Sign Up for FREE Daily Energy News
  • Stay Connected
  • linkedin
  • twitter
  • facebook
  • youtube2

Copper Tip Energy Services
Vista Projects
Vista Projects
Copper Tip Energy

Mexico Oilfield Dispute Is an Industry Warning, Talos Chief Says

These translations are done via Google Translate


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 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.

Tim Duncan, co-founder and chief executive office of Talos Energy Inc.
Timothy Duncan in Houston, on Aug. 4.

“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 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. A year ago, the company filed a notice of intent to go to international arbitration.

“We are at a critical moment,” said Duncan. “This has risen to a point where it’s a priority for both the Mexican and U.S. governments.”

Neither Pemex nor the Energy Ministry responded to a request for comment.

ROO.AI Oil and Gas Field Service Software

When Talos hit upon Zama in July 2017, Mexico hailed it as the crowning achievement of its historic 2013 and 2014 energy reforms –- which opened the oil sector to private investment after eight decades of a Pemex monopoly.

Lopez Obrador reversed the policy, promising to return Pemex to its former glory. He ended the oil auctions that enabled private companies to discover major oil fields and partner with Pemex in farm-out agreements.

The merging of Zama with a Pemex field, known as unitization, was planned before AMLO took office in Dec. 2018. But it was AMLO who moved to make Pemex operator of the mega-find.

Discrimination Complaint

The dispute is one of a number of similar cases that have spurred a conflict between Mexico and its biggest trade partner. Last month, the U.S. lodged a complaint along with Canada, arguing that moves to prioritize Pemex and the electricity provider Comision Federal de Electricidad discriminate against U.S. and Canadian companies.

Not only could Lopez Obrador’s policies deter foreign investment, they risk costing billions of dollars in international lawsuits. Foreign Minister Marcelo Ebrard and Economy Minister Tatiana Clouthier are leading a team working to resolve the dispute.

AMLO’s Cabinet Big Hitters Lead Bid to Avoid Trade Arbitration

Talos wants representatives from the consortium group and Pemex to form a team to develop the field and report to the unit operating committee, which Pemex controls. Talos shares a stake in Zama with Wintershall DEA and Harbour Energy.

Talos is also seeking to guarantee that it receive the full commercial value of its production in the contract, including market pricing, transparency, and best international practices for environmental, social and governance matters.

As a minority partner, it can’t stop the project, and Duncan said in the interview he would do nothing to delay it. Should Talos stop investing in Zama, its interest could be subdivided among the other partners.


One major concern is that developing the field is expected to require $4 billion to $5 billion over the next 30 years. Pemex has yet to invest in Zama, and it will be challenging for the cash-strapped state oil firm to find the resources to do so. Last year, Bloomberg reported that Pemex didn’t have the $2 billion needed to finance its share.

Pemex is in fact the world’s most indebted oil company, with $108.1 billion in financial debt. Credit ratings agencies such as Moody’s and Fitch Ratings have downgraded their bonds deep into junk. At the same time, Pemex is prioritizing the development of a new refinery and another recently purchased one on orders of the president, diverting key resources away from drilling.

According to Duncan, were it not for the delays caused by the disputes, Zama would already be producing this year, enabling Mexico to take advantage of record high oil prices and help stem the decline in oil output. The field is expected to produce 180,000 barrels of crude equivalent a day.

“Once fully developed, Zama will probably be 10% of the country’s production,” he said. “It will absolutely be among the highest producing fields in Mexico. So there’s a reason why this asset is so important.”

Share This:

More News Articles