Tuesday, November 28, 2023

Government gives control of private oil find to Pemex, risks international litigation

The Mexican government has awarded control of one of the country’s biggest oil discoveries to state-owned Pemex after months of deliberation, dealing a blow to private investment and raising the prospect of international litigation.

A consortium made up of the U.S.’s Talos Energy, the U.K.’s Premier Oil and Germany’s Wintershall DEA discovered the nearly 700-million-barrel Zama field in 2017 and have invested US $325 million in the project to date.

But some of the project spills over on to acreage owned by Pemex, which prompted a battle over who should be in charge. The energy ministry has now ruled in favor of the state company, which President López Obrador sees as a national champion.

In the letter posted on Twitter by energy consultant Gonzalo Monroy, Energy Minister Rocío Nahle named Pemex operator of the discovery and said the companies should present a development plan within 30 days.

Talos said in a statement: “After six years of significant investments in Zama and the Mexican economy, as well as the delivery of a Zama development plan that is credible and in line with the objectives of Mexico, Talos is very disappointed with [the energy ministry’s] sudden decision to award operatorship to Pemex.”

zama oil field

Neither the government nor Pemex had any immediate reaction to the news, which was made public on Monday. The announcement came days after a Pemex pipeline in the Gulf of Mexico caught fire, prompting a blaze in the sea.

Lourdes Melgar, a former hydrocarbons deputy minister, said Pemex had not wanted the field when the sector was opened to private investment under Mexico’s 2013 energy reform. “It’s not exactly an expropriation, but it’s close,” she said.

Nahle said her decision was based on a study by the National Hydrocarbons Commission, which concluded that Pemex has “favourable technical and operational conditions and characteristics” to develop the field.

She cited Pemex chief executive Octavio Romero as saying the company had “sufficient financial capacity.” Pemex posted a first-quarter loss of nearly $2 billion.

Pemex said it owns 50.43% of the field, located 60 kilometers off the Gulf coast of the state of Tabasco, while the consortium claims to own 60%.

However, the consortium said such percentages typically change as wells are drilled. Pemex has not drilled any wells on its acreage whereas the consortium has drilled one exploratory and three appraisal wells.

“This is a direct signal to the market in terms of how this government views private sector investment in the Mexican energy industry,” said Emily Medina, a fellow at the Energy Policy Research Foundation. “It seems that the government is definitely favouring Pemex over Talos.”

“We can’t let them be at the helm, given the state of their operations and their business,” said one senior official in the consortium, who was not authorized to be named. He said a review of possible litigation under the USMCA free-trade treaty was likely.

The official cited concerns over Pemex’s finances and its technical expertise given the field’s depth and geological conditions, as well as safety concerns, including a lack of provision to prevent wells collapsing.

Analysts say Zama’s oil is located at a depth of some 168 meters. The deepest Pemex has drilled to date is some 110 meters.

Since taking office in 2018, López Obrador has halted oil auctions and joint ventures with the private sector. On Monday, he cited Nahle, an ardent energy nationalist, as one of a group of a potential successors for the presidency when his term ends in 2024.

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