According to media reports, Mexico's energy regulator is preparing to fine state-owned oil company, Pemex. This is for excessive faring of natural gas at Ixachi field. As such, we believe the urgency to develop additional gas conditioning plants at Ixachi has intensified. This is to arrest flaring activities to prevent further environmental damage, loss of gas monetization opportunities, and reinforce Mexico’s energy security. On the back of this, Coastal is eyeing various gas projects for its Nuvoil JV in Mexico, including: (1) Ixachi gas conditioning plant (large), (2) Gas storage project (large), (3) Oil Processing plant (medium), and (4) Gas dehydration plant (small). This will add to the JV’s existing gas plants at Ixachi, namely Perdiz and Papan. The new tenders will be anchored by Pemex’s aggressive capex spending plans. Evidently, for FY22, Pemex targets to deploy capex of USD11.5bn (+41% YoY), which translates to a multi-year high since 2018. Moreover, in end-April, the Mexican government reiterated its readiness to make Pemex’s debt repayments whenever necessary. We reiterate our BUY recommendation on Coastal with target price (TP) of RM2.59 based on Sum-of-Parts valuation.

Regulators Want Ixachi to Stop Flaring. A recent Reuters report highlighted the likelihood that Mexico's energy regulator is preparing to fine state-owned oil company, Pemex. This is for "excessively flaring a valuable and irreplaceable resource", namely natural gas at Ixachi field. To recap, Pemex had committed to tap both natural gas and condensates from Ixachi. Under Mexican regulation, oil and gas (O&G) companies are not allowed to flare gas they have committed to produce. Hence, following a site visit, Mexico's energy regulator, Comision Nacional de Hidrocarburos (CNH) is preparing a sanction on Pemex. This is underpinned by "various constitutive findings of possible non-compliance" relating to Pemex's management of the field. Additionally, one source from CNH remarked that "This is an important gas field and the waste there is a clear violation". However, given that the investigation is ongoing, CNH did not divulge further details, including the size and timing of sanctions.

Perdiz is at the Heart of the Action. Recall that Coastal jointly owns 2 gas plants (including one under construction) at Ixachi. The Group’s 50% joint venture (JV) partner for the plants is Nuvoil Group, which is an established Mexican-based O&G player. The first plant, namely Perdiz sweetening plant (capacity: 180 mmscfd) was recently completed in Jul-21. Meanwhile, Papan conditioning plant (capacity 300 mmscd) is targeted to fully commission by Sept 2022. Whereas Ixachi is Pemex’s flagship natural gas development with significant reserves of 1.3bn boe. The latter is an onshore field located at Veracruz state (Figure 1). Discovered in 2017, it is Mexico’s largest onshore discovery since the 1990s. Upon hitting peak production in 2026, it is expected to be Mexico’s highest-producing onshore field.

Source: TA Research - 16 Jun 2022