We analyse Mexico’s O&G industry in the context of a challenging environment ahead, as the world is aiming to reduce demand for fossil fuels over the next 30 years. This path is unlikely to be trouble-free, as we are seeing in the current European energy crisis as a consequence of the Russian-Ukraine war. The expected scenario of low growth in fossil fuel demand is not the only challenge facing the O&G sector, as it will also have to reduce its emissions of greenhouse gases (GHG) in order to comply with the International Energy Agency’s (IEA) ‘stated policies scenario’ (STEPS), as the world tries to limit the increase in global temperatures to 2°C. In 2020, the O&G industry was the highest producer of methane in the US, according to the country’s Environmental Protection Agency (EPA).
LatAm’s national oil companies (NOC) are important in providing gasoline for domestic consumption and exports and generating wealth for their governments. Pemex is by far the largest provider of refined products (796Mboed in 2Q22) and crude oil (1,792Mboed in 2Q22) and the largest oil exporter (1,006Mboed in 2Q22) in Mexico. However, it is also one of the largest producers of methane gases in the region, according to sustainability reports provided by the largest NOCs in the region. In our opinion, the goal of significantly reducing methane flaring and emissions of other GHGs is also dependent on Pemex maintaining access to the credit market, since we believe that the pool of investors willing to invest in high-emission firms is likely to shrink. In line with the Paris Agreement, Mexico has a ‘nationally determined contribution’ (NDC) to reduce GHG emissions by 25% by 2030.
However, in 2021 Pemex’s carbon dioxide equivalent (CO2e) emissions reached 70.5tMt, a record in the history of the company. The Mexican NOC has therefore increased capex in order to reduce GHG. In 2021, Pemex spent MXN1,057.4mn (USD50mn) on environmental projects, compared with MXN468.7mn (USD20mn) in 2020. For 2022, Pemex has budgeted MXN2,348.1mn (USD100mn) for environmental projects and other expenditure, including modernising installations, implementing systems and mechanisms to monitor and control atmospheric pollution, acquiring equipment to address contingencies related to oil and gas spills, expanding water effluent systems, restoring and reforesting affected areas, and engaging in environmental investigations and environmental audits. In 2023-24 it will invest as much as USD2.2bn to reduce gas flaring – a high level of investment compared with the past three years.
Time will tell, hopefully before 2025, if the investments made by Pemex will be enough to reduce GHG emissions significantly and if the credit market will be willing to keep the door open to this NOC for further debt refinancing – Pemex is currently the most indebted company in the region.