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Mexico's Energy Secretariat chooses Pemex to operate Zama oil field

Highlights

Pemex, Talos informed by SENER of decision late July 2

Companies required to produce development plan in 30 days

Mexico's Energy Secretariat, or SENER, has appointed state oil company Pemex as the operator for the 1 billion-barrel shallow water Zama field discovered by Talos Energy in 2017, after consulting with the ministry of finance that Pemex would be given enough resources for the project.

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Both Talos and Pemex were notified of SENER's decision on July 2 through a letter, two people close to the process told S&P Global Platts. The notification came the same day a fire broke at Pemex's main production complex, arguably due to lack of maintenance.

The ruling was being watched closely by the oil and gas industry as most of the shallow water blocks operated by private companies are bordered by Pemex blocks and many believe the decision will set the tone for private investments in the near future.

Talos has already committed over $100 million to the project, which is expected to cost over $700 million, according to data from the National Hydrocarbons Commission, or CNH. Talos, unlike Pemex, has experience operating in areas with depths similar to Zama's about 2.7 miles.

Industry observers had expressed their concern that Pemex would be appointed as the operator for political reasons, as President Andres Manuel Lopez Obrador has aimed to give Pemex more market power.

Pemex is a champion in shallow waters, but has never successfully drilled a production well at that depth, they said. Observers were also concerned about Pemex's financial capabilities, already weakened by its large portfolio.

Tight schedule

According to the letter sent by SENER, both companies will now have 30 days to come up with a development plan for Zama, a process likely to take longer considering companies have not been able to make agreements so far, the people close to the deal said.

"The companies have not worked on any development plan, which requires both of them to agree completely on everything. It will take more than 30 days" said one of the people close to the process.

Observers had highlighted Talos would be a better fit to get production out quickly. The company had told investors it was in the position to reach first oil before the end of Lopez Obrador's administration in 2024.

According to S&P Global Platts Analytics, Zama is in a position to compensate for the declining production of Pemex and could help Mexico reach its objective of increasing its output to 2 million b/d by 2024 from less than 1.7 million b/d currently.

Crude production in Mexico is expected to reach 1.825 million b/d in 2022 but will begin to fall in 2023 as Pemex fields accelerate their decline, Platts Analytics data showed.

Talos and Pemex could not be reached for comment.

Security concerns

SENER's notification came the same day as a fire was registered in Ku-Maloob-Zaap, or KMZ, Pemex's main production complex. This raised concerns about the conditions of Pemex's infrastructure and the company's safety protocols.

The fire was controlled in roughly five hours without any loss of lives, Pemex said in a statement.

However, the fire on July 2 was not a first for Pemex, and it can easily be linked to lack of maintenance, observers said.

A similar incident occurred with Pemex in 2015 at Ab-Katun, a Pemex platform that was completely lost after an explosion, said Marco Cota, CEO of Mexico-based consultancy Talanza Energy.

Mexico's environment, energy and security agency, ASEA, will soon order an investigation into other incident, and sanctions can be imposed if negligence is found, Cota said.

With reserves of over 1.5 billion barrels of oil equivalent, KMZ produced almost 784,300 b/d in 2020, according to Pemex reports filed with the US Securities and Exchange Commission.