Mexico Oil Privatization Pays Off With Billion-Barrel Find

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July 12, 2017

The well, which was spudded in May 2017 using the Ensco 8503, in 166 meters (546 feet) of water and approximately 60 kilometers (37 miles) offshore Dos Boca. Credit: Ensco Plc

By Adam Williams and Angelina Rascouet (Bloomberg) — Mexico’s decision to allow private companies to explore for oil and gas started to pay off after the discovery of at least a billion barrels in a new offshore field.

A consortium of Premier Oil Plc, Sierra Oil & Gas S de RL de CV and Talos Energy LLC made the discovery in the shallow waters of the southern Gulf of Mexico just two years after winning the exploration license. It’s the first new find by a private company in the country in almost 80 years, according to consultant Wood Mackenzie Ltd., possible only after the government ended the monopoly of state-run Petroleos Mexicanos.

The Zama discovery “is the most important achievement so far of Mexico’s energy reform,” Pablo Medina, the senior upstream analyst for Latin America at Wood Mackenzie, said by email. “It is one of the 15 largest shallow-water fields discovered globally in the past 20 years.”

Mexico opened up to exploration by private companies in an effort to slow and eventually reverse the decline in its oil production. Its output fell by about a third over the past decade, according to data from BP Plc. The nation pumped 2.5 million barrels a day on average last year, the lowest level in more than 30 years. After the country initially struggled to lure interest in its fields, companies including Italian giant Eni SpA have been bidding for licenses and making discoveries.

When Premier Oil and its partners spudded the Zama-1 exploration well in May, the estimates were for as much as 500 million barrels of oil in place. In an interview on Wednesday, Tony Durrant, the chief executive officer of Premier Oil said that figure is now 1 billion to 1.5 billion barrels. Sierra said the primary target reservoir contains 1.4 billion to 2 billion barrels and could extend into a neighboring block.

Premier is taking a “reasonable guess” but said its partners may deem it’s being “too cautious,” Durrant said. Full drilling results due next month are more likely to confirm or upgrade current estimates, he said.

Worst Time

Mexico “took a really difficult decision for them politically after 40 years of 100 percent Pemex-ownership,” Durrant said. The opening up of the country’s industry “caught them at absolutely the worst time because of the collapse in oil prices. But to be fair to them, they persevered and they have now got very strong industry interest.”

The block was the most sought-after of the 13 offered in Mexico’s first auction in July 2015, as the group narrowly beat out an offer from Norway’s Statoil ASA. Zama 1 was spudded on May 21, marking the first time a private company drilled a new offshore oil well in Mexican waters since the state monopoly was lifted. Eni’s earlier oil find came from extended drilling on an existing well.

Premier Oil shares soared as much as 38 percent to trade at 64 pence in London trading. They were up 30 percent at 60.25 pence a share as of 10:01 a.m.

The field is located 37 miles (60 kilometers) offshore from the Mexican port of Dos Bocas in 546 feet (166 meters) of water and contains light oil, Premier Oil said in a statement. Drilling will continue at the well toward a deeper target in the same location, Sierra said in a statement.

Talos Energy, the operator on the block, owns a 35 percent stake in the venture. Sierra — backed by Blackrock Inc., Riverstone Holdings and EnCap Investments — holds 40 percent, while Premier has a 25 percent share.

The Mexican government will receive a 68.99 percent profit share from every barrel produced in the block, and as much as 80 percent when considering taxes and fees over the life of the project, according to the Sierra statement.

© 2017 Bloomberg L.P

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