Pemex shelves refinery upgrades, hints payroll cut

OREANDA-NEWS. February 17, 2015. Mexico's state-run Pemex is postponing a \\$2.8bn project to upgrade five of its six domestic refineries in response to the sharp decline in oil prices.

Following a government-imposed \\$4.1bn spending cut, representing 11.5pc of the company's initial \\$36.3bn budget, Pemex's board members met on 13 February to discuss and draft a slimmer budget. To comply with the firm's new guidelines and obligations introduced by the country's landmark energy reform, board members agreed to maintain spending related to domestic oil supply and delay instead new investments as well as some costly infrastructure projects already underway, such as the refineries.

The drop in oil prices since mid-2014 and falling domestic crude production have forced the government to revise down its federal budget for the year, cutting the equivalent of 0.7pc of Mexico's GDP. Half of the \\$8.2bn cutback was assigned to Pemex. State-run power utility CFE was also stripped of \\$667mn.

Pemex had unveiled the refinery upgrade package with much fanfare in September 2014 as part of a wider plan to focus on the production of ultra-low sulfur diesel and gasoline. The aim was that 100pc of the diesel sold in Mexico would be ultra-low sulfur by the end of 2017. In anticipation of a competitive landscape emerging under the reform, Pemex also wanted to start reducing products imports to eventually export any surplus supply.

Former Pemex board member Fluvio Ruiz who is associated with the political opposition panned the postponement of the downstream projects.

"This is the kind of short-term logic that has been atrophying the good development of Pemex for the past 40 years," Ruiz told Argus today.

"We have to stop thinking that way," added Ruiz, who is now an adviser at Pemex's petrochemical division (PGPB).

Pemex did not say when the refinery projects might be reintroduced. Board members said that contracted companies would be contacted to renegotiate current contracts.

The refinery contracts included ICA Fluor Daniel with a \\$737mn contract for the 190,000 b/d Madero refinery; Tecnicas Reunidas with a \\$568mn contract for 200,000 b/d Minatitlan; Samsung with a \\$359mn contract for 245,000 b/d Salamanca; Foster Wheeler with a \\$584mn contract for 330,000 b/d Salina Cruz; and a consortium of ACS, Dragados and Cobra with a \\$560mn contract for 320,000 b/d Tula.

The contractors involved in the upgrades did not immediately react to today?s news, but at least one executive had expressed concern over the likely postponement of the projects before today?s announcement.

Pemex chief executive Emilio Lozoya will be in charge of presenting the details of the company?s revised budget, which might include reducing Pemex's large 150,000-strong workforce, the company publicly acknowledged for the first time today. "Additionally, the board requested that the chief executive implement an important scheme to reduce operating costs, including those related to human resources and personnel services," Pemex said.