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News Article

Costs Climb as Dos Bocas Leaves Phase 1 Behind

By Peter Appleby | Mon, 10/19/2020 - 18:11

PEMEX Director Octavio Romero has reported that the Dos Bocas refinery project, which is still 22 months from completion, will go above its original budget by almost US$1 billion, confirming experts’ long-held belief that the original US$8 billion budget forecast was extremely optimistic.

Speaking during last week’s Congressional session, Romero said that the cost of the government’s flagship project will be “around US$8.918 billion.” On Sunday, during a ceremony to mark the end of the first phase of the refinery construction, Energy Minister Rocío Nahle said that the project was now 24 percent complete and had generated 43,321 direct and indirect jobs up to this point. Among the most recent milestones achieved was ICA Flour’s successful drilling and embedding of 6,312 construction piles on the site.

El Presidente ⁦@lopezobrador_⁩ supervisó los trabajos en la refinería de ⁦@Pemex#DosBocas . Con un avance general de la obra del 24% , de un trabajo arduo en la preparación del sitio, cimentaciones e Ingeniería y construcción.
@GobiernoMXpic.twitter.com/fjS5XYOj8T

— Rocío Nahle (@rocionahle) October 18, 2020

President Andrés Manuel López Obrador also attended the ceremony and repeated the promise that the refinery will be formally inaugurated on July 1, 2022. The president, who recently rejected a suggestion from the International Monetary Fund to postpone the refinery and focus government and PEMEX investment on developing profitable oil fields and funneling money to other in-need sectors, said that there were no financing issues with the Dos Bocas project. Despite the impact of COVID-19, financing was assured thanks to the government’s sound handling of the economy. Honesty and austerity had been vital to this, said the president.

The Dos Bocas refinery project will increase Mexico’s refining capacity to 500MMboe/d. “We will be self-sufficient,” López Obrador said.

The refinery’s budget and construction timeline has been questioned by industry analysts from the moment it was released. Critics have said that the government is offering an extremely optimistic view of the cost, while the three-year construction plan would be tough to meet.

The Mexican Institute for Competitivity in April 2019 concluded that the “Dos Bocas refinery will bring more costs than benefits to PEMEX and Mexico, with a probability of being barely 2 percent profitable based on the analysis of 30,000 financial scenarios.” Meanwhile, Moody’s credit agency predicted that the costs would rise to US$12 billion.

The Mexican Petroleum Institute, the influential organization responsible for investigation and technology research within Mexico’s oil and gas industry, published a report stating that the project was unviable and would cost US$14.74 billion. Héber Cinco Ley, the former IMP Director, resigned the day after the report was published on the IMP website, Reforma reported.

In September, Kellogg Brown and Root (KBR), the US engineering construction firm that won Packet 4and Packet 6, worth US$351.4 million and US$1.844 billion respectively, left the project due to costs going over SENER’s estimations. “When KBR bid for Phase 1, it knew that it would have to go through a conciliation process after this phase was completed. But this process went extremely far beyond the contracted amount,” said a unnamed source cited by The Yucatan Times.

In a recent interview with MBN, Parker Schreiner of Rystad Energy said that the government “has shown no signs of abating on its Dos Bocas refinery plans despite mounting cost estimates.” According to Schreiner, Rystad Energy knew of reports that suggested the eventual cost would be US$12 billion to US$13 billion, an additional 50 percent in costs against the government’s quote. “The rationale behind that is still opaque to any outside observer and, from a purely economic standpoint, the project seems unlikely to be viable,” said Parker.

The full interview Schreiner Parker can be read here.

Peter Appleby Peter Appleby Journalist and Industry Analyst