Can a $20bn refinery make Mexico’s vitality ‘dream’ come true? | USAEMALL.com

Welcome to Energy Source, coming to you from New York, where people are back at their desks after the July 4 weekend.

The latest news from another US-British struggle — activist investor Elliott Management’s drive to revamp BP — is that the laggard oil major has appointed the former chief financial officer of its rival Shell, Simon Henry, to its board.

Henry has considerable experience in oil and gas, which may help the company prove it was taking its pivot away from green energy seriously, and hold off a potential takeover.

To the east, Russia is seeking to solve the curious case of the exploding tankers.

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

For today’s newsletter we go to Mexico, where our correspondent Christine Murray looks at the country’s quest to break its energy dependence on the US.

Thanks for reading — Martha

Can a $20bn refinery secure Mexico’s energy self-sufficiency?

Amid the mangroves that line Mexico’s Gulf coast, the largest new oil refinery in the Americas is finally stepping up production of fuel.

The country’s previous president, Andrés Manuel López Obrador, called the $20bn Olmeca Refinery a “dream come true” that would help Mexico attain energy self-sufficiency.

However, the megaproject ran more than twice over budget, lacks pipeline connections and experts say it is unlikely to make a significant dent in Mexico’s heavy energy dependence on the US.

Mexico imports about half its petrol needs, one-third of its diesel and more than 60 per cent of its natural gas, all overwhelmingly from the US.

By 2030 its crude production is projected to fall by more than any other country, according to the International Energy Agency (IEA), meaning it could also become a net importer for the first time since the 1950s.

“You put the cart before the horse,” John Padilla, partner at energy consultancy IPD Latin America, said of the Mexican government’s strategy. “You didn’t stabilise your production to ensure that you would have enough product for the long-term picture of what it is you’re trying to achieve.”

At a time when Washington is slapping tariffs on Mexico and raising the possibility of military intervention, the country naturally is worried about dependence on its northern neighbour more broadly.

During his six-year term that ended last year, López Obrador bought out half of a Texas refinery, updated cokers at existing plants and built Olmeca in an attempt to insulate the country from price fluctuations abroad.

It’s a policy the current president, Claudia Sheinbaum, has vowed to continue.

“Only a traitor hands their country over to foreigners,” she said at an event in March, quoting from a historic speech by a nationalist president in 1960.

Mexico’s government has begun reducing crude exports to redirect more to its refineries, creating a problem for US refiners that rely on its heavy crude. But Olmeca also faces its own issues.

In May, Olmeca produced 50,000 barrels a day of diesel and 43,000 b/d of petrol, operating at about one-third of its total capacity. Even at 100 per cent capacity producing 120,000 b/d of diesel and 170,000 of petrol, that would only represent some 25 per cent and 18 per cent of estimated national demand.

Most refineries are also unable to operate at full speed for long periods, and industry participants are sceptical Olmeca will meet its 2026 deadline. State oil company Pemex’s other Mexican refineries are known for inefficiency, with an average operation at less than 50 per cent of capacity.

Crucially, Olmeca lacks significant pipeline and rail connections to distribute the fuel across the country, and instead will rely on trucks and its adjacent port for the foreseeable future.

“It’s going to cost more money and the fact that they didn’t think about this . . . should make anybody a little wary,” Padilla said. “It’s a big red flag.”

At the same time, Mexico may eventually need to import crude to feed the refinery.

Its crude oil production has been in decline since 2004 as previously productive fields fall off and few new ventures have come to fruition. Pemex has the highest debt burden of any oil company and has cut investments. More than half of its production is now from seven of its 240 fields, the IEA says.

Sheinbaum is implementing the largest cut to the deficit in decades, so to stem that decline Pemex needs to rely on private investment, which collapsed under her predecessor. She said last month that a new long-term financial and production plan for Pemex was nearly ready.

Ramses Pech, an energy and economics consultant, said: “Mexico won’t be self-sufficient in the next four to five decades unless there is more public investment and a total openness to private investment.”

“The last administration put the energy sector on pause and the current one doesn’t have the money to take on everything that a long-term energy transition plan requires.”

Overall, the Olmeca refinery may have come at too high an opportunity cost, Padilla said. “It created some local temporary economic benefit. You will get a little more energy certainty but at an extremely high cost and potentially huge overhead.” (Christine Murray)

Power Points

• A surge in onshore wind turbines in England has yet to materialise one year on from Labour’s lifting of a de facto ban on new projects.

• Japan is laying the groundwork to proceed with next-generation nuclear energy plants 14 years after the Fukushima disaster.

• Opinion: Climate-concerned countries should beware of the “natural gas trap”, writes Bård Harstad of Stanford University

Energy Source is written and edited by Jamie Smyth, Martha Muir, Alexandra White, Kristina Shevory, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.