As any attentive reader of Oilprice would know, Mexico has been fighting a gradual oil production decline for years already – for fifteen years in a row the Latin American country’s output has been decreasing as mature oil fields get increasingly depleted and new fields fail to catch up with the pace of decline. Against such a background, the Mexican internal political life has been simmering with speculation on how to wrest the national oil company PEMEX out of the quagmire, with discussions ranging from the extent of government help necessary to keep it afloat all the way to the role of private companies in any potential oil production renaissance. As it happens, most of the crucial questions that Mexico faces seems to be condensed in one specific case, that of the Zama field.
Graph 1. Mexico Crude Production vs Exports in 2017-2019 (million barrels per day).
The offshore Zama (Mayan word, meaning “dawn”) field was won by private firm Talos Energy (along with Wintershall DEA and Premier Oil) in Mexico’s first round of auctions (Round 1.1.) in July 2015. With the first exploration well spudded two years later in water depths of 165m, the field’s estimated reserves in place were boosted from the 100-500 MMbbbls initial estimate to 1.4-2 Bbbls, of which 670MMbbls is now considered recoverable. Then it seemed that Zama would spearhead the private sector’s breakthrough into Mexico’s upstream, the first-ever private exploration well turned out to be much better than everyone thought. In fact so good that the Association of International Petroleum Negotiators labelled it the discovery of the year 2018. Related: U.S. To Become Net Oil Exporter This Year: EIA
Further drilling results from the Zama-2 and Zama-3 confirmed that the field extends laterally to the south of the initial drilling spot, making Block 07 of the Sureste Basin a highly coveted asset. Unfortunately for Talos and its project partners, the attitude of the Mexican NOC PEMEX vis-à-vis Zama has changed over time, to the worse. Initially supportive of the private sector’s arrival to Mexico’s upstream (alleviating its upstream commitments towards the Mexican state), PEMEX has sensed an opportunity in the relatively low-cost shallow-water field – as Block 07 abuts PEMEX’s Block 08 and some parts of the Zama field extend there, the NOC has first claimed that the project needs a unified infrastructure, then it moved on to the next stage of pressuring, stating that there need be one joint operator for the field.
Why is this important, one might ask? First and foremost, Zama is the most interesting upstream prospect for Mexico’s offshore in the early 2020s (the Ixachi field is also of considerable interest yet it is located onshore and will be heavily tilted towards natural gas production). If Talos Energy’s estimates turn out to be correct, the Zama field will peak at 150kbpd a couple of years after its expected 2022 start-up. Secondly, it remains the largest private discovery in Mexico’s offshore and hence is illustrative of the general policy of the Mexican government with regards to private investments. As recently as October 2019, Mexican President Andres Manuel Lopez Obrador claimed that the “government is not seeking to take control of the project” – fast-forward to early February 2020 and one faces a completely different picture.
“We believe that we have the majority of Zama on our side”, claimed PEMEX’s chief executive director Octavio Romero late January, triggering a war of words which was followed up by Talos pointing out they possess objective information (a Netherland Sewell & Associates report) that 60% of the Zama reservoir within Block 07 and thus should not be subject to PEMEX operatorship. The 60% estimate might be even too conservative an estimate, as a Wood Mackenzie report, as reported by Reuters, puts PEMEX’s share of the aggregate deposits at around one third of the total. Interestingly, PEMEX is still yet to spud an exploration well in what it considers its own part of the Zama deposit and the company is still to present any evidence to the Mexican Hydrocarbons Commission (CNH) that Zama extends to its block. Related: Why 2020 Could Be A Record Year For Oil Trading Giants
All this did not keep Mexico’s Energy Minister Rocio Nahle from stating that the government needs to talk to the relevant companies “who will be in charge of operations as PEMEX has a big part of it”, in what might be considered a rather ill-disguised guidance of what is going to happen next. The AMLO government has long held reservations regarding the Zama discovery – even before the new team settled into their new positions, they have raised questions whether the allocation of Block 07 to the Talos-led consortium was legal. Their argumentation was that one of the initial stakeholders (Sierra Oil&Gas) was created by former PEMEX officials who might have funneled information to their advantage, yet given how contested Block 07 during the auctioning round this claim seems to be rather far-fetched.
Confronted with first signs that his hailed program of economic reform might not be working that well and that the averaged annualized GDP growth of 4 percent for AMLO’s 2018-2024 presidential tenure will be difficult to achieve, the issue of who should operate Zama might be subject to excessive media attention. GDP has decreased by 0.1 percent in 2019, there is only privately-owned project that has been put onstream in the last 5 years and Mexican oil production has fallen to 1.77mbpd as of January 2020 – all this compels AMLO to act more aggressively, even if it comes at the expense of jeopardizing future oil-related investments (something he has promised not to do).
PEMEX has tried to build momentum for its takeover of Zama operatorship and has succeeded to a significant extent. For instance, its recent discovery of the 500MMbbl Quesqui field, located onshore in the Tabasco region, has created some positive buzz about PEMEX’s intensified drilling programme – the fact that much of forthcoming production, be it from the condensate of Ixachi or the very light oil of Quesqui, will be of light sweet quality might be also perceived as a boon in a IMO-2020 environment. The main issue of concern, however, is still there – PEMEX keeps on generating losses. In red for the third consecutive quarter, Q3 2019 has seen PEMEX’s net loss rise to $4.6 billion – fortifying its status as the most indebted oil company in the world, beating PDVSA. Seizing other companies’ projects is hardly the way out.
By Viktor Katona for Oilprice.com
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Despite the passing of 26 years since I wrote that paper, nothing seems to have changed in Mexico. The National Oil Company Pemex is sinking deeper in a quagmire and the country’s socio-economic problems continue to deteriorate. Yet, the political system in Mexico is still simmering with speculation on how to wrest PEMEX out of the quagmire, with discussions ranging from the extent of government help necessary to keep it afloat all the way to the role of private companies in any potential oil production renaissance. That is why the case of the Zama offshore oilfield speaks volumes of the rigidity and futility of government thinking vis-à-vis Pemex and the role of private sector investments in salvaging Mexico’s oil industry from collapse.
Instead of encouraging the most successful oil discovery of recent times by a private consortium consisting of Talos Energy along with Wintershall DEA and Premier Oil, the government and Pemex are colluding to wrest control of Zama oilfield from the consortium probably as a way to ease Pemex mushrooming losses. Seizing other companies’ projects is hardly the way to attract foreign investments into Mexico’s upstream sector.
Mexico’s oil production has been declining for the last ten years at an average annual rate of 6.5% from 3.17 million barrels a day (mbd) in 2008 to 1.92 mbd in 2019 falling further to 1.77 mbd as of January 2020 as mature oil fields get increasingly depleted and new fields fail to catch up with the pace of decline.
And yet, the Mexican government’s attitude towards Zama oilfield’s consortium is jeopardizing future oil-related investments. Somethings never change.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London