BAD NEIGHBORS
Houston’s Talos and Pemex’s Zama go from commercial discovery to commercial dispute.
Four years after making the largest commercial oil discovery in Mexico in a generation in 2017, the commercial expectations of the consortium led by Houston-based Talos Energy continue in suspense. A positive outcome in which Talos is the operator continues to be an elusive challenge for the company.
Zama has upward of 600 million barrels of recoverable oil and gas. The reservoir in its Block 7 is believed to extend beyond the area that was awarded to Talos in 2015, thus requiring an agreement with the neighboring leaseholder. Together, they would define a “unit area,” the terms of a joint operating agreement and decide on which party would be the operator.
As Talos’ neighbor is Pemex, a plan would be needed to finance Pemex’s share of the costs as well as an export agreement for Talos’s share of crude oil production.
These matters had been on the table since September 18, 2018, when Talos and Pemex entered into a preliminary agreement to negotiate in good faith. Negotiations proceeded for almost 30 months with an agreement finally in sight in March of 2021 but still beyond reach. At that point, the ball was passed to the Ministry.
Many of the issues would have been resolved with data
obtained by Pemex from an adjacent, offset well, named Asab-1, on its side of the lease line. But Pemex, after repeatedly promising that it would drill Asab-1, never did.
An unnamed reservoir expert found that Pemex had 50.43 percent of the Zama reservoir on its side of the lease line. On July 2, Mexico’s energy minister, Norma Rocío Nahle sent a letter to both Pemex and Talos in which she designated Pemex as the operator. Minister Nahle gave Pemex 30 days to come up with a preliminary development plan “in coordination with Talos.” Sixty days then passed in radio silence.
In its news release on the 61st day, Talos on September 3, Talos advised regulators and investors that it intends to do something about the adverse decisions by Mexico’s Energy
Ministry that cause “loss or damage to the Company.”
Talos accuses the Ministry of unspecified violations of trade agreements, including the United States-Mexico-Canada Agreement, or USMCA, the successor to North American Free Trade Agreement..
What can Talos expect at this point? What can Mexico expect?
A question is whether Talos alone has the firepower to win legal or trade disputes with Pemex and the Mexican government. The company would need help from inside Mexico, but the oil trade association, AMEXHI by its acronym, repeatedly intones the “commitment to Mexico” of its members but dares not criticize the lack of reciprocity from the Mexican government. Journalists, lawyers and economists are mute.
The American Petroleum
Institute so far has not commented on irregularities in the Mexican upstream. Little can be expected from the Biden Administration, which has shown a hostile attitude toward the oil industry.
The worst case for Talos is that the development of Zama stalls indefinitely. The company’s press release of September 3 focuses on the Ministry, but Pemex and regulators are also complicit in dragging their feet, the former in not drilling Asab-1, the latter in rubberstamping decisions handed to them by the Ministry.
The opportunity cost to the State from foregone royalty payments has been in hundreds of millions of dollars—and counting.
Mexico City energy lawyer Juan Carlos Collado discerns a risk to Talos from not seeking a judge’s ruling on the legal force of Nahle’s July 2 letter. “Better safe than sorry,” he muses.
A Talos spokesman, asked for comment, referred me to the Sept. 3 press release. “We seek the ideal operatorship structure for Zama and the safeguarding of our rights as a foreign investor," he said.
Houston oil professionals hope that Talos prevails, not only for its sake but for the sake of all present and future investors in the Mexican upstream.