What Happened
In what could be a troubling sign for future energy investments, Mexico's state-owned oil company, Petroleos Mexicanos (Pemex), and U.S.-based Talos Energy are quarreling over the exploitation and development rights of the Zama oil field, in the Gulf of Mexico roughly 60 kilometers (about 37 miles) off the coast of southern Mexico. The field, discovered by Talos Energy in 2017, is estimated to hold roughly 670 million barrels of oil equivalent, making it one of the largest oil finds in Mexico in recent decades. However, the discovery's reservoir extends into an adjacent block controlled by Pemex, and the state-owned firm now seeks the rights to operate and develop the project.
Pemex CEO Octavio Romero said Jan. 29 that a company study found that the majority of the reservoir was located in the Pemex-controlled block, and that his firm would seek to operate the field. However, Romero's comments contradict an independent contingent resource report from Jan. 7 commissioned by Talos Energy that said 60 percent of the estimated resources lie in Talos Energy's block.
Why It Matters
The Zama field is one of the first sites that include an international oil company in the early development stage since Mexico implemented its energy reforms in 2014 under the administration of former President Enrique Pena Nieto. However, the government of his successor, Andres Manuel Lopez Obrador, has been skeptical of that reform and halted full implementation of the new measures. If Pemex goes on to win its dispute with Talos Energy, it would further discourage private investors not only in Mexico's upstream oil and gas sector, but also in other industries where Lopez Obrador is seeking to strengthen national control.
Both companies have been at odds over the Zama oil field for over a year without a resolution. If the two firms cannot reach an agreement, the Mexican Energy Ministry would intervene to arbitrate the dispute and award the project's operational rights. Lopez Obrador's nationalist energy policy raises pressure on Talos Energy, as a potential government decision could force the company to accept joint development of the field, with Pemex as the lead operator.
Talos Energy currently projects that it would be able to finalize two production facilities with a combined capacity of 150,000 barrels per day by 2023, but the dispute risks delaying the project's launch date. A delay of the oil field's production date could also affect Mexico City's ability to extract profits from the discovery, as Talos Energy has argued that it would generate some $28 billion in revenue for the Mexican government.
Strategic Context
Since coming to office in 2018, Lopez Obrador's administration has taken incremental action to halt the 2014 energy reform's implementation. One of the first steps the administration took was to freeze bidding rounds designed to attract foreign companies and increase domestic competition. His administration also reduced funding for Mexico's independent energy regulator, the National Hydrocarbons Commission, curtailed deep-water exploration efforts and sought to strengthen Pemex to reestablish it as the predominant force in Mexico's energy sector.
Pemex, meanwhile, has developed an ambitious plan to commit to more than $100 billion in investments between 2019 and 2024. The company hopes that the Zama oil field will add roughly 1 million barrels per day to its production by the end of its five-year plan, but it remains unclear if the company will be able to implement its strategy due to financial and technical constraints. The government already announced a $7.4 billion plan in 2019 to provide financial support and tax relief to the company. However, the new measures weren't sufficient in addressing Pemex's immediate needs, and Fitch Ratings Agency downgraded the firm's credit rating to junk status in June 2019. Other rating agencies may soon follow suit.
