Pemex and the Energy Transition: Timely Responses to Growing Threats
The energy transition requires timely and effective responses to ensure a sustainable future for everyone.
Key messages
- An energy transition that progressively phases out fossil fuels is needed to avoid climate catastrophe. Nonetheless, such a transition will harm oil-producing countries and their state-owned businesses, such as Mexico and Pemex. In the International Energy Agency’s Announced Pledges Scenario, an estimated USD 10 billion of Pemex investments would not break even. This would harm Mexican society: government revenue would fall, and Mexican businesses in the oil industry, such as those in the states of Campeche and Tabasco, would suffer.
- The energy transition is increasingly likely to result in a progressive and lasting decrease in global demand for oil. Although Mexico’s domestic oil market is significant, were Pemex to produce only to meet domestic demand, this would not sufficiently protect it or Mexico from the fall in global export demand.
- The energy transition may exacerbate what is already a difficult financial situation for Pemex. It is the world’s most indebted state oil company, with high costs in its refinery system, its labor and pension commitments, and several upstream projects. These challenges weaken the company’s position vis-à-vis the impacts of the energy transition.
- Oil extraction in Mexico has decreased over time. Despite substantial government financial support, Pemex has been unable to reverse the significant downward trend, and this is unlikely to radically change.
- Without sufficient profits, Pemex’s debt will grow. Its creditors have thus far been willing to loan it money, expecting continued government support. However, as more creditors worry about energy transition risk and decarbonize their investments, such willingness to lend is reducing. Interest rates are already rising for Pemex and likely also to increase for the Mexican government. This trend will make debt costs prohibitive for the company, trigger a spiraling of financial problems and increase the costs of government support.
The global energy transition is necessary to avoid the worst impacts of the climate crisis. However, it also brings risks for fossil fuel producer countries and national oil companies (NOCs), such as Mexico and Petróleos Mexicanos (Pemex). The International Energy Agency (IEA) estimates that if governments around the world meet the climate commitments they have set, global demand for crude oil will drop by half by 2050. This won’t be sufficient to meet the targets in the Paris Agreement, but it is concerning for oil companies and oil-producing governments.
The energy transition comes at a time when Pemex already faces challenges. Its oil production has fallen by nearly half since 2010. As a result, Mexico is today a net importer of oil products. To boost its “energy sovereignty” as defined by the Andrés Manuel López Obrador administration, and to ensure a diversified and secure oil supply, Pemex has invested significant resources in its national refinery system. The company also carries important financial labor liabilities linked to funds committed to its workers’ pensions. Considered the most deeply indebted oil company in the world, Pemex stays afloat because of substantial government support. Pemex’s debt exceeds USD 100 billion, equivalent to 5.6 percent of Mexico’s gross domestic product (GDP) for 2023.
On top of this, a significant portion of the government’s revenue comes from oil revenue. In 2023, oil revenue accounted for 15 percent of its total budgeted income. Of this total, 10 percentage points (MXN 736.56 billion) came from Pemex revenue. If we include the contribution Pemex makes to the Mexican Oil Fund, Pemex’scontribution to the country’s 2023 budget revenue is 22 percent. Nonetheless, as this report will explain, Pemex itself has reabsorbed a large portion of this contribution through financial support from the government.
These factors put Pemex in a difficult bind in facing the global energy transition. The response from Pemex and the government will be crucial for the sustainability of this state-owned enterprise. The response will equally be critical for Mexico’s public finances,6 its energy security, and the 520,000 people Pemex and its associated industries employ—especially in states like Campeche and Tabasco, where Pemex extracts most of its oil (50 percent and 41 percent of total company production respectively).
The decisions Mexico’s new government makes around Pemex will be pivotal, as will be proposals for how the company can face the enormous challenges ahead, including the energy transition risks the new administration faces. Mexico’s change of government in October 2024 represents an opportunity for citizens to demand a commitment from their political leaders to focus on the challenges Pemex faces in the context of the transition and on progress toward the country’s energy and decarbonization goals.
This report contributes to an understanding of the current situation and recommends three main focuses of discussion and action for Pemex, the Mexican government and policy-makers
