Can a $20bn refinery make Mexico’s energy ‘dream’ come true?

Welcome to Vitality Supply, coming to you from New York, the place individuals are again at their desks after the July 4 weekend.

The most recent information from one other US-British wrestle — activist investor Elliott Administration’s drive to revamp BP — is that the laggard oil main has appointed the previous chief monetary officer of its rival Shell, Simon Henry, to its board.

Henry has appreciable expertise in oil and gasoline, which can assist the corporate show it was taking its pivot away from inexperienced vitality critically, and maintain off a possible takeover.

To the east, Russia is searching for to resolve the curious case of the exploding tankers.

On Sunday an explosion on a vessel carrying Russian cargo resulted in an ammonia leak. There was hypothesis the blasts have been linked to Ukraine, whose representatives have declined to remark, or Libya.

For immediately’s e-newsletter we go to Mexico, the place our correspondent Christine Murray seems on the nation’s quest to interrupt its vitality dependence on the US.

Thanks for studying — Martha

Can a $20bn refinery safe Mexico’s vitality self-sufficiency?

Amid the mangroves that line Mexico’s Gulf coast, the biggest new oil refinery within the Americas is lastly stepping up manufacturing of gas.

The nation’s earlier president, Andrés Manuel López Obrador, known as the $20bn Olmeca Refinery a “dream come true” that may assist Mexico attain vitality self-sufficiency.

Nevertheless, the megaproject ran greater than twice over funds, lacks pipeline connections and specialists say it’s unlikely to make a major dent in Mexico’s heavy vitality dependence on the US.

Mexico imports about half its petrol wants, one-third of its diesel and greater than 60 per cent of its pure gasoline, all overwhelmingly from the US.

By 2030 its crude manufacturing is projected to fall by greater than every other nation, in line with the Worldwide Vitality Company (IEA), that means it might additionally develop into a internet importer for the primary time for the reason that Fifties.

“You place the cart earlier than the horse,” John Padilla, companion at vitality consultancy IPD Latin America, stated of the Mexican authorities’s technique. “You didn’t stabilise your manufacturing to make sure that you’d have sufficient product for the long-term image of what it’s you’re making an attempt to attain.”

At a time when Washington is slapping tariffs on Mexico and elevating the potential of navy intervention, the nation naturally is frightened about dependence on its northern neighbour extra broadly.

Throughout his six-year time period that ended final yr, López Obrador purchased out half of a Texas refinery, up to date cokers at present crops and constructed Olmeca in an try to insulate the nation from value fluctuations overseas.

It’s a coverage the present president, Claudia Sheinbaum, has vowed to proceed.

“Solely a traitor arms their nation over to foreigners,” she stated at an occasion in March, quoting from a historic speech by a nationalist president in 1960.

Mexico’s authorities has begun lowering crude exports to redirect extra to its refineries, creating an issue for US refiners that depend on its heavy crude. However Olmeca additionally faces its personal points.

In Might, Olmeca produced 50,000 barrels a day of diesel and 43,000 b/d of petrol, working at about one-third of its complete capability. Even at 100 per cent capability producing 120,000 b/d of diesel and 170,000 of petrol, that may solely signify some 25 per cent and 18 per cent of estimated nationwide demand.

Most refineries are additionally unable to function at full velocity for lengthy intervals, and business members are sceptical Olmeca will meet its 2026 deadline. State oil firm Pemex’s different Mexican refineries are identified for inefficiency, with a median operation at lower than 50 per cent of capability.

Crucially, Olmeca lacks important pipeline and rail connections to distribute the gas throughout the nation, and as a substitute will depend on vehicles and its adjoining port for the foreseeable future.

“It’s going to price extra money and the truth that they didn’t take into consideration this . . . ought to make anyone a bit cautious,” Padilla stated. “It’s a giant pink flag.”

On the similar time, Mexico could finally must import crude to feed the refinery.

Its crude oil manufacturing has been in decline since 2004 as beforehand productive fields fall off and few new ventures have come to fruition. Pemex has the best debt burden of any oil firm and has lower investments. Greater than half of its manufacturing is now from seven of its 240 fields, the IEA says.

Sheinbaum is implementing the biggest lower to the deficit in many years, so to stem that decline Pemex must depend on non-public funding, which collapsed below her predecessor. She stated final month {that a} new long-term monetary and manufacturing plan for Pemex was practically prepared.

Ramses Pech, an vitality and economics advisor, stated: “Mexico received’t be self-sufficient within the subsequent 4 to 5 many years until there’s extra public funding and a complete openness to non-public funding.”

“The final administration put the vitality sector on pause and the present one doesn’t have the cash to tackle every thing {that a} long-term vitality transition plan requires.”

General, the Olmeca refinery could have come at too excessive a chance price, Padilla stated. “It created some native short-term financial profit. You’ll get a bit extra vitality certainty however at an especially excessive price and probably enormous overhead.” (Christine Murray)

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Vitality Supply is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Kristina Shevory, Tom Wilson and Malcolm Moore, with help from the FT’s international workforce of reporters. Attain us at vitality.supply@ft.com and comply with us on X at @FTEnergy. Compensate for previous editions of the e-newsletter right here.