Jeremy Martin :Land issue skirts
the heart of the Pemex refinery issue

Location, location, location: The age-old first law of real estate has now emerged as a question mark over Pemex’s Bicentennial 300,000 barrel-per-day refinery.

Announced in April and to be built in Tula, in the state of Hidalgo, at a price tag of about $10 billion the topic has resurfaced as perhaps an antidote to the summer lull.

Last week, Pemex’s CEO, Jesus Reyes Heroles, ignited attention anew by publicly stating that despite April’s “award” to Hidalgo, the refinery will be sited in the state that is first to the table with affirmation of the full terrain (roughly 700 hectares) the project necessitates for construction. Neither the original location nor another possibility – Guanajuato – submitted the requisite land guarantees to Pemex.

And the chase publicly commenced.

But, alas, the real debate should not be centered on which state will ultimately land the project but instead over the efficacy and rationality of the proposed project and level of investment.

Admittedly, the race over which state will guarantee the requisite land for Pemex’s massive new refinery – the first new refinery in over 30 years in Mexico – makes for good newspaper copy and a potent blend of politics, oil and economics, not to mention the customary intrigue that grips Mexico with regards to anything related to Pemex.

That this latest wrinkle comes on the heels of the mid-term elections and can be conveniently categorized as another political horse race is a given with Hidalgo ruled by the PRI and Guanajuato governed by the PAN.

There is, however, a more fundamental matter: Should the refinery project move ahead given the economic turmoil gripping Mexico (and the world), the as-of-yet-unresolved crude oil production issues facing Pemex and, perhaps most importantly, the global shift in policy direction toward reduced gasoline consumption.

Even before the deadly flu outbreak, Mexico’s economic outlook for 2009 was dreary. And economic news from Mexico only gets worse. The peso continues to weaken as the government and international forecasts revise – downward – their economic outlook. Indeed, the Finance Minister recently acknowledged that the contraction might rival that of the 1995 peso crisis - GDP fell over 6 percent that year.

But this is at its core an oil and Pemex story, so let’s consider this: Pemex’s oil production peaked in 2004. Output is off by as much as 20 percent since then; over the last year production declined about 8 percent.

Recently announced results from the second quarter of 2009 – 2.59 million barrels a day production - underscore the continued decline. Meanwhile, the first half numbers also demonstrate that Pemex will have a tough time meeting its 2.75 million barrel a day average production target for 2009.

Thus, an impertinent but logical question for Pemex: Upon completion of the new refinery and other modifications, will the company be able to provide adequate crude oil supply for its revamped refining network?

Finally, Mexico’s energy interconnection with the United States and North America demands that signals from that market be heeded. And, according to Reuters, the refinery business in the U.S. is in disarray. Layoffs abound and analysts tend to concur that a rebound in refining margins is way off; leading refiner Valero announced plans to shutter for several months its almost 300,000 barrel per day refinery in Aruba – roughly the same production as Pemex’s proposed refinery.

There’s a reason Pemex’s Bicentennial refinery is to be the first new one in Mexico in over 30 years. It makes dubious economic sense and even less so when analyzed against the backdrop of declining oil production at Pemex and the globe’s purported energy transition, not to mention a national economic crisis.

The dance over which state will come up with the winning land package for Pemex is surely interesting. But it is an unneeded tangent.

Jeremy M. Martin is Director, Energy Program of the Institute of the Americas. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Mexbiznews, July 29, 2009. Petroleumworld reprint this article in the interest of our readers .

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Petroleumworld News 07/31/09

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Jeremy Martin :Land issue skirts the heart of the Pemex refinery issue

Jeremy Martin :Land issue skirts
the heart of the Pemex refinery issue