Will Talos share its oil with Pemex?

Houston-based Talos Energy discovery of 2Bbls in July caught the attention of the industry. However, the firm did not expect that it would have to share part of the oil with Pemex.

Talos’ was the first major discovery since the government opened the industry to foreign investment in 2013, but it did not expect the site to extend beyond the boundary of its exploration block, to an adjacent block owned by Pemex, or that it would have to share part of the oil it with it.

Back in July, the consortium said that oil “might extend into a neighboring block.” Weeks later, Pemex’s CEO José Antonio González announced that his company, which has rights over that block, would fight for part of the oil.

The Mexican government is now rushing to draft a legal framework to establish how this discovery will be shared, as well as the ones that will come, but the regulation could define the future of Mexico’s entire energy plan.

It has been said that the Sierra Oil & Gas and Premier Oil consortium has stopped investments, waiting for the government’s decision.

Other companies that bought exploration rights also want to have access to the government’s ruling before taking on financial commitments.

“This is the most important issue that is pending in the sector. It would delay activities until there is clarity. Instead of drilling or continuing development projects, the industry is waiting for this to be resolved,” said Raymundo Piñones, director of the Mexican Association of Hydrocarbon Companies.

Almost 70 companies have received leases to explore in Mexico. One of them, Italy’s Eni, even reported an offshore discovery that has at least 1.4Bbls, and is located under one of Pemex’s wells.

David Enríquez, partner of Goodrich Riquelme and Associates, said that the new laws should give more freedom to new contracts.

He said the biggest challenge is to address the difference between the types of contracts that Pemex and the consortium have, because the NOC has a government allocation and private firms a joint production contract.

“In a first step, the Mexican Government has to generate a regulatory instrument that basically gives freedom to the parties. The second step should be to allow Pemex to migrate to an exploration and production contract,” Enríquez said.

He pointed out that contracts will have the same legal nature and the field could be unified by doing that, and added that if the government does not perform these procedures, companies might stop their investments and interest in next rounds may be reduced.

Energy consultant Enrique Silva said that international standards include the negotiation of royalties, risks and benefits, among others.

“The problem is the deposit characterization, of establishing who is entitled to a higher proportion of royalty payments,” Silva said.

Bottom-line: It seems like the excitement that followed Talos’ discovery in July turned into a nervous waiting period for companies.

If the Mexican government is smart, it will not approve regulation that scares investors away.

Mexican authorities have been doing a good job so far, but this could affect all the progress made.

The government must guarantee signed contracts and investments, and if authorities change the initially agreed conditions, the only thing that they will achieve is to send a message of uncertainty to the market.

Especially if conditions change only because a company has a big discovery and do not change if a contract encounters an adverse situation.

Tags: energy, hydrocarbons, latam, mexico, oil, oil and gas, pemex, talos
Posted in LatAm, Energy, Energy