Pemex Refinery, Priority for Mexico President, Runs Billions Over Budget

Reuters, May 2, 2022

A major Pemex oil refinery under construction in Mexico is running over budget and unlikely to come online this year as promised, according to documents seen by Reuters and sources close to the project, despite being a presidential priority.

The Olmeca refinery has an official $8.9 billion price tag approved by the board of the national oil company in 2020. President Andres Manuel Lopez Obrador has long pitched the refinery as essential to weaning Mexico off its dependence on foreign gasoline and diesel supplies, which he argues undermines the country's energy security.

But two sources with direct knowledge of the project's finances say the latest cost estimate has reached $14 billion, or some $5 billion over budget.

Officials at Pemex, the energy and finance ministries did not respond to requests for comment.

Sources within Pemex say the original budget of $8.9 billion was always unrealistic, with internal estimates calculating a range of up to $12 billion. The upper end of the range, which included the possibility of higher costs, administrative expenses or other contingencies, was never made public.

The $12 billion figure was based on 2020 estimates but the sources said the cost of building Olmeca is now around $14 billion, due largely to already-committed contracts through early 2024. The sources did not give details about those contracts.

Lopez Obrador, a leftist resource nationalist who has pledged to revive the fortunes of state-owned Pemex, early on tapped his close confidant Energy Minister Rocio Nahle to oversee construction of the new refinery, in the president's native Tabasco state in southern Mexico.

Squeezed by higher costs and Lopez Obrador's determination to see the signature project completed in time for an inauguration this summer, the sources say Nahle is scrambling for additional funding.

"The minister is committing resources that have not been authorized by the Pemex board and that the finance ministry wants to avoid due to legal issues," said one of the sources, who spoke on condition of anonymity to discuss the project's finances.

To date, more than $8.818 billion has already been spent on the Olmeca refinery, according to the government documents.

Designed to be able to process up to 340,000 barrels per day of crude, Olmeca would be Pemex's biggest domestic refinery.

The documents seen by Reuters reveal a back-and-forth between the finance and energy ministries, and show how the former has so far declined to approve more money, arguing that the Pemex board must first authorize more spending.

As part of her duties as energy minister, Nahle chairs the Pemex board.

A few days ago, Nahle publicly acknowledged that the refinery's costs had risen by $900 million to reach $9.8 billion, due to added pipelines, a power plant and aqueduct. Previously, she had repeatedly denied reports that the project was over budget.

"Where is the money going to come from?" asked the second source, who also declined to be named as they were not authorized to speak to reporters.

"I don't know if the president knows about all these extra amounts," the source added.

In January, Nahle also batted away suggestions that the refinery would not begin operations later this year, which Lopez Obrador promised in 2019, his first full year in office.

She most recently said the first barrels of gasoline will be produced in December, despite the facility's scheduled inauguration in early July, while Lopez Obrador has acknowledged that the refinery would need a few months for production tests after the formal ribbon-cutting ceremony.

($1 = 20.4575 Mexican pesos)

(Reporting by Ana Isabel Martinez; Additional reporting by Dave Graham;Writing by David Alire Garcia; Editing by Alistair Bell)

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Copyright 2024 Thomson Reuters. Click for restrictions.

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