In late 2016, to avoid racking up fines for burning too much natural gas, Mexico’s state oil company Pemex struck a deal with the regulator to invest over $3 billion to fix its flaring problem at its most productive set of oil fields.
But five years on, the little-publicized project has been abandoned, according to three sources with direct knowledge of the matter, and the environmental toll at the Ku-Maloob-Zaap offshore fields in the Gulf of Mexico continues to rise.
The broken commitment, which has not previously been reported, highlights the struggles of Mexico’s oil regulator to rein in Pemex, a powerful state monopoly that is always closely connected to the government.
It also shows how, while countries like Colombia, Kazakhstan, and Nigeria have cut flaring by investing in infrastructure and strictly enforcing penalties, Mexico is heading in the opposite direction, as Reuters has reported.
Pemex opted to drop the plan halfway through completion, the three sources said, as low gas prices made it less economically attractive and political priorities shifted to raising oil output.
The decision was made despite the environmental cost and threat of regulator fines.
“The fines are not an adequate incentive for a state company to change its way of doing things,” said Rosanety Barrios, a former energy ministry official who designed and coordinated policies for the creation of gas and oil products markets.
For decades, companies routinely burnt off the gas – whose main component is methane – that came to the surface as a byproduct of oil production and exploration. It was cheaper than investing in infrastructure to capture and process it.
But growing fears about climate change have made that unpalatable.
Mexico – the world’s eighth biggest flare – is under increasing pressure, including from the United States, to cut gas flaring and methane emissions, which are set to worsen as fields age further.
Pemex development plans and legal records, as well as previously unreported internal assessments made by the regulator, and confidential data, show the enormous waste of resources following Pemex’s decision to not complete the works on Ku-Maloob-Zaap – which produces nearly 40% of national oil output.
Pemex, the energy ministry and the regulator did not respond to requests for comment. The oil company has in recent quarterly reports stressed it was making efforts to clean up its operations and bring down flaring and other waste.
Pemex broke no laws by not following through with the investment pledge and there were no penalties foreseen under the terms of the deal. But the plan would have been an important step towards operating in a more environmentally responsible manner.
The plan stalled at the end of the term of President Andres Manuel Lopez Obrador’s predecessor, the sources said and was never resumed even as environmental concerns rose.
In a bid to make Mexico self-sufficient, resource nationalist Lopez Obrador has vowed to help Pemex reverse a decade of declining production – even if it results in higher emissions.
Energy experts said the discarded investment plan also shows how Pemex has struggled to understand the rise of the environmental movement – and how important it would become to its own investors.
“Pemex lags behind its peers in terms of climate ambitions: obviously the listed oil majors but also many national oil companies,” said Marie-Sybille Connan, a senior ESG analyst at asset manager Allianz Global Investors.
“Pemex operations are in clear need of investment in order to be more efficient and reduce their greenhouse gas emissions.”
Earlier this year, under increasing international criticism, Lopez Obrador said Pemex would invest $2 billion to improve infrastructure to reduce flaring and methane emissions. It has yet to publish details on how the money will be spent, over what time period, and where it would come from.
Source: El Financiero