At a time when other large oil companies in the region and elsewhere seek to cut the carbon they emit, why has Pemex lagged behind its peers? We think a combination of government policy & structural factors help explain its lack of progress on decarbonisation – and the absence of a market response.
In general, there appears to be no major push by the Mexican state to promote low-carbon technologies. For example, the 32 projects included in President López Obrador’s four-year Infrastructure Plan include multiple carbon-intensive investments, while no investment is planned in renewable energy. Similarly, recent moves to implement a new regulatory framework for the power sector would give the state-owned utility, CFE, a monopoly over supply, crowd out private investment into renewables projects and boost demand from its fuel oil generation plants.
At the same time, Pemex continues to benefit from generous government capital injections to make up for dwindling productivity, as well as tax breaks and debt support – totalling $9.5 billion in 2021 alone.
This blending of corporate & sovereign balance sheets creates perverse market incentives. The more the company struggles, the more support it receives from the state, which – at least in the short-term – anchors its financial performance and papers over its poor decarbonisation record. But Pemex’s large outstanding debt and broad inclusion in major emerging market bond indices means it forms an integral part of many investors’ portfolios; excluding it could dent fund performance. This is likely one of the main reasons why, despite no shortage of calls for greater transparency and progress on decarbonisation, we’ve seen little evidence of ESG factors influencing investor allocations to Pemex – and why, more worryingly, investors appear to be under-pricing climate risk at the firm.