Observers welcome Talos' 50% sale of Zama but questions remain regarding first oil

Talos Energy's decision to sell a 50% stake in its Zama field in Mexico to a conglomerate owned by Mexican billionaire Carlos Slim has been broadly welcomed as all parties benefit from the operation but questions remain about the ability of the team to reach first oil.

The Zama field is expected to yield as much as 150,000 b/d when it peaks and it will be one of the main private contributors to the national production, together with BHP-operated deepwater block Trion, according to S&P Global Commodity Insights estimates.

Houston-based Talos and partners Harbor Energy and Sierra Oil & Gas discovered Zama in 2017, becoming the first private oil discovery in Mexican territory in more than seven decades. In 2018, Sierra would sell its stake in the field to Wintershall Dea. Talos and its partners soon discovered the reservoir extended into an adjacent block operated by state oil and gas company Pemex. After Pemex and Talos failed to reach an agreement on who should operate Zama, Mexico's Energy Secretariat appointed Pemex as the operator in July 2021.

Talos said May 25 that a subsidiary of Mexican conglomerate Grupo Carso, which Slim owns, agreed to acquire a 49.9% interest in Talos Mexico, which holds a 17.4% stake in Zama.

"It's great news," Mexico's President Andres Manuel Lopez Obrador said during his May 26 press conference. Lopez Obrador said he was pleased with the operation as a Mexican company with its own drilling equipment was involved. The fact that Carso has its own drilling equipment will accelerate the production of crude, which could start as early as 2025 and peak by 2029 at as much as 180,000 b/d, the president said, adding, "It is a support for the next government."

Lopez Obrador will end his six-year tenure in December 2024. S&P Global estimates first oil by 2026, considering three years after the final investment decision is expected later in 2023.

Marco Cota Valdivia, CEO of consultancy Talanza Energy and head of exploration and production at SENER during the last administration, told S&P Global that Talos is finding in Slim a businessman with a "high bargaining power, who is an expert in doing business in Mexico."

Talos was clearly trying to "de-risk" the operation since SENER took the decision to designate Pemex as an operator, Cota said.

"The decision was arbitrary and clearly a conflict of interest as SENER decided in favor of Pemex based on an unknown assessment and despite the fact that Pemex failed to drill an exploration well on its side of the reservoir to better understand it," Cota said. In Mexico, the head of SENER is also chairman of Pemex's board.

Fernando Cruz Galván, an expert in Mexican energy at Kannbal Consulting, agreed with Cota that Grupo Carso brings bargaining power to the table and added that it is a way to form an integrated team without contradicting the nationalistic discourse used when SENER designed Pemex as the operator. "Pemex has developed its expertise in very shallow waters mainly, and the depth at Zama could be a challenge, so it makes a lot of sense to strengthen the expertise of the private partners," Cruz said.

Zama is located at a water depth of roughly 165 meters, National Hydrocarbons Commission data shows.

"The move also makes financial sense for Talos, as the company recently made an important acquisition and is probably looking to reduce its debt levels," said Marco Biersinger, a director of oil and gas corporate finance at Kroll. In September, Talos announced the acquisition of EnVen, a private operator in the deepwater US Gulf of Mexico, for $1.1 billion. "The company is managing to reduce its risk exposure with a known partner," Biersinger said, noting that the companies had partnered before to bid for blocks in the country during the 2015-2018 liberalization.

Andrés Armijos, head of Latin American research at Welligence, a market intelligence firm specializing in the upstream oil & gas sector, said that the sale is clearly "a way to monetize the efforts Talos has made in the field."

According to Talos, the company has invested more than $100 million since 2015.

Armijos added that the price valuation of the transaction seemed to have "a bit of discount" compared with other acquisitions of stakes in Mexican blocks, but there is an upside for Talos if Zama is developed successfully.

Zama has been estimated to hold almost 700 million barrels of light crude, according to early estimates. Sources mentioned that given Grupo Carso's tradition to grow through acquisitions, and its reiterated interest in the sector, it would not be a surprise to see Grupo Carso increasing its stake in the project, either through Talos' share or others.

Questions regarding first oil

But there are still questions about how the joint venture will work and how it will affect their ability to reach first oil.

Cota said Pemex lacks the resources and equipment to fully serve its own portfolio, let alone take care of a new project. Talos might be looking to have a way to persuade Pemex to accelerate the development of the field with Carso sitting "at the table," he said.

Aparicio Romero, a rig analyst at PetroData, part of S&P Global, agreed that it would make sense to use the rigs Carso owned or any other that is already in Mexico to develop Zama, as demand for rigs from Brazil and the US is creating a shortage in the region.

One option for the field is Grupo R's La Muralla IV, which is currently being reconditioned in the Bahamas and will later be taken to Curacao for final works, Romero said. Another option is Frida I, owned by Unifin, which is in a sale process. It is en route to Belize, but sources indicate it could come back to Mexico, he said.

"We understand that Pemex is looking to stay away from deep waters in this administration, so leaving these activities for foreign operators could yield better results," Romero said.

Another challenge for reaching first oil will be the ability of the partners to work together, observers noted. Pemex will need to operate in a way that it is not accustomed to, which involves following the steps and the budget it sets, Armijos said.

"It will be interesting to see how Pemex plays on a team when it is forced to negotiate," said Armijos.

What's positive is that all parties are trying to move along with the project, observers noted.