When Talos Energy, a Houston driller, made the biggest private oil discovery in Mexico’s history in 2017, it enthusiastically led a $350-million investment in its new-found Zama oil field. Mexico had declared itself open to international business in energy, and Talos would help lead the way.
What Talos didn’t know — couldn’t know — was that the field crossed one belonging to the indebted state-owned oil company Pemex, and that the following year Mexico’s presidency would be won by a leftist intent on bolstering that company. Andres Manuel Lopez Obrador or AMLO, as the president is known, had his energy minister inform Talos that Pemex would majority-own and operate the 800-million-barrel Zama based on one independent study.
The decision was a blow not just to Talos but to its partners, Wintershall DEA and Harbour Energy Plc. It has chilled investor confidence, with industry members concerned that the Mexican government could lay claim to other private companies’ discoveries.
Talos has spent the past few years trying to keep its foot in the door. At its Houston headquarters, its chief executive officer Timothy Duncan didn’t hide his irritation.
“Our situation is a proxy for everything you don’t want to see happen, which is investing under a certain set of conditions, developing an asset that had a specific amount of value, to not knowing exactly what you have, due to government action,” Duncan said.
Nearby, a large metal oil drill bit sat somewhat sadly on display, framed with a plaque that marks the date the Texan oil producer discovered the Gulf of Mexico field.
Duncan sought to correct contentions by Lopez Obrador that Talos still wants to wrest control of the project. Not so, said Duncan. As he put it, “Talos is willing to move forward and not continue to fight over operatorship as long as it has a leading role.”
AMLO and Pemex have justified the takeover based on a Ryder Scott study last year which found that 50.4% of the potential oil reserves were in Pemex territory. This contradicted an earlier study commissioned by Talos from Netherland, Sewell & Associates Inc. that gave Talos and its partners 59.6%. Duncan rejected the importance that Mexico has placed on the percentages, arguing that they will evolve as the project progresses.
“This dispute is not about the percentage of oil under each contract. It’s about the process,” said Duncan. “Interests evolve over time in unitizations.”
AMLO Says US Driller Shouldn’t Be Allowed to Operate Oil Field.
Duncan hopes to reach an agreement with Pemex by March, when the field development plan is due, marking the last step before the companies involved in the project finalize their investments. If the parties can’t agree, he says Talos will likely seek compensation under the U.S., Mexico, Canada free trade agreement USMCA.
Source: Talos Energy