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Talos Energy talks with Pemex over the Zama oil deposit are slowing down

Talos Energy

Timothy S. Duncan, Founder, CEO of Talos Energy

- The fight over Zama is a potentially troubling sign for private sector investment in Mexico
- Agreement between Talos and Pemex is needed for the development of the field.

By David Alire Garcia / Reuters

MEXICO CITY
Petroleumworld 02 12 2020

A dispute between Mexican state oil company Pemex and U.S.-based Talos Energy Inc has slowed talks to develop a major discovery, Talos' CEO said, in a case that tests the climate for private investors under President Andres Manuel Lopez Obrador.

In recent weeks, the behind-the-scenes dispute over the nearly 700 million-barrel offshore discovery has spilled into the open as both Pemex and the Talos-led group claimed to hold the majority of the Zama deposit and the right to ultimately run operations at the field.

Discovered in 2017, Zama marked the largest find in decades by a private company in Mexico and represents the first time two sides will have to divvy up a joint oil reservoir after a 2013 reform opened the sector to private producers.

Agreement on operatorship and an initial split between Talos and Pemex is needed before regulators can approve the development of the field.

“That part of the discussion has obviously slowed down,” Talos Energy Chief Executive Officer Tim Duncan told Reuters in an interview.

The differences appear to be widening between the Talos-led consortium, which made the discovery, and Pemex, which claims it holds most of the find in its adjacent area and asserts it can bring it into production faster.

Zama lies in the southern Gulf of Mexico near the eastern border of an area Talos and its partners won at auction five years ago, just outside a neighboring block that belongs to Pemex.

Duncan, whose consortium also includes Germany's Wintershall Dea [WINT.UL] and Britain's Premier Oil, said his team had surpassed its contractual obligations by drilling four exploratory wells on its block and spending $250 million, when it was only required to invest less than one-third of that amount.

“They've had their lease for a long time and there hasn't been a lot of activity. We've had our lease for a shorter amount of time and there's been a tremendous amount of activity,” he said referring to Pemex.

He said that despite the stalemate, Talos continues to invest in would-be platform designs. “We're happy to move this forward, and we expect to move this forward,” he said.

Pemex's press office did not respond to requests for comment or provide answers to written questions.

‘TRYING TO EXECUTE'

Prior to a 2013 constitutional reform that ended Pemex's 75-year monopoly - a reform fiercely opposed by Lopez Obrador who is a leftist energy nationalist - only the state-owned company could explore for and produce oil and gas in the country.

Pemex CEO Octavio Romero told reporters at the president's morning news conference late last month that his firm is seeking to run the Zama project, declaring that most of it lies within its block.

Pemex has yet to drill a well on its area even though last year it received authorization from regulators to drill its Asab well due east of the boundary between the two blocks. Romero added that the reservoir Asab would hypothetically tap could be brought into production next year, a claim that left Duncan scratching his head.

“I don't know how that's physically possible,” he said, adding that he thinks Asab would only duplicate the data Talos and its partners have already collected on the shared reservoir.

“We just don't think that's a good use of capital for them or for anyone for that matter,” he added.

Duncan pointed to an engineering study by Netherland, Sewell & Associates - a technical oil consulting firm that Pemex has also used in the past - that estimated that 60% of the reservoir lies in its block, while Pemex holds 40%.

Asked about Romero's view that those third-party estimates are off, Duncan said it was an objective fact-based analysis. “It's difficult to overcome an opinion,” he said.

Duncan said Talos operates five other projects in U.S. territorial waters deeper than the 550 feet (168 meter) depth where Zama is located, a feat that Pemex has yet to duplicate even though it does have extensive experience in shallower waters.

The executive said he was determined to meet Lopez Obrador's calls for private oil companies to invest and show results. Duncan said production from Zama could be brought online in 30 to 36 months once its development plan is approved.

Oil sector analysts have pointed to the fight over Zama as a potentially troubling sign for private sector investment in Mexico, as Lopez Obrador pledges to strengthen Pemex with a bigger budget and reverse 15-consecutive years of declining output.

“I can understand why people are drawing parallels to the private sector in this project. I can certainly understand why,” Duncan said. “But we're not trying to draw those parallels. We're just trying to execute.”



Reporting by David Alire Garcia; Editing by Daniel Flynn and Cynthia Osterman from Reuters.

reuters.com 02 11
2020

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