Pemex Can’t Afford to Develop the Oil Field It Fought to Control

By Amy Stillman (Bloomberg)–Petroleos Mexicanos fought tooth and nail to wrest control of the country’s biggest private oil find from the companies that discovered it. Now it has found itself without the cash to actually develop the field.

After taking operational control of the Zama megafield last month, the Mexican state-owned oil producer doesn’t have the nearly $2 billion needed to develop the prospect over the next five to seven years, said people familiar with the discussions being held at Pemex, asking not to be named because the information isn’t public.

Mexican President Andres Manuel Lopez Obrador swept to power in late 2018 on pledges to put the country’s oil riches back in the hands of the state. Pemex’s subsequent fight to prevent its partners from operating Zama plunged Mexico’s already precarious investment climate into further uncertainty, and has potentially opened the door to costly international arbitration proceedings.

One idea that was floated to overcome the funding challenges was a deal in which Talos Energy Inc. — which remains a minority owner in the project — would facilitate the financing using barrels as collateral, the people said. But the suggestion was met with resistance from Pemex’s top executives and Energy Minister Rocio Nahle, who view it as a threat to Mexico’s oil sovereignty, they said.

Pemex, the Energy Ministry and Talos, which represents the group of private partners in the field, didn’t immediately respond to requests for comment.

In a July 2 letter to Talos and Pemex, Nahle cited Pemex Chief Executive Officer Octavio Romero as saying the company had “sufficient financial capacity” to develop the project.

The consortium has invested nearly $350 million in the project to date. In November, Mexico’s oil regulator CNH approved Talos’s $875 million capital spending budget for Zama in 2021. Wintershall DEA and Premier Oil Plc are also partners in the oil find.

After a protracted dispute between Pemex and Talos over who would operate Zama, the Energy Ministry last month named Pemex the field’s operator and gave it a 50.4% stake.

The victory now seems bittersweet as the world’s most indebted oil company struggles to find the money to develop its prize, further exacerbating its already stretched finances. Pemex’s debt of $115 billion has ballooned following a decade and a half of production declines.

Lopez Obrador’s government has also canceled Mexico’s nascent oil auctions and rolled back 2013-2014 reforms designed to bolster the private energy industry.

International oil companies that swarmed into Mexico following the historic reforms are now scaling back investments as a result of the shift in policy.

Talos has said that it could seek legal action over the decision to grant Pemex operatorship, and it has said that it will focus on developing its assets outside of Mexico.

Talos and its partners discovered Zama in 2017 after winning the block in Mexico’s first ever competitive oil auction. It was later determined that Zama spilled into a neighboring field belonging to Pemex, and Mexico officials ordered Talos and Pemex to unify the shared reservoir.

© 2021 Bloomberg L.P.

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