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Talos says working with Pemex to finalize plan for Mexico Zama oil field before FID

Highlights

Development plan is the last hurdle before reaching a final investment decision

Talos discussing formation of integrated project team to designate project roles

Talos Energy is working with Mexican state oil company Pemex to finalize a field development plan for Zama, the shallow-water field the companies share in the Gulf of Mexico, Talos executives said Aug. 5.

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Reaching the development plan is the last hurdle before reaching a final investment decision for the project, CEO Timothy Duncan,said during theTalos' second-quarter earnings conference call with analysts. The companies are working to finish the plan before a March 2023 deadline.

Houston-based Talos won the block where the 700 million-barrel field is located during the first auction organized by the prior Mexican administration of President Enrique Pena, which opened the sector for private investment for the first time after seven decades of Pemex's monopoly. In addition to Talos, Zama is co-owned by minority investors Harbour Energy and Wintershall DEA.

Talos discovered Zama in 2017, becoming the first private company to strike oil in Mexican territory in more than seven decades. Soon after, the company discovered the reservoir extended into an adjacent block, operated by Pemex. After failing to reach an agreement on who should operate Zama, Mexico's Energy Secretariat, or SENER, appointed Pemex as the operator in July 2021. Talos said then it was "disappointed" with SENER's decision, considering its significant investments in Zama during the six years of its ownership. Talos said it would consider all its options, legal or commercial to maximize value for its investors. In late July, Mexic'an President Andres Manuel Lopez Obrador said his government's talks with the US for possible violations of the US-Mexico-Canada Agreement were mainly triggered by the "controversy" with Talos over Zama.

Project governance

Talos executives said during the earnings conference call that the companies in the consortium are discussing the formation of an integrated project team that will designate a variety of roles for the project within all the partners.

"That will enhance governance rights for all parties and benefit the project," Duncan said.

Observers told S&P Global Commodity Insights there is always cooperation between partners in a unified field, and the operator must always consult all activities with others. However, they also said Talos may be concerned with Pemex running the operation as it has a reputation of mishandling fields in its quest for quick gains.

"Pemex has on certain occasions shown to prefer bringing wells into production early and may therefore have sacrificed the total recovery volume at its fields," said Marco Biersinger, director of oil and gas corporate finance at Kroll. .

That happened to Pemex in the Cantarell Field and Talos or any other partner might have the concern that it could happen again, Biersinger said, adding that the goal of a governing team is that best international practices are followed all the time.

Cantarell, discovered in 1976, was the second-largest oil deposit in the world with a peak production of roughly 2 million b/d of crude in 2004. According to multiple accounts, Pemex strategy to boost production led to the premature decline of the field.

Luis Miguel Labardini, a partner at energy consultancy Marcos y Asociados in Mexico City, agreed with Biersinger that the experience Pemex had with Cantarell could cause Talos to worry about the way Zama could be handled.

Labardini, a former senior advisor to Pemex's CFO, told S&P Global that Pemex should unofficially recognize it is not in a position to handle all the project and give Talos a greater operating role.

"People inside Pemex should understand it really does not matter who the operator is, but who adds value to the project," he said.