ESG is the biggest challenge for PEMEX
Corporate capitalism focused on the capital owners (shareholders) has been challenged for many years by the concept of capitalism focused on other interested parties involved in the business (stakeholders). In the first case, a company’s management must respond exclusively to the interests of the shareholders. In contrast, in the second case, the top management must also take care of the interests of the community, employees, and the environment, among others. Stakeholder capitalism is well reflected in the ESG methodology for measuring the company’s value, whereby its performance is not only measured in financial terms but also in terms of its environmental (E), social responsibility (S), and governance (G) impacts. In this one-pager, we look at PEMEX’s ESG performance and show the urgency for the State-Owned Productive Enterprise to adapt to change. Otherwise, there are significant ESG risks that directly impact its financial cost.
ESG Risks | Sustainalytics
The methodology used by Sustainalytics, which allows investors to understand the material financial risks related to ESG, is shown on the right. According to this rating agency, PEMEX presents severe ESG risk with a score of 64.1, which is approximately twice as high as the best-evaluated companies such as TotalEnergies, REPSOL, EQUINOR, BP or SHELL.
Sustainalytics’ methodology assesses a company’s ESG risks along two dimensions: 1) ESG risk exposure and 2) Management implements actions to mitigate such risks. Thus, a company committed to ESG principles must improve its Exposure by modifying its corporate purpose and adapting it toward ESG objectives. It must also have an Administration (Board and Management) that represents the interests of different stakeholders aligned with ESG principles. For the oil sector, it is also essential that its administration has the right profile for the energy transition.
According to Sustainalytics, PEMEX has HIGH ESG risk exposure and WEAK ESG risk Management. According to the 13 companies analyzed, only Petrochina, PDVSA and PEMEX have SEVERE category events. For PEMEX these events correspond to the categories of (1) community relations and (2) occupational health & safety.
Management is essential to improve ESG in the oil industry
The hydrocarbon sector is highly exposed to climate change risk (see February 2022 one-pager). Therefore most of the international oil companies are assuming commitments to reduce methane emissions by 30% and Net-Zero by 2030 and 2050, respectively. In addition to the fact that the global financial sector would increase the financing cost for companies that do not comply with these commitments, oil companies would be left holding many stranded assets (mainly heavy oil fields, tar sands, and any other assets that do not contribute to improving ESG indicators).
As a result, in recent years, we have seen an increase in the transformation of oil companies into energy companies, which is not only limited to rebranding (Statoil~Equinor, British Petroleum~Beyond Petroleum, TOTAL~TotalEnergies), but in some cases, we see a radical change towards a renewable and emission-free future. Therefore, it is imperative that PEMEX changes its corporate purpose and adopts a strategy with which it can move towards the energy transition. Otherwise, it will be extinguished, like any other oil company that depends on international financing.
When assessing a company’s environmental performance, especially its greenhouse gas emissions (which represent the greatest risk to humanity due to their global warming potential), an oil company must ensure to:
- Allocate capital and Research and Development (R&D) expenditures to address climate change risk.
- Have a business model that involves aradical change towards a sustainable future (renewable energies and emissions reduction).
- Have an experienced board of directors and management to move towards the energy transition effectively.
- Climate change risk is an integral part of its business strategy.
- Be committed to Net-Zero or a significant reduction of its emissions. Specifically, companies must take actions to reduce emissions in Scope 1: Generation of own emissions. Scope 2: Emissions from energy purchased from someone else. Scope 3: Indirect emissions in the company’s value chain.
The oil industry will be one of the most affected by the transition to an ESG economy. In addition to Sustainalytics, other ESG risk rating agencies provide detailed information to the investing community (MSCI and S&P Global Trucost), who will make decisions considering ESG objectives. PEMEX is one of the worst-rated oil companies and currently has more than 110 billion dollars in debt, which positions it as perhaps the oil company with the greatest exposure to ESG risk. The first balance will occur in 2030 when the financial sector reviews those oil companies that have managed to reduce their methane emissions by 30%, and in 2050 those that have achieved a net-zero emissions balance. PEMEX should already be taking strong measures to mitigate its emissions.
1. Ultra emission on the Zaap-C platform (December 2021)
Using information obtained by the WorldView-3 and Landsat 8 satellites, scientists from the Polytechnic University of Valencia, the Environmental Defense Fund (EDF), and the University of Utrecht detected a 17-day event classified as an ultra-emission. The volume of methane emitted is estimated at 3.36 million tons of CO2 equivalent.
2. Increase in Ixachi flaring
IXACHI is one of PEMEX’s most important producing fields. However, its accelerated exploitation has caused IXACHI-1DL and IXACHI-2001EXP, appraisal and exploration wells, respectively, to start production even without being included in a development plan necessary to ensure the engineering for the field’s hydrocarbon management. The lack of infrastructure for the management of sour gas at the Perdiz separation battery, at the Papán measurement and control regulation station, and at the Playuela sales point has resulted, since mid-2020, in the flaring of gas and condensates improperly because, being a non-associated gas field, flaring is not allowed and doing so results in patrimonial damage to the Nation. As of May 2022, production from these two wells represented 18% of the IXACHI field production.
3. PEMEX emissions
The emissions reported by PEMEX in its 2020 sustainability report are estimates based on calculations and application of emissions factors. However, these methodologies usually do not provide an accurate diagnosis and process improvement. PEMEX urgently needs to start measuring methane directly at its facilities.
Talanza Group is committed to supporting the oil industry in reducing its emissions. We are pioneers in Mexico in the detection and quantification of methane emissions, authorized third parties of the ASEA for methane, and international consultants in methane emissions regulation.