandra Leon, an oil analyst at IHS Markit Ltd. in Mexico City. “The companies invited to this project were not very enthusiastic because they knew that they could not provide what the government wanted to hear. Now, the government listens to them but ignores them, which is irresponsible and foolish because they will waste money that belongs to Mexicans.”

Pemex bonds erased earlier gains on Thursday, leading losses for Mexican issuers. Yields on Pemex bonds maturing in 2027 rose 4 basis points to 6.57% on the day. The peso fell 0.5% to 19.1712 per dollar, among the worst performers in emerging markets behind Argentina, South Korea and China.

While the Dos Bocas refinery has 50 billion pesos in initial resources allocated for the year, the project may be problematic for Pemex, the world’s most indebted oil major with about $106.5 billion in outstanding debt. The state-owned oil company’s six refineries are currently processing at about a third of their capacity.

The proposed Dos Bocas plant was one of Lopez Obrador’s campaign pledges and he pushed the project through a public consultation after taking office in December. Companies that qualified to bid for its construction included Bechtel Group, Techint, WorleyParsons Ltd, Jacobs Engineering Group, TechnipFMC and KBR Inc, Energy Secretary Rocio Nahle said in March.

“They were asking for too much,” Lopez Obrador said at his daily press conference alongside Nahle and Pemex Chief Executive Officer Octavio Romero. Lopez Obrador lauded the “new Pemex” for not issuing debt in the first quarter of the year and vowed production would surge in the coming years. He said Pemex was up to the task of building the new plant in his home state of Tabasco. “That’s how it was done before, refineries were built by Mexican specialists,” Lopez Obrador said. “It’s a challenge, and we’ll accomplish it.”

It’s not hard to see why investors are skeptical. Refinery upgrade projects that began in the early 2000s have yet to be completed. Another much-lauded plan to build a refinery in Tula, Hidalgo, for $12 billion was scrapped by the previous administration five years after it was announced.

Pemex’s existing refineries are in such poor shape that they lose more money the more crude they process. The Salina Cruz, Minatitlan and Madero plants have all been offline intermittently over the past several years, which Pemex has said is due to extended maintenance or because of operational problems.

“A refining project of this magnitude is complex, expensive and it must be done safely,” said Ixchel Castro, Mexico energy analyst at Wood MacKenzie Ltd. “Accelerating these processes can put at risk the integrity of the refinery and undermine its profitability.”

(Updates paragraphs three and four with additional analyst quote, bond information.)

–With assistance from Justin Villamil.

To contact the reporters on this story: Amy Stillman in Mexico City at astillman7@bloomberg.net;Carlos Manuel Rodriguez in Mexico City at carlosmr@bloomberg.net

To contact the editors responsible for this story: Daniel Cancel at dcancel@bloomberg.net, Catherine Traywick, Joe Carroll

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