Potential Pemex grab of Zama site raises concerns

State-run oil firm Pemex reportedly wants to take over the Zama offshore patch from Talos Energy, which is just the latest in a series of signs suggesting the company seeks to reassert control over Mexico’s oil and gas assets.

“It’s clear that AMLO [President Andrés Manuel López Obrador] doesn’t really believe that the free market is going to solve the challenge of increasing oil production,” Roger Horn, senior emerging markets strategist at SMBC Nikko Securities America, told BNamericas. “So expect to see more interventionist policies with Pemex as the mechanism for Mexican energy policy.”

On Monday, Reuters reported that Pemex was considering using its adjacent rights at the shallow-water site in the Gulf of Mexico to assert a claim and take over the Zama site operated by Texas-based Talos Energy. 

“If the talks deadlock,” the report noted, “Lopez Obrador’s energy ministry would settle disputes and appoint one company to oversee drilling.” In 2018 Pemex and Talos began talks to develop the adjoining sites.

ZAMA’S SIGNIFICANCE

Talos’ discovery of the Zama site two years ago marked a significant and symbolic turn. The site is thought to have at least 1Bb in recoverable oil and gas. Because it was the first oil discovery from a foreign firm since the 1930s, it was also hailed as a success of the 2013 energy reforms aimed at liberalizing the market.

Though the deposit at Zama may not extend into the adjacent site, it is more likely that part of the deposit does spread and includes the area Pemex claims.  Pemex, however, has yet to begin the necessary exploratory work to prove it.

Already one Talos partner at Zama, Sierra Oil & Gas, has sold its stake in the site, while in August another partner, Premier Oil, put its stake on sale.

The Reuters article said Premier Oil and Wintershall DEA, which now has Sierra’s stake, both see potential in Mexico’s energy sector.

LARGER IMPLICATIONS

The news of Pemex’s potential takeover comes as part of a government plan to increase Pemex's output during AMLO’s term, reaching 2.67Mb/d by 2024.

During the first five months of 2019, Pemex output averaged 1.67Mb/d, the result of annual output declines dating back to 2004.

AMLO insists that Pemex’s oil output stabilized over the last few months. In August, he told congress that Pemex will be producing 50,000b/d more by December.

Experts doubt that Pemex is capable of producing 1Mb/d more in five more years, leaving open the possibility that the government may intervene more in the energy market to help Pemex along.

According to the Reuters report, Sierra’s decision to leave came as result of a “dark cloud” of government policy that complicated raising capital.

While AMLO has said Pemex will honor existing contracts, his administration has forced private firms to renegotiate contracts with Mexico’s other major energy firm, public electricity utility the CFE. 

Moreover, AMLO has moved quickly over the past year to curtail site development by private oil companies, by dismissing private bidders, creating more stringent rules for minority investment with Pemex, and awarding complete control over building and operations of the massive Dos Bocas refinery to Pemex.

Recently, hydrocarbons regulator CNH approved a two-year contract extension for Talos’ work at Zama, as well as approvals for additional exploration at the Block 7 site that encompasses Zama.

Talos and Pemex have until September 2020 to hash out a preliminary negotiation for the co-development of the Zama site.