Pemex urged to add value to its own oil by investing in refineries

By BRENDAN M. CASE / The Dallas Morning News

CADEREYTA, Mexico – What a difference a border makes for Mexico's state-owned oil monopoly, Petróleos Mexicanos.

Ten years ago, Pemex and Royal Dutch/Shell Group upgraded a major refinery in Deer Park, near Houston. They finished the job on time for about $1 billion.

Pemex tried to duplicate its success by reconfiguring a refinery in Cadereyta, 80 miles from the Texas border. That $1.6 billion project and a related coker generated millions of dollars in cost overruns, some experts say. Although portions were completed in 2001, the full project wasn't ready until this summer – three years behind schedule.

Analysts are still trying to figure out why.

"The really perplexing part of it is that the Cadereyta upgrade was supposed to be modeled on the Shell Deer Park refinery," said George Baker, president of Baker
& Associates, a Houston consulting firm. "The Shell Deer Park refinery was done on time and under budget. In Mexico, it was three years late and way over cost."

Pemex ranks among the world's top crude oil producers and exporters. But as Cadereyta shows, it's a world-class laggard at adding value to that oil. Despite fabulous oil resources, Mexico imports gasoline, propane and petrochemicals worth billions of dollars a year.

"This is a country that exports crude oil, a raw material, and imports expensive processed goods like gasoline," said Felipe Ocampo, a former official with the Mexican Oil Institute, a think tank affiliated with Pemex. "If you add up our imports of natural gas, refined products, other fuels and petrochemicals, their value is comparable to the value of oil exports."

Pemex's refining division has scored some recent successes. Over the last decade, it's spent billions making gasoline and other fuels cleaner. Better quality gasoline has helped reduce pollution in Mexico City and other metropolitan areas.

Pemex executives acknowledge that the company has invested more heavily in crude oil production than in refining. But they say that makes sense, because profit
margins are far higher in oil production than in refining.

"Crude oil is a much better business for Pemex than refining is," Raúl Muñoz Leos, Pemex's director general, said this year. "Focusing our investment on crude oil
production is a rational choice."

Exclusive control

Mexican law gives Pemex control of nearly all of the hydrocarbons sector. Politicians rely on Pemex to provide about a third of all federal revenue. More profit for
Pemex means more money for the taxman.

Still, channeling most investment to crude oil production has damaging consequences. Just ask the nation's chemical industry.

The National Chemical Association, a private sector group known as ANIQ, estimates that Mexico's chemical imports last year were about $5.9 billion more than
its chemical exports – a significant figure in a country that ran a $7.9 billion trade deficit in 2002.

Mexico's petrochemical output is only about half what it was a decade ago. ANIQ officials say that Pemex will only be able to supply about half of Mexico's
petrochemical needs this year.

Without more investment in petrochemicals, imports will continue to grow.

'Losing an opportunity'

"We'd be losing an opportunity to produce petrochemicals, even though we're an oil-exporting country," said José Luis Uriegas, ANIQ's president.

Mr. Muñoz Leos, a former executive with DuPont's Mexican operation, understands the weaknesses of the chemical industry as well as anyone.

He has announced plans for at least $2 billion in investments in new petrochemical complexes along the Gulf Coast, pledging to build them with at least some
private-sector backing.

But the business community's participation remains politically controversial. A plan to privatize some petrochemical plants in the 1990s aroused staunch nationalistic
opposition, forcing officials to cancel it.

Federal investigations have uncovered numerous cases of corruption within Pemex. Meanwhile, the company has chronically underfunded its refining arm.

Gasoline production is about the same as it was a decade ago. Since Mexico's population and economy have grown, the country has long relied on gasoline imports
from the United States.

Such imports amount to one of Pemex's most rankling failures in the eyes of most Mexicans and many analysts.

"The Mexican oil industry has lost a historic opportunity by not building more refineries to add value to oil before selling or exporting it," David Shields, a Mexico
City energy analyst, wrote in his recent book, Pemex: An Uncertain Future.

Last year, Pemex imported about 90,000 barrels a day of gasoline, about 16 percent of total consumption. That added just over $1 billion to the trade deficit last
year.

Pemex imports gasoline from its refinery in Deer Park, which it jointly owns with Shell, and also from independent suppliers, said Mr. Ocampo, the former Mexican
Oil Institute executive.

The company imported less gasoline in 2002 than in 2001. Pemex officials are striving for greater reductions, recently launching a $1.65 billion plan to reconfigure a
refinery in the Gulf Coast state of Veracruz.

But officials will have to figure out how to avoid the problems that plagued the reconfiguration of the Cadereyta refinery, a sprawling complex of processing plants,
storage tanks and railroad tracks about 20 miles from Monterrey.

Cadereyta's troubles effectively cost Mexican taxpayers millions of dollars, creating suspicions of a financial stench to go along with the refinery odors that blanket
the town. Those problems remain shrouded in mystery.

In the late 1990s, Pemex hired a consortium of private companies called Conproca to handle the reconfiguration. Backed mainly by South Korea's Sunkyong
Engineering & Construction, Conproca also included Germany's Siemens AG and Mexican construction company Tribasa.

A key step

Pemex officials called the Cadereyta project a key step in reducing gasoline imports, but the reconfiguration was not finished until early 2001, nearly nine months
behind schedule. Cost overruns may have reached into the hundreds of millions of dollars, according to Mexican news reports. They also generated suits and
countersuits between Pemex and Conproca.

In addition to the reconfiguration, a Mexican company called Protexa was building a coker in Cadereyta, a critical piece of equipment that would allow Pemex to
produce more high-performance gasoline instead of low-quality fuel oil. That project was only finished this summer – three years after the refinery's complete revamp
was to have been finished.

Pemex refining officials declined to be interviewed for this story and denied requests for a visit to the facility. Conproca executives, who have never publicly
explained their results, could not be located.

Mr. Muñoz Leos said earlier this year that Cadereyta's problems were costing the company millions of dollars a month. He also criticized the reconfiguration, which
was handled by his predecessors, as poorly managed. But neither he nor Pemex refining officials have provided a detailed account of what actually happened.

Industry analysts say they hope more careful management will lead to fewer delays and cost overruns in similar projects.

Otherwise, woes in the refining and petrochemical industries will continue, eliminating jobs and job opportunities by the thousands.

"We're always complaining about the lack of jobs in Mexico," said Mr. Ocampo. "And yet we choose not to make investments that would create lots and lots of
jobs."