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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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This Unexpected Move Could Derail Mexico’s Oil Boom

PEMEX

Just as Mexico’s oil industry was starting to get off the ground with foreign players entering, Mexico is throwing a wrench in the works with its consideration of new regulations that could turn off private interest for its significant oil reserves.

This summer, Mexico’s landmark energy reform—ending decades of Pemex’s monopoly—started to pay off when a consortium including foreign companies struck oil in a world-class discovery off the Mexican coast. Now Mexico wants to get its hands on some of that oil in a move that could threaten to derail future interest in Mexico’s oil industry.

The recent discovery could potentially extend into a neighboring block owned by state-run Pemex, so Mexico is currently drafting regulations on how to share this discovery, and other discoveries that could follow.

Anxious about how the country would decide to split royalties or proceeds, the consortium—consisting of Talos Energy as operator and joint venture partners Sierra Oil and Gas S de RL de CV and UK-listed Premier Oil Plc—has temporarily suspended development and investment plans for the huge offshore oil discovery, Bloomberg reports, citing a person familiar with those plans.

“Initial gross original oil in place estimates for the Zama-1 well range from 1.4 to 2.0 billion barrels, exceeding pre-drill estimates, some of which could extend into a neighboring block,” Talos Energy said in its July statement announcing the discovery.

It’s that neighboring Pemex-owned block that has prompted the Mexican authorities to review the rules.

Shortly after the big discovery was announced Pemex CEO Jose Antonio Gonzalez Anaya told El Financiero newspaper that the state firm would fight to get a cut of the proceeds. Related: Qatar Uses Saudi Strategy To Conquer LNG Markets

New rules on sharing of proceeds could delay Mexico’s new oil developments and put plans by foreign firms on hold, as the private sector mulls over whether new regulations would be enough disincentive to stop doing business there.

“This is the single most important outstanding issue in the sector,” Raymundo Pinones, director of Mexico’s Association of Hydrocarbon Companies, told Bloomberg.

“It could delay activity until there is clarity. In place of drilling or continuing with development, the industry is waiting for this to be resolved,” Pinones noted.

Deputy Energy Minister Aldo Flores believes that “If there’s enough evidence and certainty that the discovery extends into Pemex’s block, then it would have to be shared,” he recently told Bloomberg.

Mexico would devise rules on sharing and collaboration between private companies with finds extending into neighboring blocks as well—it would not be done just for Pemex, Flores added.

However, this first collaboration would involve the state firm, so there’s some concern among foreign firms and observers that Pemex may get preferential treatment.

Another potential setback for international companies willing to explore Mexico’s reserves is the upcoming presidential election next year.

Mexican President Enrique Pena Nieto—the architect of the energy reform—is completing his last term in office, and the front-runner for the 2018 presidential election is a leftist populist candidate, Andres Manuel Lopez Obrador, who has pledged to hold a referendum on the energy reform and review the oil contracts. Related: What Really Killed The Oil Price Rally

Although it’s far from certain that Obrador would undo his predecessor’s reforms, there’s industry concern that the Mexican market could present some difficulties for foreign investors, or that an Obrador presidency could create uncertainties in the regulatory landscape.

Mexico will probably have completed the draft regulation on sharing within neighboring blocks prior to the elections, and that regulation will shape the future of foreign oil exploration and interest in bidding in tenders.

“If they don’t get this right, they are going to jeopardize a lot,” John Padilla, managing director of energy consulting firm IPD Latin America, told Bloomberg.

By Tsvetana Paraskova for Oilprice.com

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