Resource Nationalism

In the perennial struggle between resources owners and resource exploiters, Mexico’s latest move surrounding its largest private oil discovery ever has echoes of many past battles. There are only a few countries in the world that have both the physical energy assets and the technological know-how to exploit it, such as the US, UK and Norway. Even other major producers such as Saudi Arabia, Russia, Iran and Venezuela had plenty of outside help before nationalisation took over; to say nothing of the new players to hydrocarbons such as Guyana or Ghana. So Mexico’s decision to designate its state oil firm Pemex as the sole operator of the Zama field over the private consortium (led by Houston-based Talos Energy) that made the discovery has plenty of precedent. And is also a chilling reminder that the battle between national pride and international experience will always play out.

The Zama field, located in Block 7 of the Sureste Basin in the Gulf of Mexico, was discovered in July 2017 from the first exploration well to be drilled by the private sector in the country. The Zama-1 well struck oil at a depth of nearly 170m, and subsequent appraisal wells estimate the total recoverable reserves at nearly a billion barrels. Talos Energy, which holds a 35% stake in the block, is the current operator, sharing it with consortium partners Sierra Oil and Gas (40%) and Premier Oil (25%). First oil is expected by 2022 and peak production should stand at around 100,000 b/d. In many ways, Zama was a game changer for the Mexican upstream industry. At the point of discovery, Mexican oil production had been waning and discoveries lacking; Zama was proof that there was still significant amounts of oil left to be found.

The fact that Zama was the result of the first private sector exploration ever (well, at least for in over 80 years) was key. The fact that it was a huge resource was icing on the cake. Because in 2013, the Energy Reform allowed private and foreign investor across the entire energy value chain in Mexico for the first time since 1938, breaking Pemex’s monopoly in an effort to combat what was seen then as a chronic decline in Mexican energy. On the downstream side, international fuel brands penetrated the market for the first time, setting up what are now lucrative fuel station networks. But the biggest impact was on the upstream side. In the years following the 2013 Energy Reform, the Mexican National Hydrocarbons Commission awarded 107 oil and gas exploration and production contracts to over 73 companies from 20 countries.

The Zama discovery was born out of this de-monopolisation drive, and the companies currently drilling wells and making discoveries across Mexico include those from as far as Thailand and Malaysia. The string of new discoveries that have followed Zama’s are the fruits of this labour. Pemex still plays a vital role in the country – including running one of the world’s largest crude hedging programmes – but its loss of relevance has rankled some nationalists. Which is why in 2018, when new President Andrés Manual López Obrador (AMLO) took office on a nationalist platform, issuance of new E&P contracts have slowed down to a near trickle and new crude auctions have been suspended, as AMLO’s administration tries to assert domestic interests. His stated goal is to return Pemex to glory, which will mean rolling back the energy reforms that (briefly) made Mexico an upstream investment darling between 2014 and 2018.

Zama – as the most high-profile of all the private-led discoveries so far – has been at the centre of this tug-of-war. There is some basis to the government’s decision to hand over Zama to Pemex; this is not just some flimsy asset-grab attempt. Since the Zama field shares the same reservoir as one belonging to Pemex, the dispute has raged over whether Talos or Pemex has operational rights. A unification process to establish a joint area has been underway since 2018, with a study commissioned by both parties concluding that Pemex has a slight majority share with 50.4% of the shared reservoir. That ordinarily should have led to a new joint venture recognising the shared resource, but instead Mexico has decided to name Pemex as sole operator. It is a decision that should send chills down the spine of other international firms.

Because if it could happen to Talos, then it could happen to Lukoil, which just agreed to acquire a 50% interest in the Area 4 Ichalkil and Pokoch fields in the Bay of Campeche from Fieldwood Energy. It could happen to Petronas, which has made a string of offshore discoveries including from the Polok-1 and Chinwol-1 wells in 2020. It could happen to Eni, which holds rights in six E&P blocks (six as the operator) in the Sureste Basin. It could happen to anyone, because the AMLO administration has indicated with this approach that it is ready to confront the frustration and concern of foreign investors in order to polish Pemex. This could bring Mexico in the crosshairs of the Biden administration, since Talos is an American firm and this could fly in the face of some terms in the new North American trade deal. And more concerning is whether Pemex even has the resources and skills to operate Zama. The energy reform in 2013 happened precisely because Pemex couldn’t deliver operationally. Six years on and not much has changed at Pemex, so will there be any difference beyond nationalistic pride? Talos has made the full investment at Zama so far, while Pemex has yet to drill a single well after cancelling plans in June at the reservoir. Indonesia attempted something similar; and despite grand ambitions, Pertamina is no Petronas and the Indonesian upstream sector has languished.

Time will tell if this is a one-off or a trend in Mexico. But odds are that it will be the latter, given the nationalist bent pursued by AMLO and his relatively high popularity. But this shouldn’t be a surprise to any international firm operating in the sector. It happens everywhere. It is currently happening in Guyana, which is currently debating new petroleum laws to give the state a greater share of oil revenue after ExxonMobil was attracted there on favourable terms to make blockbuster oil discoveries. It is at the heart of the crisis in Papua New Guinea where the new government is attempting to extricate better terms from ExxonMobil and Total after their LNG projects took off. It resulted in Eni being ordered by a Ghanian court to place 30% of the Sankofa field’s revenue in an escrow account after the Italian major defied Ghana’s request to combine its field with the neighbouring Afina field owned by Springfield. Competing national interests and commercial rights are reality in the upstream world. And if those signs coming out of Mexico are correct, then current private firms sitting on Mexican assets should be wary. At least until this attempt fails and a new politician initiates a U-turn.

End of Article

Market Outlook:

• Crude price trading range: Brent – US$72-74/b, WTI – US$70-72/b
• News that OPEC+ was on the verge of a new deal – after some concessions were offered to the UAE to entice it to support the extension of the club’s supply deal – provided some relief to the global crude markets, but the resulting incremental gains in supply over 2021 have seen benchmarks retreat down to the US$70/b level
• Markets are also increasingly concerned about the global resurgence in Covid-19 infections that spiking cases even in vaccine success stories such as the US and the UK, both of which have seen daily cases return to high double-digits; although this is mainly among the unvaccinated and death rates are low, the chances are the renewed outbreak causing further mutation is dampening forecasts for mid and long-term crude demand

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