A major oil discovery offshore Mexico by a consortium of Talos Energy, Premier Oil and Sierra Oil & Gas is a boost for the country’s recently reformed energy sector, but a popular legacy of national ownership could pose a number of political challenges for oil and gas companies.
- In July, a consortium of Talos Energy, Premier Oil and Sierra Oil & Gas announced a 1.4 to 2bn barrel oil discovery in the Gulf of Mexico. This is the fifth biggest discovery globally in the last five years, and the first to have been made by private companies in Mexico in almost 80 years.
- The Zama well is located 60km off the coast of the southeastern state of Tabasco. The shallow water block is 35%-owned by operator Talos, with Sierra holding a 40% interest and Premier the remaining 25%. The consortium was awarded the block in July 2015 in Mexico’s first oil tender following significant reform to open the oil and gas sector.
- Talos’ discovery already appears to have further boosted the growing interest of oil and gas investors in Mexico, and the country expects to hold annual auctions until 2025. Initial bidding rounds, which began in 2015 following the opening of the sector, were met with muted interest. However, larger players such as Exxon, Total, Chevron and Shell have since been awarded blocks in auctions, and Eni announced a significant discovery in March this year. The latest auction for onshore blocks saw a spike in investor interest with multiple companies making the maximum possible bid. Following this success, Mexico’s chief oil regulator has decided to postpone the sector’s next auction, which will be for deepwater blocks, by a month to January 2018 in order to give potential bidders more time to evaluate the recent discoveries.
- The government of President Peña Nieto launched a set of reforms in 2013 that amended the constitution to end a decades-long monopoly by state energy company Pemex. However, some challenges remain that will require Talos to proactively manage its stakeholder relationships. The reforms aimed to lower fuel prices and reverse years of declining output as Pemex proved unable to exploit opportunities in deep-sea drilling. Nonetheless, they may not have completely eliminated issues from the past, such as political interference, corruption and nepotism. Regulation may also be a challenge. The upstream regulator, the National Hydrocarbons Commission (CNH), previously only had few regulatory responsibilities and was to an extent captured by Pemex due to the asymmetry in knowledge and resources. It is thus untested and needs to expand its staff without relying too heavily on retired engineers and geoscientists with a fundamental loyalty to Pemex.
- While the reform of the oil and gas sector is enshrined in the constitution and the government is committed to it, popular opinion in Mexico could present a further challenge. The 1938 nationalisation of the oil sector has historically been a source of national pride and President Peña Nieto’s approval rating has been pulled to record lows by the struggling economy, reductions in fuel subsidies and increasing crime. In addition, the left-leaning frontrunner for the July 2018 presidential elections, Andrés Manuel López Obrador, has pledged to hold a referendum on whether to roll the reform measures back. Given the longer-term uncertainty around political and public attitudes to the oil sector, Talos will need to have a solid and forward-looking cross-party engagement strategy.
- Oil and gas investors like Talos will also face longer-term concerns related to climate change. Therefore, they need to take into account the risk that at some point global shifts towards lower-carbon forms of energy may make new oil and gas discoveries unprofitable. For example, while the Mexican government currently sees the oil sector as vital to boosting the country’s energy security, economic growth and public revenue, it is also committed to the Paris Agreement and has introduced measures to encourage the decarbonisation of the economy, as a result of which the share of oil in Mexico’s energy mix is declining rapidly.
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