VZCZCXRO9595
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2738/01 2612231
ZNR UUUUU ZZH
P 182231Z SEP 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8286
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF INTERIOR WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 02 MEXICO 002738 
 
SENSITIVE, SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC 
STATE FOR EEB/ESC (MCMANUS AND DUGGAN) 
DOE FOR A/S SANDALOW, G.WARD AND A.LOCKWOOD 
MMS FOR RENEE ORR 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EINV PGOV SENV MX
SUBJECT: GOM LAUNCHES CONTROVERSIAL OIL REFINERY PROJECT 
 
¶1.  Summary:  President Calderon announced August 2009 that 
state-owned oil company PEMEX selected Tula, Hidalgo as the site of 
its new "bicentennial" refinery, a state governed by the PRI 
opposition party.  His statement brings to end a fierce 
eighteen-month battle between various Mexican states for the 
location of this USD 9 billion project.  Energy experts agree that 
the project is driven largely by politics and resource nationalism. 
While Mexico refines over half of its crude oil, its growing 
reliance on imports of refined products (mostly from the U.S.) has 
become an increasingly sensitive political issue. Nonetheless, with 
declining oil production, lack of investment in exploration and low 
margins of return on refineries, building a costly new refinery at 
the expense of other projects makes little economic sense. 
Thankfully, there is plenty of time to kill this project before 
construction is set to begin in 2012 SUMMARY 
 
¶2.  Mexico has not built a new refinery since 1979.  With six 
refineries in operation, Mexico's refining capacity has remained 
constant, while demand for gasoline has increased on average by 3.4% 
annually over the past twenty years.  By 2008, Mexico imported 
340,000 barrels per day of gasoline, 42.5% of Mexico's total gas 
consumption.  To create value for its heavy crude with minimal cost 
and risk, PEMEX in 1993 bought from Shell Oil half its interest in 
its Deer Park refinery near Houston, establishing a joint venture. 
This investment gives Mexico some supply security, but does not 
address concerns that a significant and growing portion of Mexico's 
crude oil exports are re-imported as refined products. 
 
¶3.  PEMEX's domestic refining operations reflect years of 
underinvestment as officials opted to sink money into more lucrative 
oil exploration and production projects.  The GOM's prohibition on 
foreign investment in refining and transportation activities 
exacerbated the problem.  A government proposal under the 2008 
Energy Reform which would have allowed private investment in these 
downstream activities was rejected by the Mexican Congress, leaving 
the Mexican government with no choice but to increase dependence on 
imported refined products or invest heavily in refining operations 
to increase capacity. 
 
RELIANCE ON FOREIGN IMPORTS IS SENSITIVE ISSUE 
--------------------------------------------- - 
 
¶4.  Mexico's growing reliance on imports of refined products became 
an increasingly sensitive political issue during the early years of 
the Calderon administration leading the government to choose greater 
investment in this sector at the expense of other projects.  On 
March 18, 2008 (the 70th anniversary of the nationalization of 
Mexico's oil sector and the founding of PEMEX) President Calderon 
announced the government's plans to build a new refinery as an 
employment and infrastructure investment project.  After intense 
political lobbying between Mexican states for this estimated 9 
billion dollar project, the GOM announced in April 2009 that the new 
refinery will be built in Tula, Hidalgo if the state government 
could secure the necessary land for the refinery within 100 days - 
no easy task given the power of local landowners or ejidos.  With 
some difficulty, the State of Hidalgo was able to purchase most of 
the necessary 700 hectares of land at a cost of MXP 1.5 billion and 
donate it to PEMEX as an in kind contribution.  Issues regarding 
land right could still be problematic.  The state of Hidalgo is 
still negotiating with landowners about several small parcels of 
land. 
 
¶5.  With the location selected, PEMEX entered into a multi-year 
project design phase in which it will clarify the technical plans 
and further analyze site specific factors such as altitude and the 
potential for flooding.  Engineering and construction contracts will 
likely be awarded beginning summer 2011.  The construction phase of 
the project which will account for 85% of the project costs and most 
of the temporary employment gains, will begin in 2012, with the 
refinery scheduled to be fully operational 2015.  PEMEX's new 
refinery will be built next to an existing refinery, and PEMEX will 
have an opportunity to take advantage of some infrastructure already 
in place.  Tula is located inland some 100 miles north west of 
Mexico City, allowing the new refinery to supply heavily populated 
central Mexico, including Mexico City.  PEMEX admits, however, that 
with a capacity of 300,000 to 400,000 barrels a day, the refinery 
will reduce but not eliminate Mexico's reliance on imports of 
refined products. 
 
COMMENT: PURELY POLITICAL 
------------------------- 
 
¶6.  Mexico's "bicentennial" refinery project is controversial. 
Energy industry experts agree that, with rapidly declining oil 
production and severe budgetary shortfalls, Mexico would be better 
 
MEXICO 00002738  002 OF 002 
 
 
off investing in exploration activities.  The low rates of return 
for investment in refining make this project an unattractive 
alternative.  Moreover, by the time this project is scheduled for 
completion, Mexico may not produce enough domestic oil for its 
refineries.  Financing is also problematic.  PEMEX says it will rely 
on outside financing (capital markets) to fund up to one third of 
the project, but it is far from clear whether this is feasible.  The 
impetus behind the project is purely political.  President Calderon 
came under enormous pressure not only to build the refinery, but to 
do so in a state in which the opposition PRI is in power.  Many 
industry analysts - who overwhelmingly oppose the project - believe 
the refinery will never be built.  There is plenty of time to kill 
this project before construction is set to begin in 2012. 
 
 
PASCUAL