Talos Files Dispute Notice Against Mexico Over Zama

(Bloomberg) -- Talos Energy Inc., the U.S. offshore explorer behind Mexico’s largest oil discovery in years, is taking the first step toward an international dispute after control of the field was given to state producer Petroleos Mexicanos.

The Houston-based driller sent the Mexican government a dispute notice Friday, a required step before moving to arbitration under the U.S.-Mexico-Canada Agreement. The takeover of the Zama oil field in July was a violation of the USMCA, Talos said in a statement, urging negotiations to avoid further legal action and arbitration.

The government of Mexican President Andres Manuel Lopez Obrador, who has pledged to put the country’s oil riches back in the hands of the state, named Pemex Zama’s operator and gave it a 50.4% stake. It was one of his latest moves to backtrack on the previous administration’s historic reforms to open up Mexico’s energy industry to private investment. 

“We are still hopeful that a negotiated outcome that fully respects the rule of law is achievable,” Talos Chief Executive Officer Timothy Duncan said in the statement. “We respectfully call upon the Government of Mexico to engage with Talos in meaningful negotiations and consultations.”

The company and its partners discovered Zama in 2017 after winning the block in Mexico’s first-ever competitive oil auction, before Lopez Obrador rose to power in late 2018. His government later determined that the Zama field extended past the boundaries of Talos’s block and into a neighboring field belonging to Pemex, and Mexico officials ordered Talos and Pemex to unify the shared reservoir.

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

The Talos-led consortium said it has invested nearly $350 million in the project to date. In November, Mexico’s oil regulator 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.

While emphasizing that it wants to resolve the issue without going to court or arbitration, Talos argues that the energy ministry has not shown how it has followed the legal principles required for granting operatorship to Pemex. Those principles include considering competitiveness, transparency and best industry practices. 

The ministry gave Pemex control of the field only three days after receiving a letter from the state oil producer arguing for operatorship, Talos said. 

While Pemex won control of the field, it doesn’t have the nearly $2 billion needed to develop the prospect, according to people familiar with the matter

The Talos-led group has followed up on the discovery with three successful appraisal wells, while Pemex for years has failed to drill a single confirmation well on its neighboring contractual area, Talos said. 

(Corrects spelling of Talos in second paragraph.)

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