By Jessica Resnick-Ault and David Alire Garcia
NEW YORK/MEXICO CITY (Reuters) - Sweeping energy reforms have turned Mexico into one of the world's most attractive offshore prospects, but one segment is getting no love from U.S. investors: the nation's aging refineries.
Efforts by Mexico's state-owned oil company Pemex to attract about $5 billion in capital to help modernize its two largest refineries so far have proved futile, according to two people familiar with the process who declined to be named because they were not authorized to speak publicly.
The company is seeking a joint venture partner for its Salina Cruz refinery on the West Coast. It's also looking for an investor to complete construction of a coking unit to process heavy crude at its Tula refinery just north of Mexico's capital.
Among those to rebuff overtures from Pemex over the past year are U.S. refining giants Valero Energy Corp (N:VLO) and Tesoro Corp (N:TSO), the people said.
Valero and Tesoro declined to comment. Those and other companies were deterred by operational, political and market concerns, the people said.
Pemex officials said they "categorically reject" the notion that they are struggling to find investors.
"There has been interest," a company spokesman said Thursday. "We've had talks with many companies whose names we can't reveal."
Pemex has said publicly it's seeking investment from Korean, Japanese and Chinese firms. The company hired Bank of America (NYSE:BAC) last year to seek potential partners.
The refining sector has contributed buckets of red ink to Pemex's bottom line. Its six domestic refineries have accumulated annual operating losses of about $5 billion in recent years. Government-set fuel prices, a spate of accidents and other non-scheduled stoppages have cut deeply into margins.
For years, Pemex prioritized investment in profitable drilling projects, neglecting other areas. As a result, refineries built decades ago to process light, sweet crude from Mexico's shallower waters can't efficiently process heavy oil from fields currently in production.
The upshot: Today Mexico imports more than 60 percent of its refined gasoline and diesel from the United States, while its own refineries operate at about half capacity.
The mismatch would seem a prime business opportunity. Instead Pemex’s refineries have become a virtual third rail for investors.
Some potential partners are leery of the sums needed to bring the aging facilities up to standard, people familiar with the situation said. Then there's the bloated refinery workforce whose jobs are protected by a strong union. On average, Pemex uses about 3,000 full-time workers to operate each refinery. That's triple the number found at U.S. facilities with similar sized operations, according to figures from Pemex and U.S. refiners.
"The refineries aren't competitive. Their product slate doesn't meet the demand of the country," said Dave Hackett, an energy consultant at Stillwater Associates in California.
Pemex's refineries could be the biggest challenge yet for Jose Antonio Gonzalez Anaya, who was brought in as chief executive last year to lure investment to Mexico's most important company. The oil giant has struggled in recent years with slumping production, falling oil prices and rising debt.
Gonzalez Anaya, a polished, American-educated technocrat, has scored some early wins. He oversaw cost cuts of more $5 billion last year and has hustled to attract exploration and production partnerships; the first one covering a deep water Gulf block was inked in February between Pemex, U.S. oil major Chevron (N:CVX) and Japan's Inpex (T:1605).
On Wednesday, Pemex reported its first quarterly profit in five years, gaining some $4.7 billion during the January-March period.
Overall, the outlook is bullish for Mexico's oil industry. Reforms to Mexico's constitution four years ago ended Pemex's nearly 80-year monopoly and allowed the government-controlled company to form its first-ever equity partnerships. The changes also permitted private oil companies to operate fields on their own. Major oil companies including Exxon Mobil Corp (N:XOM), Total SA (PA:TOTF) and Statoil (OL:STL) have snagged offshore leases at auction.
Overhauling Mexico's refining sector, however, has proven daunting. Unlike offshore production, where new rigs can be brought in and operators can largely call their own shots, the refineries come with baggage. Potential investors must contend with the existing infrastructure, much of it dating back to the 1970s. Then there are entrenched relationships with local government officials and union leaders.
Lowering a massive coking drum into place during an event at the Tula facility last month, Pemex chief Gonzalez Anaya was accompanied, not by foreign investors, but by Carlos Romero Deschamps, head of the powerful oil workers union and a senator with the ruling Institutional Revolutionary Party, or PRI, of President Enrique Pena Nieto.
If refinery investors "are forced to follow exactly how Pemex has worked in the past, obviously no one will enter," said Carlos Petersen, an analyst covering Latin America for Eurasia Group.
Mexico's political climate is another concern. By law, Pena Nieto, who led the oil reform, is limited to a single six-year term that ends next year. The government's decision to open its oil industry to outside producers and sell off some Pemex assets was vehemently opposed by many Mexicans and left-leaning politicians. Among them is Andres Manuel Lopez Obrador, a populist who's the current front-runner for the 2018 presidential race.
In the meantime, Pemex is moving forward - alone - to finance some of its refining needs. Badly in need of more capacity to process heavy crude, Pemex broke ground in 2013 on the coker project at its Tula refinery.
The company will fund half the $2.2-billion cost for the first phase while it seeks partners to help complete the facility, Pemex's top downstream executive Carlos Murrieta told analysts on a conference call earlier this week. He put the final price tag at $4.5 billion and projected the plant would be ready in 2022.
Houston oil analyst Jake Fuller is dubious that other new Pemex refinery projects will follow anytime soon.
"It would be a monumental shift," said Fuller, downstream expert at IHS.