A Mexican official said the government had put a contentious refinery project on hold against a background of flagging economic growth and was preparing a fresh capital injection to boost production at Pemex, the debt-laden state energy company.

Arturo Herrera, deputy finance minister, told the Financial Times that $2.5bn earmarked this year for the Dos Bocas refinery project would instead be channelled into turning around Pemex’s 15-year slide in production.

The cost of Dos Bocas has repeatedly been revised upwards and the decision on the project will be welcomed by investors, who feared it would be a burden that Pemex and Mexico could ill-afford as the economy slows. Rating agencies are turning increasingly negative on Mexico because of Pemex’s fragile finances.

“We will not authorise [construction] until we have a final figure that is not very different from the original $8bn,” said Mr Herrera, adding that this year’s planned investment in the refinery “can go to exploration and production”. He spoke during a trip to London for meetings with investors.

Within hours President Andrés Manuel López Obrador contradicted the minister, saying the refinery project did have a budget and that it was “very possible” that a tender would be announced on March 18.

The date is symbolic, marking the anniversary of the oil nationalisations that created Pemex in 1938.

Many investors think that Mr López Obrador’s pledge to halt lucrative crude exports in three years, and refine oil domestically to sever reliance on imported US fuel, makes little financial sense.

“A lot of options are on the table including a delay to the refinery construction,” said Andrew Stanners at Aberdeen Standard Investments, one of several investors who have visited Mexico recently and been told the project may not go ahead.

“It’s almost a done deal that [the refinery] will be cancelled,” said another participant in recent investors’ meetings with senior government officials, who asked not to be named.

Mr Herrera said the government was talking to the IMF and other multilateral organisations about structuring a fresh capital injection for Pemex. He said the discussions were technical and no borrowing was involved.

Arturo Herrera: ‘We will not authorise [construction] until we have a final figure that is not very different from the original $8bn’ © Bloomberg

The government has already put forward a package of financial help for Pemex totalling $5.5bn, including a $1.3bn capitalisation, tax breaks and expected savings from a clampdown on rampant fuel theft, to boost investment in the company by 46 per cent this year.

“We know the size [of the planned additional capitalisation] but we are not ready to announce it,” Mr Herrera said.

Finance minister Carlos Urzúa said last week that “other measures that will be a bit more significant” would be announced soon.

Analysts said Pemex needed $10bn-$15bn a year to start recovering production, which sank to 1.64m barrels per day on average in January, far from the 3.4m b/d peak in 2004 and the government’s goal of 2.4m b/d by 2024.

BBVA Bancomer has said a recent increase in a fuel excise tax could deliver a $2bn windfall this year, which could be ploughed into helping Pemex. “I’m worried we’re being overly pessimistic,” noted one senior banker.

Nevertheless, the Mexican national champion has $106bn of debt and faces an onerous schedule of repayments. Its ability to make profits is curtailed by its tax burden: the company funds one-fifth of Mexico’s budget.

“Many management decisions could have been taken differently but that is not the main problem,” said Mr Herrera. “Pemex has historically been overtaxed and that needs to change.”

He said a draft business plan for the company would be presented in the next six weeks or so that would match “financial needs and conditions with a production plan”.

Mr Herrera stressed the new government’s commitment to delivering a promised budget surplus this year equal to 1 per cent of gross domestic product. Critics have questioned its ability to do so given its ambitious spending plans.

“If anything has to be adjusted, it won’t be the fiscal target,” he said.

Mr Herrera acknowledged the government needed to “communicate better” and “help market participants understand whether a tweet [from a politician] reflects a policy change or is the result of people spending too much time on social media”.


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