CAUGHT IN THE MIDDLE
Talos feels squeeze offshore as Pemex again flexes its muscle.
A little-known Houston oil company called Talos Energy struck it big in 2017 when it became the first private company to make a major discovery offshore of Mexico.
The Zama discovery put Talos on the map and, one year later, Talos expanded and went public when it merged with Louisianabased Stone Energy.
But, now, Talos finds itself in the middle of geopolitical tensions as Mexico’s state energy company Pemex aims to flex its muscles again under Mexican President Andres Manuel Lopez Obrador, known as AMLO. The president, who took office in 2018, has flirted with undoing some of Mexico’s energy reforms that opened the country up to private investments — and ended Pemex’s 75-year monopoly in the country — to make Pemex great again.
Pemex is interested in wresting control of the Zama development from Talos, which is not only making Talos executives and investors nervous, but also other international companies that have or are considering investments in Mexico. Handing the project over to Pemex would represent be symbolic blow to the reforms that opened Mexico’s energy markets.
Talos leads the consortium that discovered Zama. Zama field, however, is believed to bleed into offshore positions held by Pemex, so there was always going to be some shared equity on the project. The expectation was that Talos would lead the operations, and Talos made it clear last week it won’t back down.
“Keep in mind, we’ve spent all the money to date, and we’ve taken all the risks,” Talos Chief Executive Tim Duncan said Thursday during Talos’ earnings call. “And so we feel good about our position, but we’re mindful and respectful of Pemex.”
Ebb and flow
One of Talos’ partners, London-based Premier Oil, plans to sell its 25 percent stake in the Zama project. The other partner, Sierra Oil & Gas, was absorbed at the end of last year by Germany’s Wintershall DEA.
The goal is for Talos to submit its development plans for the project by the end of this year and move forward with the final investment decision in 2020 once the negotiations are finalized. Talos estimates the Zama field has about 800 million barrels of recoverable oil equivalent.
Couching his words because of the tenuous state of the discussions, Duncan said there’s a “cadence” and an “ebb and flow” to the discussions. Pemex wants to drill, Duncan said, and Talos has questioned whether that’s necessary.
“We understand the pride they have in wanting to contribute,” Duncan said. “And so we just have to work through that.”
Pemex hasn’t yet drilled on its neighboring block to confirm whether the Zama field extends into its position.
Little choice
Talos focuses on offshore oil and gas on both the U.S. and Mexican sides of the Gulf. Talos’ future isn’t entirely tied up in Mexico, but it’s a major chunk of the company’s value and potential.
Energy companies never want to rely too heavily on politicians, especially not populist ones like AMLO. But Talos has little choice. The company will bank on the administration valuing its expertise and not wanting to scare off too many other companies. What comes next could determine the future of Mexico’s energy sector.