IN THE CROSSHAIRS
A Houston oil company made a big discovery on Mexico’s side of the Gulf of Mexico. Now, it’s getting muscled by the state-owned oil company Pemex.
In Mexico, petroleum resources and reserves are the property of the nation and the national oil company, Pemex, is the property of all Mexicans. These seemingly anodyne formulations can have toxic effects.
There is a systemic bias that, in a commercial dispute, authorities would favor claims of Pemex over those of a private party regarding the ownership of a lease. The bias would affect the conduct of public servants who would be drawn into technical, regulatory or policy determinations regarding the dispute.
The dispute that we have characterized as the “stress test” of Mexico’s energy market design concerns the claims of Pemex to majority ownership of a large oil reservoir that had been discovered by a consortium led by Houston company Talos Energy. The 600million-barrel discovery, the largest in a generation, was made near the eastern edge of a block, the commercial rights to which the consortium had won in the first lease auction in 2015.
It was no surprise to the consortium that data from the discovery well, Zama-1, indicated that the reservoir extended eastward beyond the lease. Pemex was the owner of a block on the other side.
Louder than words
As the purpose of Mexico’s 2014 energy market reforms was to open commercial space for private oil companies to bring new eyes, capital, technology and management to accelerate discovery and production, news that ownership of the reservoir could be disputed by Pemex put senior public officials in an awkward position: Support or oppose Pemex’s pretensions. By their inaction, they threw their support.
The discovery, announced in July of 2017, was made on the eastern edge of the Talos consortium’s block, with the high probability that the reservoir extended into a block owned by Pemex, Energy Minister Petro Joaquín could have ordered the immediate reconfiguration of the block to cover the entire reservoir.
Juan Carlos Zepeda, the then president-commissioner of the National Hydrocarbon Commission, which oversees oil and gas exploration, could have made a case that the soul of energy market reforms required the development of lease blocks to be carried out exclusively by the winners of the auctions. Instead, Hydrocarbon Deputy Secretary Aldo Flores rushed ahead in October with an intrusive framework to combine the claims of Talos and Pemex into a joint venture to develop and operate the oil field, a process known as unitization.
Talos was forced by the rules to enter into an agreement with Pemex on Sept. 18, 2018.
In the summer of 2019, Energy Minister Rocío Nahle and National Hydrocarbon Commission President-Commissioner Rogelio Hernández Cázares had another opportunity to correct the situation: As Pemex had not complied with its legal and regulatory obligations — most conspicuously by not drilling a confirmatory well in its block — its rights could have been canceled. Instead, the commission voted to rename and expand the area of Pemex’s block and to reissue a lease for 30 years.
In May, the National Hydrocarbon Commission produced a study that speculated that there was hydraulic connectivity between the western (Talos) and eastern (Pemex) portions of the reservoir. Such connectivity is shown by conducting a pressure test on both sides of a structure; but, as a Pemex well had not been drilled, the only data used were those supplied by Talos on its side.
Nahle on July 7 ordered the parties to reach an agreement within 120 days. Or else. The guidelines provide that when the parties do not agree, the ministry has one year to unilaterally impose the terms by which the ownership and administration of a reservoir will be conducted.
Demoralizing outcome
How will this story likely play out? History shows that at every turn, public officials favored Pemex’s pretensions, indicative of systemic bias.
On Jan. 29, the public learned during a press conference with the head of Pemex, DirectorGeneral Octavio Romero, that the national oil company was seeking not only majority ownership, but also the right to be the operator of the future field. When it came to the lack of confirmatory data from a well drilled on its side of the lease line, Pemex and the ministry insisted on the validity of “other facts.”
The discovery by Talos Energy was justly celebrated as evidence that Mexico’s energy reforms — and the philosophy behind them — had merit. It would be a demoralizing outcome for all investors if Talos’ asset becomes majority-owned and operated by Pemex.