Pemex’s Flaring Problem Not Going Away

Whether Petróleos Mexicanos (Pemex) admits it, the state-owned company still has a flaring problem.

Details were confirmed in a July 2023 study by the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs following an earlier report by Hart Energy highlighting Pemex’s flaring problem.

RELATED: US Reduces Flaring and Flaring Intensity, The World Bank Says

According to data from the World Bank, Mexico flared the world’s seventh-largest gas volumes in 2022, and data from the Paris-based International Energy Agency (IEA) ranked the country as the 10th-largest methane emitter in 2021.

Despite the negative economic and environmental impacts of flaring, Pemex continues with the practice due to a political mandate from president Andrés Manuel López Obrador favoring production and refining to help Mexico achieve energy self-sufficiency. The country also suffers from a lack of economic incentives and lax regulatory policies.

The country’s 2024 presidential election means reforms are unlikely or that Pemex will change direction on flaring this year or next.

RELATED: Pemex’s Glaring Gas Flaring Problem

Energy self-sufficiency political mandate

Pemex’s flaring problem has persisted through prior Mexican governments, including one that heavily promoted energy sector reforms.

“Pemex flared around 5.8% of its natural gas production during the administration of Enrique Peña Nieto (2013–2018), but the share flared under López Obrador’s watch more than doubled to 12.4%, peaking at 16.5% in 2021,” the Columbia University report said. “Although flaring dropped from 620 MMcf/d in 2021 to 449 MMcf/d in 2022, the latter volume is still almost 50% higher than that of 2019.”

“Because Pemex’s finances are intertwined with the state, investing in flaring mitigation infrastructure would have to follow from a shift in the government’s priorities—a shift that doesn’t seem likely given the company’s financial woes and with Mexico’s next presidential elections only about a year away,” Columbia University research scholar Adrian Duhalt wrote in the report.

Beyond the environmental progress made from reduced flaring, capturing the volumes could give Pemex a financial boost, as it currently relies heavily on piped-gas imports from the U.S.

RELATED: US-Mexico Energy Trade Reaches Record $81.9 Billion in 2022

Lack of government oversight

Mexico’s low tax collection levels also have an impact on Pemex’s ability to limit flaring since policy makers rely heavily on the company for tax revenues.

Tax collections averaged 17.9% of GDP in 2020, compared to 12.1% in 1990. That compares to an average 21.9% in the Latin America and Caribbean region and 33.5% among Organization for Economic Co-operation and Development countries, according to data in the report.

The average share of Pemex contributions to public revenues between 1990 and1994 was 22%; Between 1995 and 2000 they were 26.6%; from 2001 to 2006, 30.3%; and from 2007 to 2012, 37.3%. Contributions to revenue peaked at 44% in 2008.

“Simply put, these figures reveal that Mexico has become reliant on Pemex filling gaps in the government’s budget—a practice that has not faded,” the report said.

Additionally, Mexico’s oil and gas sector regulator, the National Commission of Hydrocarbons, which imposed fines on Pemex in the past, has not been able to discourage the state-owned producer from flaring.

Pemex indebtedness, financial factors

Pemex’s inability to reduce flaring was impacted by Mexico’s above ground actions, which indirectly impacted the company’s financial abilities to combat the issue.

“A hurdle that may prevent Pemex from addressing its gas flaring issue is related to its huge debt. Pemex’s financial standing cannot be delinked from the fact that its income plays a central role in government revenues,” the report said. “For Pemex, flaring is cheaper than ‘investing in infrastructure to capture, process and transport natural gas for other uses.”

With Pemex’s debt remaining slightly above $100 billion, it’s the largest debt load of any of the other Latin America and Caribbean region’s national oil companies, including Argentina’s YPF SA, Brazil’s Petrobras and Colombia’s Ecopetrol.

A number of domestic factors, “such as technical failures at processing plants, accidents and insufficient infrastructure for capturing natural gas on site, help explain why flaring has increased since 2019,” according to the report. “Pemex has also recognized that, due to the complexity of maintaining production levels at mature fields (alongside other expenses), its natural gas production costs more than doubled since 2010.”