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Zama oil find targets 2020 FID

Upgraded resource estimate from Mexican field boosts hopes of a financial decision, but a serious potential roadblock remains

Mexican president Andres Lopez Obrador took little time in shelving all planned licensing rounds when he secured office at the tail-end of 2018—rolling back a raft of energy reforms which had granted new entrants’ access to the sector for the first time since the sector’s nationally iconic 1938 nationalisation and ending state-owned oil and gas firm Pemex’s monopoly.

But while further concessions have now been suspended, discoveries already made by beneficiaries of the reforms are moving towards first oil. The shallow water Zama discovery, first announced in 2017 by a consortium of operator US independent Talos Energy (35pc), Mexico’s Sierra Oil and Gas (40pc)—later taken over by Germany’s Wintershall Dea—and UK producer Premier Oil (25pc), is progressing towards FID after a third-party resource evaluation upgraded reserves estimates to between 670mn bl oe and 1.01bn bl oe. 

“Talos and its partners in the consortium have made great progress in meeting the milestones required to keep our world class Zama discovery on pace for a 2020 FID if we can conclude unitisation discussions soon,” says Talos CEO Timothy Duncan. “Doing so will allow us to establish first oil in 2023.”

Cost-effective

The new evaluation confirms the presence of high-quality crude. Roughly 94pc of total resources are believed to average 28° API crude quality, on both 2C and 3C bases, while early FEED studies are targeting 150,000bl/d in production capacity—around half of the production target of the 22 priority fields in development under Pemex operatorship.

Talos says Zama’s breakeven price will be among the lowest in the world, at less than $20/bl, below ExxonMobil’s Liza project in Guyana and Brazil’s pre-salt Sepia and Itapu fields.

In the first year of production, the consortium is targeting $3.6bn in total revenue, on an assumed Brent average of $65/bl. From this share, $1.1bn would be allocated to the government in profit oil and royalties, leaving $2.5bn to be shared among the consortium. 

But who gets what of this $2.5bn is where complications start. Zama sits on the border between Talos, Wintershall Dea and Premier’s Block 7 and a neigbouring licence held by Pemex, who will also need to be brought into the consortium.

Talos says Zama’s breakeven price will be among the lowest in the world, at less than $20/bl

The resource evaluation concludes that 60pc of Zama sits in Block 7, but Pemex has done little work on its side of the divide and has not yet agreed to a unitisation solution. “Both Talos and Premier are pushing Pemex to start its own assessment of the [part of the field lying in its block], in order to determine ownership, how the revenue will be split and who will be the operator of the whole field,” says Edgar Cruz Borges, head of credit research at Spanish bank BBVA.

The situation is further complicated by Premier’s desire to sell its Zama stake. The UK firm aims to divest its 25pc holding to reduce its debt burden—estimated at around $2bn at year-end—as it focuses on expanding its Catcher Area development in the UK North Sea.

Under Mexican law, the ministry of energy (Sener) would have the power to determine the final unitisation agreement if the Block 7 partners and the Mexican firm fail to come to a bilateral solution. “Unitisation could strongly [negatively] affect progress to first oil if Pemex has the majority of the field and also if it is the operator,” says Borges. He has particular concerns over Pemex controlling the sales process of eventual production, and also whether—if Sener awards a much larger share of Zama to Pemex—one or both of the other partners could join Premier in looking to offload what would then be less attractive stakeholdings.

2024 contribution?

Last year, reports suggested Pemex planned to appropriate the whole field, but in October Lopez Obrador denied this suggestion. This could be a promising sign.

Shortly after taking office, the new administration promised to resurrect national oil production to 2.6mn bl/d by 2024. Pemex already has bringing at least 20 new operated fields into production in its hopper. Agreeing a fair deal for Zama—that might give operatorship to a less busy firm, award a smaller stake for Pemex that would reduce Zama’s call on its straining capex budget, and help ensure that no other Block 7 shareholder slows things down by then also trying to exit—could facilitate a much quicker material contribution from Zama to the 2024 target.

In the first year of production, the consortium is targeting $3.6bn in total revenue

Talos and its partners are pushing ahead with six other drilling prospects in Block 7. “We filed for and received a two-year extension of the primary term on Block 7 in the third quarter, which will allow us to test other exploration ideas on the block through [to] September 2021, including our Xlapak and Pok-A-Tok prospects,” Duncan told the company’s third-quarter earnings call.

The firm also has a 25pc stake in Block 2/31 offshore Mexico, together with operator Hokchi Energy (75pc), a subsidiary of Argentina’s Pan American Energy. A well is planned to assess productivity from the Xaxamani-2 discovery at the Olmeca complex, to be immediately followed by a further well at Tolteca. A further 3 potential prospects could also be drilled in this block.

Further north, in the US Gulf of Mexico (GoM), Talos acquired the Antrim discovery from ExxonMobil last January, which will be tied back to the Green Canyon 18 platform. Together with the Orlov find, both are expected to begin production in 2020.

The company also purchased the GoM Hershey discovery from ExxonMobil in September, adjacent to its Phoenix complex which reached a production milestone of 43,000bl/d in May. Talos has identified a further five prospective drilling targets within this complex.

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