Mexican regulator prepares to fine Pemex for 'excessive' gas flaring at top field - sources

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TIERRA BLANCA, Mexico, May 24 (Reuters) - Mexico's energy regulator is preparing to fine state-owned Pemex for burning off vast amounts of natural gas from one of the country's largest deposits, according to five sources and documents seen by Reuters.

Neither Pemex nor the energy ministry responded to repeated requests for comment about the anticipated fine.

Petroleos Mexicanos (Pemex) committed to tapping both the natural gas and higher-value condensate from the Ixachi field in the eastern state of Veracruz after it heralded the discovery in 2017 as one of the most exciting in Mexico's history.

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But half a decade later, satellite data shows the area has become one of the world's largest sites for gas flaring - a major contributor to green house gas emissions.

The site still lacks the crucial infrastructure to commercialize the abundant gas and heavy machinery had only just started clearing the dense vegetation for construction, a Reuters visit earlier this month found.

At a distance, gas was burned off in giant roaring flames.

Despite its devastating environmental impact, energy companies routinely flare gas where it is a byproduct of oil production and infrastructure is deemed too expensive.

The practice is not illegal in Mexico when the gas is found alongside oil, as long as the energy companies abide by flaring limits agreed with the regulator.

But at the Ixachi field, the situation is different.

The gas here is not a byproduct but one of two main resources, alongside condensate, and worth about a third of the discovery's total value.

Under Mexican regulation, companies may not flare the gas they have committed to produce.

Mexico's energy regulator, Comision Nacional de Hidrocarburos (CNH) said in response to a Reuters freedom of information request related to possible Pemex violations at the Ixachi field, that it inspected the site in August.

The regulator added it has been preparing a sanction since November citing "various constitutive findings of possible non-compliance" relating to Pemex's management of the field but gave no details of the nature or timing because the investigation is ongoing.

Two sources with direct knowledge of the matter, who, like others, spoke on the condition of anonymity because the information is not public, said the fine would be for "excessively flaring a valuable and irreplaceable resource."

While they would not disclose the size of the planned fine, the two sources said it would likely be significantly higher than previous ones.

"This is an important gas field and the waste there is a clear violation," said one of the sources at the regulator. "It has gone too far."

In response to a separate Reuters freedom of information request to ascertain whether Pemex had faced previous sanctions, the regulator said it had fined Pemex in 2017 for well drilling violations under the previous government. At today's exchange rate, the fine would be worth $55,000.

Another case from 2020 under the current government also relates to violations of exploration plans; it is sealed.

Pemex executives are concerned that a possible fine would scare off bond investors, said a source at its production and exploration unit, who attended a recent internal meeting where the prospective sanction was discussed.

Pemex has previously acknowledged challenges in keeping flaring down. In a December presentation to investors, the company listed the "maintaining and refurbishing" of gas processing centers – needed to reduce flaring – as one of its ten most important areas of focus.

In first quarter results this year, the company said missing infrastructure at the Ixachi field was one of the "main reasons gas is released into the atmosphere."

Pemex does not disclose how much gas it flares at the Ixachi field. The regulator declined to disclose its own estimate.

NASA satellite images - analyzed exclusively for Reuters by scientists at the Earth Observation Group of the Colorado School of Mines - showed Pemex flared 24.9 billion cubic feet of gas in the area last year.

Nearly all of the flaring occurred at just two sites, the data showed: the Ixachi Exploratory Well I and the Perdiz Plant, a hydrocarbon separation unit built years earlier to service an adjacent field and which is unable to handle the additional volumes from the Ixachi field, according to a ministry source and another at the regulator.

Now the plant is the 10th largest flaring site worldwide, said Tamara Sparks, a researcher who analyzed the data. A year earlier, it was not even in the top 1,000.

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Reporting by Stefanie Eschenbacher in Tierra Blanca Additional reporting by Scott DiSavino in New York Editing by Stephen Eisenhammer and Marguerita Choy

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