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World Class Oil Discovery Puts Mexico Back In The Race

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The UK-based Premier Oil, along with its partners Talos Energy and the Mexico City-based Sierra Oil & Gas, announced a potentially huge new oil discovery off the Mexican coast last Wednesday. Premier said the Zama-1 well is a “world class discovery.”

Premier said the initial results suggest the well holds in excess of 1 billion barrels, although the field could extend into a neighboring block. The well contains light oil and some associated natural gas.

“We have encountered a very substantial oil bearing interval which indicates over 1 billion barrels of oil in place, a commercial standalone development which adds materially to Premier’s portfolio of assets worldwide. It is particularly pleasing that our strategy of focusing our exploration portfolio on high impact opportunities in proven but under-drilled basins has led to this world class discovery with our first well in Mexico,” Premier’s CEO Tony Durrant said in a statement.

For Premier, the discovery couldn’t have come at a better time. The company also slashed its spending plans for 2017 amid rising debt levels. Premier has spent the past year, according to the FT, “wrangling with lenders and bondholders” in an effort to stretch out its increasingly painful debt payments. Its new refinancing package will extend maturing debts through 2021, loosening the noose around the company’s neck.

The discovery might reverse the company’s fortunes; its stock price shot up by 30 percent in the days following the announcement. Wood Mackenzie says the Zama-1 well is the 15th largest shallow water oil discovery in the past two decades.

But the discovery has even larger ramifications for Mexico as a whole. Mexico has struggled with declining oil production for years, and the historic energy reforms passed in 2013 were aimed at halting that decline. The liberalization of Mexico’s energy sector ended seven decades of state-owned monopoly, opening up Mexico’s offshore to international investment. Related: IEA: Market Shows Waning Confidence In Oil Rebalancing

The auctions started off slowly, with only mild interest. But things have picked up more recently. In December 2016, Mexico pulled off a successful auction of deepwater blocks, attracting the oil majors with some appetizing prospects.

After that auction, Italian oil giant Eni drilled a successful exploration well in Mexico’s shallow water, discovering much more oil than was anticipated. The tract was previously explored by Mexico’s state-owned Pemex, so while there was generally thought to be oil in place, Eni announced in March 2017 that it thinks the area holds much more oil than anyone thought.

That was the first inclination that not only did Mexico’s deepwater offer a lot of potential, but perhaps its shallow water did as well.

Success tends to breed success. The good results from the December auction, followed up by Eni’s discovery, created much more hype around a June auction for shallow water tracts than otherwise would have been the case. The June auction exceeded expectations, with 10 of 15 blocks awarded. Several large international oil companies, including Shell, Eni, Total and Russia’s Lukoil were awarded drilling rights.

The latest discovery from Premier will add further momentum to Mexico’s energy reform efforts. It now appears that Mexico is a top global destination for oil exploration, and the rush is on. Related: The Technical Failure That Could Clear The Oil Glut In A Matter Of Weeks

Politically, the energy reform is still complicated and highly controversial. The Mexican government promised that ended state monopoly would translate to benefits for the populace, but there are few tangible gains for the Mexican people at this point. “To people who know the industry, it’s very good news that there is more oil than we expected,” Jorge Piñon, a former oil executive and currently a professor at the University of Texas, Austin, told the WSJ. “But from the point of view of the guy on the street, as far as he’s concerned, the reform hasn’t given him any benefits so far.”

But the discovery could bolster the government’s case. President Enrique Pena Nieto hinged his legacy on the energy reform, and at this point he is very unpopular. One of the frontrunners for next year’s presidential election, the leftist Andrés Manuel López Obrador, has threatened to roll back the energy liberalization.

Each new discovery, however, will make Mexico’s energy reform much more difficult to undo. Premier Oil’s discovery is “the most important achievement so far of Mexico’s energy reform,” Pablo Medina, an analyst with Wood Mackenzie, told the WSJ.

By Nick Cunningham of Oilprice.com

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