In doubt, profitability of new Olmeca refinery

If the cost of the new Olmeca refinery, located in Dos Bocas, Tabasco, exceeds a total of 12 thousand 40 million dollars, today, July 1, a project will be launched that is not profitable, according to the parameters of the work.

In the cost-benefit study, in May 2020 this priority work for the current administration was labeled, in accordance with section IV (Investments) of the General Policies and Guidelines for Investments, Associations and Strategic Alliances of Petróleos Mexicanos, its Companies Productive Subsidiaries and Subsidiary Companies in force, “as a capital investment project carried out by Pemex or subsidiaries”.

In this section, class IV investment refers that the cost of the work was estimated at 8 thousand 918.5 million dollars.

The document, to which EL UNIVERSAL had access, indicates that “the project has a range of -20%/+35%, so it may rise from 7 thousand 134.8 million to 12 thousand 39.9 million dollars”, with an execution program which set a deadline for mechanical completion in 2022.

This means that the cost-benefit study included probable increases in inputs, machinery, equipment, exchange rate movements and raw material prices such as crude oil, among the most important, of up to 35%.

Outside this range, the indicators of profitability, expected benefits and evaluation horizon are compromised.

Since the inception of the refinery, 15 risks with the highest severity were identified for the project, with “resource estimation errors” topping the list.

Santiago Arroyo, specialist in the energy sector and partner at the firm Ursus Energy, explained that “when you exceed the pre-established margins, which in this case is the budget, you begin to have a deficit, your rate of return increases and, consequently, from the day one, you’ll be working in the red.”

“The new refinery is no longer profitable, it is a loss for the Mexican State, since there is already talk of costs greater than 15 billion dollars,” he stressed.

Another specialist who asked not to be identified agreed that the project “was not profitable” since it appeared on the financial spectrum.

Both the federal government, but especially the Ministry of Energy, “handled numbers, which, at least in the industry, could not be handled,” he said.

In May 2019, President Andrés Manuel López Obrador reported that the refinery tender was declared void, since four companies that were invited to participate —Bechtel-Techint, WorleyParsons-Jacobs, Technip and KBR— postulated a cost higher than 8 billion dollars and a construction time of more than three years.

Political compromise

Arroyo indicated that, from a political point of view, “the refinery is fine,” and the fact that it is not profitable is of no importance to López Obrador. “Finally, for him it is an achievement of the six-year term, because his goal goes beyond numbers and profitability, it goes to a simply political issue, which is energy self-sufficiency,” he stressed.

Today’s speech at the refinery’s inauguration ceremony is predictable, he predicted, and will focus on AMLO’s affirmation that the objective has been met.

Both sources consulted agreed that the big problem with Dos Bocas is that it is poorly planned and, in order to maintain the austerity discourse, what was ultimately offered “is a cheap refinery, so to speak.”

According to information from Petróleos Mexicanos (Pemex), up to May and at current prices, the refining complex already had a cost of 10.65 billion dollars, exceeding the initial investment estimate by 1.75 billion.

On June 24, President Andrés Manuel López Obrador acknowledged that the new Olmeca refinery had an increase of between “20% or 30%” of what was estimated.

The head of the federal Executive justified the adjustment by pointing out that the Board of Directors of the state oil company, headed by Rocío Nahle, who is also in charge of the works of the new refinery, had authorized the increase.

“There was an increase… and it will remain at 11 billion or 12 billion dollars, including VAT. It conforms to what was authorized by the Pemex Council. This is reviewed by the Treasury and the Public Function”, he reported.

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