· 6 min read
The fracking ban in Mexico: Political promises vs. reality
Despite President Andrés Manuel López Obrador’s 2018 campaign promise to ban fracking, legislative attempts between 2018 and 2020 failed, and fracking activities continued throughout his presidency. Claudia Sheinbaum reaffirmed a ban, stating that "exploitation of hydrocarbons through fracking will not be permitted." Yet, in 2025, her government allocated 12.364 billion pesos ($604 million) for fracking-related projects, contradicting earlier commitments. Mexico possesses 57% of its oil and gas technically recoverable resources in shale and other unconventional formations. At the same time, over 70% of its natural gas is imported, rising to 90% when excluding PEMEX’s internal consumption. Industry voices are advocating for fracking’s continuation. At the July 2024 Future of Energy in Mexico forum, experts from CIDE, COMENER, and Regulatory Consulting argued that PEMEX should reinvest more of its profits into exploratory activities, particularly in unconventional reservoirs. A legislative fracking ban appears unlikely in the coming years, and the economic and energy security arguments for fracking will likely drive future political and industry tensions.
PEMEX’s methane emissions and sustainability challenges
PEMEX has one of the highest methane footprints per barrel of oil in the world. As of recent data, its methane emissions are about eight times that of ExxonMobil and 83 times that of Saudi Aramco, according to local think tank Mexico Evalúa. Despite corporate promises to control methane emissions, PEMEX has struggled to do so. The company has increased gas flaring and venting over the past decade, which could threaten Mexico's goal of achieving net-zero emissions by 2050. One of the most significant methane leaks occurred in April 2024 at a plant in Minatitlán, where a massive plume released more than 16 tonnes of methane per hour into the atmosphere. PEMEX has aligned with global initiatives such as the Global Methane Pledge and the Oil and Gas Climate Initiative (OGCI), pledging to cut methane emissions by 30% by 2030 and achieve zero routine gas flaring by the same year.
Fracking and oil production trends
PEMEX's fracking-related spending increased by 200% in 2022 but was cut by 50% in 2023, with fracked oil still making up approximately 10% of total production. By 2023, PEMEX had utilized 55% of allocated resources for fracking projects. The Aceite Terciario del Golfo (ATG) project, aimed at exploiting hydrocarbons in the Chicontepec Paleocanal, has seen extensive use of fracking. Seventy-six percent of the 1,323 wells drilled by 2010 were fractured using fracking. Over its 28-year project, PEMEX plans to drill 3,395 wells and expects significant oil and gas production. The ATG project has experienced repeated overspending, with major overages recorded in 2018, 2019, and 2022. The budget for fracking-related expenses has fluctuated, showing a tendency to overspend.
PEMEX’s debt and financial struggles
PEMEX is one of the most indebted oil companies globally, with over $100 billion in liabilities, representing 5.6% of Mexico’s GDP. The company has faced increasing borrowing costs due to energy transition risks, while oil production has halved since 2010. In 2024, the Mexican government allocated $8.7 billion, or 0.6% of Mexico's GDP, to cover PEMEX’s debt obligations. Between 2019 and 2023, the government provided $45 billion in direct financial support to keep PEMEX afloat. The company remains a net fiscal burden, facing risks of defaulting on its debt with potentially severe economic repercussions for Mexico’s public finances. PEMEX’s 2024 Sustainability Plan aims to cut methane emissions by 30% by 2030 and reduce routine gas flaring to zero, but it does not outline a clear financial strategy to achieve these goals.
Can PEMEX issue a sustainability-linked bond to halt fracking?
PEMEX is seeking financing for its 2024 Sustainability Plan and is exploring the issuance of a Sustainability-Linked Bond (SLB). The company commits to halting new fracking activities and issues a Contingent Resilience-Linked (CORL) bond type with credit enhancement from the Inter-American Development Bank (IDB) to attract private capital and reduce the cost of capital. The goal is to finance methane reduction projects through the SLB. Under this framework, PEMEX would aim to reduce methane emissions from fracked oil production by 30% by 2030, as it is stated in their 2024 Sustainability Report.
Structuring the sustainability-linked bond
The proposed bond would have a 10-year maturity with a step-down structure. It could be issued in U.S. dollars, euros, or Mexican pesos, depending on investor interest and PEMEX’s currency risk strategy. The initial coupon rate would be set at 10% fixed, reflecting PEMEX’s recent borrowing rates, with a potential step-down if PEMEX achieves its sustainability performance targets. IDB would provide credit enhancement by guaranteeing higher recovery rates if PEMEX defaults, thereby attracting a broader investor base. The expected investor group includes private investors and development finance institutions (DFIs).
Potential investments for methane reduction
The funds raised through the SLB would be allocated to achieving PEMEX’s goal of a 30% reduction in methane emissions by 2030. Key initiatives include implementing advanced technologies for detecting and measuring methane leaks, developing a digital repository to quantify emissions at the facility level, and reducing routine flaring by upgrading equipment. By 2030, PEMEX aims to abate over 5 million metric tons of CO₂ equivalent per year, requiring capital expenditures of $30-50 million. Other initiatives include improving energy efficiency and reducing combustion emissions through equipment upgrades, with an estimated CAPEX of $350-400 million.
The role of public development banks
Mexican Public Development Banks such as Nacional Financiera (NAFIN), Banco Nacional de Comercio Exterior (Bancomext), and Banco Nacional de Obras y Servicios Públicos (Banobras) have historically supported PEMEX by providing concessional financing. These banks could play a key role in supporting the bond issuance by offering loans with favorable terms, providing technical assistance, and advocating for policies that promote the energy transition.
Financial and market implications
If PEMEX achieves its sustainability targets, the bond’s coupon rate could decrease by 0.5% after five years, lowering its cost of capital. Credit enhancement from IDB could improve PEMEX’s bond rating from B3/B+ to BBB, increasing its market attractiveness. Initial pricing for the bond, assuming a B3/B+ rating, would be around $98.89, with an expected recovery rate of 40%. If the credit rating improves, the bond price could rise to $104.99 due to higher recovery expectations.
Conclusion
A Sustainability-Linked Bond linked to halting fracking could provide PEMEX with a credible pathway to finance its sustainability commitments while improving its financial stability. By leveraging credit enhancement mechanisms and development finance institutions, PEMEX could attract private capital, reduce its borrowing costs, and demonstrate a tangible commitment to climate goals. However, the political and industry tensions surrounding fracking in Mexico, along with PEMEX’s financial instability, may challenge the implementation of such an instrument. The success of this approach will depend on PEMEX’s ability to deliver on its sustainability targets, investor confidence, and broader regulatory support for clean energy investments in Mexico.
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