Mexico Completes 1st Oil Refinery Upgrade

It is the world’s seventh-largest oil producer, yet Mexico has to import more than one-fourth of its gasoline for lack of refining capacity. That’s not just embarrassing. It’s also expensive.

So national oil monopoly Petroleos Mexicanos, known as Pemex, launched a major refinery upgrading program in 1998, part of a broader strategy to maximize the value of the 3.5 million barrels of crude oil Mexico pumps from the ground each day.

The first phase of that $5.5-billion refinery investment program will start paying off this month with the formal dedication of the expanded Cadereyta refinery, the cornerstone of Pemex’s supply strategy for northwestern Mexico.

With world oil prices at decade highs, Pemex’s first refinery upgrade is both timely and more affordable.

Indeed, Mexico is not alone in its refinery woes; a worldwide shortage in refining capacity, notably including California, has helped to fuel the current surge in energy prices. But Pemex’s problems are largely self-imposed, the result of many years of neglect as oil revenue was diverted to other government uses.

The modernized Cadereyta refinery will enable Pemex to process more of its own heavy crude oil, freeing more of its light crude--a more desirable grade of oil that fetches a higher price--for export. That, in turn, brings more foreign currency into Mexico.

When completed, the refinery overhauls will enable the country to reduce gasoline imports from 27% of all gas sales to just 10% by 2005, said Jaime Willars, Pemex’s director of refining.

Still, the overall refinery upgrading project has been a mixed bag of achievements and delays. In this way, it mirrors the challenges ahead for the government-owned oil company when the country’s new president, Vicente Fox, takes office in December and puts Pemex under the magnifying glass.

Nobody expects Fox to try to reverse the nationalization of the oil industry, which dates to 1938. But issues of Pemex’s efficiency, its ability to finance huge investment projects and whether it should face competition in refining and gasoline retailing are likely to be on Fox’s agenda as he moves forward on a promised national government overhaul.

George Baker, a Houston-based oil analyst, fears that these refinery improvements could undercut any impetus for introducing competition to Mexico’s energy markets.

“All this talk of making Pemex more efficient is dangerous language,” said Baker, who publishes the Mexico Energy Intelligence newsletter. “Because the implication is that if you can demonstrate that Pemex is more efficient, then everything is fine. The real issue is: Do you believe in having a more efficient state-owned oil company with efficiency goals mandated from above, or do you believe in letting the market foster this efficiency through competition?”

It made sense for Pemex to focus first on the immense Cadereyta refinery, 20 miles east of the Monterrey business hub. This is the fastest-growing region in the country, with demand for oil rising well ahead of the national average growth of 3.5% a year.

Industry analysts applaud the showcase Cadereyta project, but hope it won’t remain an isolated success story for Pemex.

“Cadereyta is a major accomplishment, but Pemex must also recognize that the entire program is running very late. They were supposed to upgrade a bunch of other plants as well, but nothing has happened,” said Eduardo Lopez, Latin American analyst for Petroleum Finance Co. in Washington.

Of Pemex’s six refineries in Mexico, Cadereyta is the only upgrade that is nearly complete. Three other projects are underway, but bidding hasn’t even begun on the two others.

Government budget-tightening prompted by low oil prices in 1998 was a factor in the delays. With the rebound in crude oil prices, more financing has been available and the refining division alone is investing nearly $800 million this year, Willars said.

“We have never had so much investment in refining as we have this year,” he said.

The original overall upgrading plan called for work to be completed by 2002, which could have eliminated gasoline imports altogether. Now it appears likely to take until 2005, when growth in demand will still leave a 10% production deficit for gasoline.

Still, the upgrades of the six refineries should nearly double the amount of heavy crude oil being processed each day, from about 400,000 barrels in 1997 to 771,000, a major achievement for Pemex.

Mexico increasingly is pumping heavy crude, particularly from the huge Cantarell offshore field in the Gulf of Mexico. That thick, molasses-like crude, which makes up more than 60% of total production, sells for less per barrel and is more costly to refine. But the upgraded refineries will be able to squeeze more refined products from each barrel.