Lack of Cost Transparency Overshadows Opening of Mexico’s Dos Bocas Refinery

Doubts over the provenance of funds, omissions in public accounts, the lack of an investment portfolio and inconsistencies uncovered by auditors have clouded the opening of AMLO’s flagship energy project

Mexico's President Andrés Manuel López Obrador (center) and Energy Minister Rocío Nahle )far left) said in recent days that the budget ceiling for the Dos Bocas refinery is $12 billion, as approved by Pemex's board of directors. (Courtesy: Mexican Government)
July 01, 2022 | 05:25 PM
Reading time: 7 min.

Mexico City — More gasoline and diesel refined in Mexico without the need to import the fuels was Mexican President Andrés Manuel López Obrador’s (AMLO) justification to build the Dos Bocas refinery in his home state. To build it, however, his administration chose a path that has been overshadowed by cost overruns and a lack of budget transparency.

AMLO inaugurated part of the Olmeca refinery on Friday, and which is one of the three mega infrastructure projects he promised to carry out during his six-year term, in the tourism, aviation and energy sectors.

The refinery, which has been under construction for three years, has raised doubts however regarding its real cost, despite the fact that every Monday, during the president’s morning conference, he has shown videos of the progress of the project located in the port of Paraíso, in the southeastern state of Tabasco.

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Mexico’s Energy Minister Rocío Nahle was placed in charge of the project that has yet to convince Mexican public opinion due to its austere budget, while state oil company Pemex is in charge of running the country’s other six refineries and could have headed the project through a subsidiary.

However, Mexico’s national energy policy has always been managed by the ministry.

One of AMLO’s major boasts is his government’s fight against corruption, and yet the financing of the Dos Bocas refinery has used a system of transparency that has served to cloud the process and making it difficult to trace the financing, peso by peso, for the project’s budget, and which AMLO often refers to as “the people’s money”.

The financing process begins with the transfer of funds from the Finance Ministry, which passes the public money to the Energy Ministry, and which in turn transfers the resources to Pemex’s refining subsidiary, Pemex Transformación Industrial, known as Pemex TRI.

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The money then ends up in the indirect subsidiary, Pemex Transformación Industrial Infraestructura de Desarrollo S.A. de C.V. (PTI-ID), formerly known as PMI Infraestructura y Desarrollo, through a capital contribution.

This indirect subsidiary is in charge of building the refinery, but is not required to publicly report its results, as Pemex TRI would be, even though the latter is in charge of operating the six refineries in the country.

This route clouds the task of tracing the resources and makes it easier for Pemex and the companies involved in the construction work to omit explanations about modifications and increases in the expenditure on the project.

In May 2019, Pemex’s board of directors, which is chaired by Nahle, instructed Pemex TRI to present a physical and financial evaluation of the project, and deliver quarterly reports, but those reports are not made public.

Nahle presents a weekly report every Monday during the president’s press conference, but does so without giving an explanation of the percentage of the budget spent, or of the physical progress of the works.

Bloomberg Línea’s requests for comment from the Energy Ministry and Pemex regarding the project’s budget have not received a response.

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Dos Bocas: A history of cost overruns

In 2017, a year before the presidential election that brought him to office, and while still a presidential candidate, AMLO and his energy team pledged to build two refineries at $6 billion each in the event that he were elected. Upon winning the election on July 1, 2018, the projected expenditure rose to $8 billion, although only for one refinery, Dos Bocas.

In October 2020, Pemex announced that the refinery would cost $900 million more. And then the figure kept rising.

In April 2022, the oil company, currently headed by agronomist Octavio Romero Oropeza, acknowledged a 13% cost increase, pushing the overall cost to $9.1 billion (182 billion pesos).

Bloomberg News stated however that the work would likely cost up to $18 billion. AMLO called that figure an exaggeration, but acknowledged a further increase of 30%, or $4 billion.

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AMLO and Nahle both stated recently that the investment ceiling for Dos Bocas, and which has been approved by Pemex’s board of directors, is $12 billion, but the overall cost of the project is already heading toward $13.6 billion.

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Dos Bocas: Four flashpoints of a lack of transparency

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AMLO often says that his government has nothing to hide when talking about the budget for all the priority programs of his six-year term, however, in the case of Dos Bocas, the project has been marked by a lack of transparency.

Spending on the refinery has been discretionary since the beginning of the six-year term. Three years later, the situation has not changed. The public information available is insufficient for any citizen who wants to know how their taxes are invested and to corroborate the amounts of the transfers to Pemex and the accumulated cost of the project.

1. Tracing the money trail

Once Mexico’s Congress approves the government’s expenditure budget, the Finance Ministry is in charge of transferring the budget approved for Dos Bocas to the Energy Ministry. The ministry then transfers the resources to Pemex, via its subsidiary PTI, followed by their transfer to the subsidiary PTI-ID.

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This same route is followed in the case of the federal government’s equity contributions from the budget to support the construction of the refinery.

This chain of transfers dilutes the possibility of accountability for the resources because, although it is money from the budget, when the money reaches PTI it is classified as financial investment instead of capital expenditure.

Manuel Guadarrama, public finance coordinator for the Mexican Institute for Competitiveness (IMCO), explained to Bloomberg Línea that because the budgetary resources are labeled as financial investment and not as public works financing, it is more complicated to trace the route of the resources transferred to Pemex.

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He added that since it is classified as financial investment, it is not a detectable investment for public works, even though the Mexican Government identifies the project as public works to be financed with budget resources.

2. Public accounts omissions

The government’s Public Account is the annual report of the year’s financial results, and which is key to governmental accountability in Mexico. It is the document that the Federal Auditors Office (ASF) uses to review and audit the budget of each ministry, however the energy ministry has omitted information from the report regarding the details of the project’s expenditure and physical progress.

The ministry, in charge of capitalizing Pemex, reported the spending of its financial investments from 2019 to 2021, but without detailing the Dos Bocas project. Over that period, the approved expenditure in financial investments totaled 116.25 billion pesos ($5.73 bilion), while expenditure outlay amounted to 484.74 billion pesos ($23.9 billion).

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Since the energy ministry and Pemex do not provide details of the figures, this amount is presumed to be associated with the construction of the refinery, however, it also includes the equity contributions of the federal government to Pemex for the payment of the oil company’s debt.

Another omission is related to the fact that Pemex records in the 2021 public account that between January 2019 and December 2021 it has not spent a single peso on the construction of the new refinery.

In addition, the ministry reported in its public accounts of the years 2019, 2020 and 2021 blank sheets with the legend not applicable’ appear when one wants to consult the details of the investment programs and projects under its management.

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“When one wants to see specifically the investment budget programs, we do not find disaggregated information, the investment sheet of the energy ministry literally comes up as blank, and this obviously has all the intention of hiding how much resources and what programs are involved in the project,” Guadarrama said.

3. Inexistent investment portfolio

The Finance Ministry maintains an Investment Portfolio, a registry of investment programs and projects with budgetary resources. However, Dos Bocas does not appear in portfolio.

The refinery has appeared intermittently in the portfolio since 2019, however, but in 2021 - the year in which there was the greatest progress in construction in view of the proximity of the inauguration date - the project was removed from the portfolio.

A listing in the portfolio implies transparency of a project’s technical, legal, economic and environmental feasibility studies, as well as its financing schedules, evaluations carried out, and profitability indicators, as well as georeferencing, among other data, however, none of that information appears for Dos Bocas.

The Treasury’s budget transparency website, where public works with budgetary resources underway can be geolocated, does not include information on Dos Bocas either.

4. Auditors uncover inconsistencies

In October 2021, the ASF detected multiple inconsistencies in the development of Dos Bocas by Pemex TRI and PTI-ID.

“It lacks the elements for the evaluation of expenditure, as well as to measure the degree of progress of the works, and the objectives and specific goals of the strategic project,” the auditing agency said.

The ASF also questioned the existence of unstamped invoices, the recovery of taxes, the lack of a commissioner to oversee the work, and the lack of information forthcoming from Pemex TRI.

An uncertain starting date

López Obrador and Nahle have said that the refinery will begin a six-month operational testing stage of the equipment as of July 1. However, days before the president’s announcement, Pemex confirmed to Bloomberg Línea that the refinery complex will begin operations in 2023.

Authorities assured that the seventh refinery of the state-owned giant would be ready in three years, and would refine 340,000 barrels of heavy crude oil per day. This Friday the facility will be inaugurated without processing a single barrel.

The Mexican government has also not clarified whether the Olmeca refinery, one of the government’s flagship projects, will reach full operating capacity during AMLO’s six-year term, which concludes in December 2024.

Translated from the Spanish by Adam Critchley