A study conducted by the Mexican Institute for Competitivity (IMCO) to assess the feasibility of the Dos Bocas refinery projection suggests alternatives may be a better way to go to boost production in Mexico. The institute favored canceling the project and implementing other options like storage.

 

monte carlo simulation

IMCO performed a Monte Carlo simulation that revealed that in 98 percent of the possible scenarios derived from the construction of the Dos Bocas refinery, construction and operating costs would exceed possible revenue. This represents 29,400 out of 30,000 possible scenarios allowing only 600 for possible success.

The Monte Carlo Method, also known as Multiple Probability Simulation, is a technique used for risk assessment that enables better decision-making. This kind of simulation is used to predict all possible outcomes dependent on several random variables. Its models are built by substituting different combinations of variable values to create a probability distribution.

Due to the massive number of possible scenarios, the test is typically computerized.

 

The parameters used in IMCO’s simulation include oil refining margins, total project investment, construction time and operating costs. Nevertheless, the variables for reaching the previously mentioned result do not contemplate construction costs of additional infrastructure, such as storage facilities, pipelines and the revamping of the Dos Bocas port in the state of Tabasco.

 

oil refinery

The construction of a world-class refinery was among the flagship projects proposed during President López Obrador’s election campaign to lessen the country’s dependence on imported oil. To ensure this goal is fulfilled, Minister of Energy Rocío Nahle announced that only the world’s four top companies were invited to bid: Bechtel-Tecnict, Worley Parsons-Jacobs, Technip and KBR. Aside from the MX$160 billion Dos Bocas refinery construction, which was announced in December 2018, further infrastructure development would be required. The refinery needs to be connected to the port, gas pipelines, highways, railroad system, electric transmission lines, hydraulic and sanitation facilities and telecommunications. AMLO believes the Dos Bocas project could foster the creation of 23,000 direct jobs and 100,000 indirect jobs.

If the Dos Bocas refinery is to be profitable, several pieces need to come together; in particular, it requires a short construction time to avoid delays in operations and low construction costs. On March 26, AMLO announced that construction of Dos Bocas will begin in three months, with the goal of launching operations within three years, thus fulfilling the first requirement. However, the second condition is jeopardized since the cost of the project is estimated at US$8 billion.

 

With a decreased budget resulting from austerity measures implemented by AMLO’s government, the Ministry of Finance has been reluctant to release funds for Dos Bocas’ construction. Deputy Minister of Finance Arturo Herrera has stated that due to the project’s high stakes, monetary resources allocated for the refinery should be invested in exploration and production efforts. Considering the project will be built with public funds, an economic failure of Dos Bocas could drive the country to a commercial deficit.

 

The global mean for refining capacity is 133,000 b/d per country, an output that could be surpassed by Dos Bocas refinery’s estimated 340,000 b/d capacity. Yet, to reach this target, the refinery would need to operate at 100 percent capacity. While PEMEX’s six refineries have the capacity to process 1.5 million b/d together, they operate at under 40 percent of their total capacity most of the time.

 

oil industry

Even if it were to operate at full capacity, the refining market Dos Bocas is trying to address poses several challenges. For instance, oil production in the country is likely to decrease within the next 18 years. To deal with the resulting excess processing capacity, PEMEX would need to import oil for the new refinery to continue producing revenue. As Mexico progressively becomes dependent on imports to feed its current refineries, it will face competition from the 690 refineries operating worldwide; its major competitor being Jamnagar Refinery in India with a current throughput of 1.24 million b/d. Moreover, refining is the process that generates the least amount of profit in the oil supply chain. For the country to become a refining hub, a different strategy may be required.

IMCO’s suggestion is to cancel the project and explore alternate options to improve oil supply in Mexico, including investment in different parts of the supply chain, such as storage and distribution. IMCO believes the increase in renewable energy alternatives will eventually reduce demand for hydrocarbons, added to the fact that current refineries can handle any necessary increase in oil production.

 

Currently, 80 percent of Mexico’s national refined oil demand is supplied by the US. Decimated refinery infrastructure is a leading factor in the increased reliance on imported fuel. Refineries often suffer unplanned shutdowns due to a lack of electric power, steam, or hydrogen. In fact, shutdowns can cost over US$10 million a day in productivity losses.

 

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