Jorge Pedroza
Director, Energy Sector
PwC Mexico

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Energy Transition in Mexico: Risks, Opportunities for Oil and Gas

By Jorge Pedroza | Thu, 07/21/2022 - 13:00

According to the International Energy Agency (IEA), the world will require a US$4 trillion annual investment by 2030 in clean energy and infrastructure if we are going to achieve the global warming limit goal of 1.5°C, according to the Net Zero Scenario, published by the IEA on May 17, 2021[1].

The IEA considers in its Outlook 2021 three scenarios: The Net Zero Emissions by 2050 (NZE), which aims to achieve net-zero CO2 emissions by 2050; the Announced Pledges Scenario (APS), where several nations made a long-term net-zero commitment and include its Nationally Determined Contributions (NDCs); the Stated Policies Scenario (STEPS), which consists of the government’s public policies and its sector-by-sector assessments, and finally, the Sustainable Development Scenario (SDS), based on the United Nations Sustainable Development Goals, which contemplates net-zero emissions by 2070.

In the coming years, the world will require more energy, which represents a significant challenge for oil and gas companies, a majority of which have started changing their core business. The world will not change its consuming habits overnight but there is a strong message from society to be more environmentally responsible.

Since the electricity sector is responsible for 36 percent of the global CO2 emissions, which is more than any other sector, a decrease of 10 percent is expected in 2030 under STEPS, 20 percent under APS, and 60 percent under NZE. In the case of Mexico, according to the General Climate Change Law[2], in 2024, the goal of at least 35 percent of energy from clean sources should be met. According to the Mexican Ministry of Energy,[3] only 31 percent will be achieved.

Some actions by oil and gas companies include changing the mindset to be more sustainable in their current processes and finding opportunities to diversify their business and look for non-hydrocarbon-based activities. Also, they have been developing increasingly effective and robust corporate governance strategies that focus on health and safety aspects, environmental responsibility, and enhancement of their internal controls to be more reliable regarding ESG indicators.

All changes ponder the positive impacts of innovation, which let oil and gas companies develop integrated energy sources and supply capacities. Finding ways to upgrade infrastructure to optimize products for refining and chemical uses according to growing demand from consumers based in a new economy (after COVID-19), and finally, promoting circular economies with the improvement of energy efficiency in its current process.

Oil and gas companies can integrate into their current business sources of income related to the energy transition, considering clean energy generation based on solar, wind, and thermal (among others) and optimizing infrastructure dedicated to producing, transporting, and storing natural gas, hydrogen, and biomass.

Being in the oil and gas sector has never been as challenging as it is today. All oil and gas companies assess climate risk as extreme weather conditions affecting their operations and compromising safety and reputation. Also, the climate risk affects the supply and demand of energy, which ultimately impacts prices. To face that kind of challenge it is crucial to have reliable risk management, which turns risk into opportunities, or at least to be well prepared when threats materialize.

In the case of Mexico, most of the international oil and gas companies that operate in the region, implement their energy transition strategy consistently according to their global objectives. Nevertheless, only some companies lead the energy sector in Mexico according to their size and diversified operations. All efforts to meet the energy transition in the country depend on the strategies of both companies.

In November 2021, the Ministry of Environment and Natural Resources published the Special Program on Climate Change 2021-2024 (SPCC), which specifies under policy 2.4 three actions to mitigate CO2 emissions, which are:

  1. Mitigate emissions from O&G activities,
  2. Report compliance of the Methane Regulation's Compliance Program, and
  3. Assign to ASEA (Agency for Safety, Energy, and Environment) to include in the applicable regulation the requirements and specifications for adopting best practices regarding climate change.

Mexican companies specify that they will optimize the use of their productive infrastructure, through actions to take advantage of all their energy processes, the use of new materials and the automation of production processes as well as their logistical and commercial capacities.

In conclusion, the scenarios are not feasible if there is insufficient investment from the private sector. Also, Mexican companies will require high capital levels to achieve the SPCC policy. The authorities should keep the dialogue open with investors to develop clear and assertive long-term public policies prioritizing the energy transition.

 

[1] IEA, World Energy Outlook 2021, December 2021, https://www.iea.org/reports/world-energy-outlook-2021.

[2] Article Third, item e) https://www.diputados.gob.mx/LeyesBiblio/pdf/LGCC.pdf

[3] Ministry of Energy SENER, National Electric System Development Program PRODESEN 2021 - 2035

Photo by:   Jorge Pedroza