Zama: Rift Over Reserve Rights Causes Concern

Wed, 01/22/2020 - 05:12

In 2017, American oil company Talos Energy made one of the most important discoveries in Mexican oil history. The Zama oil field, located in the shallow waters of the Gulf of Mexico spanning both Talos Energy and PEMEX-operated blocks and expected to yield up to 800MMboe, quickly became a symbol of the success of the Energy Reform. Politicians and oil players alike lauded the size and accessibility of the field. Indeed, Talos Energy CEO Timothy Duncan stated in June 2019 that based on the preliminary results of the company’s appraisal program and comparisons of well data to Talos’ geophysical models, the team had settled on a 400-800MMboe guidance range of gross recoverable resources. Under the Production-Sharing contract Talos holds with the Mexican government, almost 70 percent of the profits made from Zama would return to the state. At 165m below the waves, the field is well within the company’s capabilities, already having operations in the deep (180m-915m) and ultradeep waters (over 915m) of the US Central Gulf of Mexico. 

Talos is the operator on Block 7, within which most of the Zama field is located, and leads a consortium that originally consisted of the British company Premier Oil and Mexico’s Sierra Oil & Gas, which was later acquired by Deutsche Erdoel AG (DEA). Yet, the Zama field’s expansive size, which extends across the boundaries of the 465km2 Block 7 and into the PEMEX-operated AE-0005-2M-Amoca-Yaxche-03 assignation, caused controversy.

In September 2018, PEMEX and Talos signed a preliminary unification agreement between Block 7 and the AmocaYaxche-03 area, one of the 42 blocks that PEMEX will develop over the next several years. However, in October 2019, media reported that PEMEX was attempting to wrestle control of Zama from Talos, claiming drilling rights over the area. During the same period, President López Obrador restated his intention to review the 107 contracts signed since the Energy Reform, leading to further speculation. The decision by Talos to hand back 50 percent of Block 7 to focus its energies on a smaller area also added fuel to the fire.

According to Reuters, if terms of the unification agreement cannot be agreed, the Ministry of Energy may choose to be the operator of the Zama field. This would be a serious blow to the progress made since the Energy Reform and would alarm the private sector, including major IOCs, who may question the sanctity of the contracts they hold. 

During an investors meeting, Duncan said that his company had taken on the entire financial risk of the Zama field thus far and he would continue working on the Block 7 Development Plan as operator. He added that he respected PEMEX’s right to drill exploration wells to identify reserves within its operated areas. 

PEMEX has had the Asab-1 EXP well, whose planned location is close to its border with Talos’ Block 7, authorized since February 2019. During the 71st Session of CNH, commissioners discussed the drilling of the well, remarking that drilling is unlikely to take place until February or May 2020. Commissioner Alma América Porres expressed frustration at the speed with which the drilling plans are moving and noted that the importance of the Asab-1 EXP well should make it a priority. The well will be part of PEMEX’s overarching push to revive the country’s falling oil reserves, a strategy that will require an investment that could reach US$2.5 billion by 2023.