Mexico’s Oil Race Tests Its Investment Climate
WHY YOU SHOULD CARE
Mexico opened its oil industry up in 2013. Now investors are testing its sincerity.
By Jude Webber
Energy companies trying to make a deal with Pemex to share one of Mexico’s biggest oil discoveries accuse the state giant of dragging its feet to win control of the project, in a test case for foreign investment under President Andrés Manuel López Obrador.
A consortium made up of Talos Energy of the United States, Premier Oil of the United Kingdom and Wintershall DEA of Germany discovered the nearly 700-million-barrel Zama field in 2017. They are awaiting a decision from the Mexican government on how to share responsibility for a resource that spills into acreage owned by Pemex.
We can’t figure out who else [a delay] benefits except Pemex.
Tim Duncan, CEO, Talos
But negotiations with Pemex have become bogged down, raising the alarm in a sector already concerned by AMLO’s efforts to build up the state-controlled company and limit private oil participation.
“I don’t understand who a delay benefits — it’s not us, or the arrival of first oil, or workers or the Treasury — we can’t figure out who else that benefits except Pemex,” says Talos CEO Tim Duncan.
Pemex is demanding a 50-50 split on the project and wants to operate it despite its fragile finances and lack of experience working at the depths of the Zama field, about 38 miles off the coast of Tabasco.
The target is to begin pumping oil by 2023 — a year before the end of AMLO’s six-year term — by which time the president has promised that Mexico’s oil production will have risen to 2.6 million barrels a day from 1.73 million at the end of 2019.
But “for this to happen, we have to move this along,” Duncan says.
Another consortium executive, who did not want to be named, says: “What we are most worried about is that they are waiting us out — that the strategy is a de facto expropriation.” The consortium’s contract runs out in September 2021.
Mexico opened up its oil sector for the first time in eight decades in a landmark 2013 reform. But since taking office in December 2018, AMLO has made Pemex his priority, halting oil auctions and joint ventures with the private sector. The president said that the 100-plus contracts already awarded — Italy’s Eni has also made a big discovery — would be respected. But Duncan says the Zama delays sent worrisome signals.
“As [drilling] activity [from other oil companies] increases, this can probably happen again. It sets a precedent,” Duncan says.
Pemex CEO Octavio Romero Oropeza said in January that while Talos and partners “argue that they have the biggest part of the deposit, the analysis of Pemex and our technicians is that we do.”
But with AMLO at his side at one of the president’s daily news conferences, Romero added: “Talos wants to be operator and Pemex also wants to operate this field that has at least some 600 million barrels of oil equivalent. It would be 300 and 300.”
That remark came on the day that U.S. President Donald Trump signed the United States-Mexico-Canada Agreement that succeeds NAFTA. The consortium is expected to invest several billions of dollars to build platforms and infrastructure for production.
“Our investors would have serious problems investing at all if Pemex was involved, for fairly obvious reasons — they’re broke,” says another consortium executive who asked not to be named. “We expect that in the end they’ll see sense.”
Pemex’s 2019 results last month were dismal. The debt-laden company’s losses virtually doubled to $17 billion despite what AMLO says is his “rescue” of the national champion.
The two sides are supposed to negotiate a deal over Zama. But if they cannot, the final say goes to the Energy Ministry — headed by Rocío Nahle, one of the Cabinet’s most ardent resource nationalists.
“They [Pemex] get to walk into a discovery for free,” says Duncan, who expects any Pemex well on its acreage “not to tell us anything new.”
Duncan says that “between royalties, profit-sharing and taxes, the total government take is 81 percent [of profits from us].” He praises Mexico’s oil regulator and Energy Ministry for otherwise smooth decisions. “The only thing that’s ever been delayed are these discussions,” he says.
OZY partners with the U.K.'s Financial Times to bring you premium analysis and features. © The Financial Times Limited 2020.