Talos trying to resolve Zama controversy through notice of dispute

Houston-based Talos Energy has decided to dispute the Mexican government’s decision to designate the state-owned Pemex as the operator of the Zama offshore field in an effort to reach a resolution without further legal action, including arbitration.

The Valaris 8503 rig was used for Zama appraisal - Talos
The Valaris 8503 rig was used for Zama appraisal

Talos Energy and Talos International Holdings SCS have submitted Notices of Dispute to the Government of Mexico over decisions taken by Mexico’s Ministry of Energy (SENER), Talos said last Friday.

Talos said that these decisions, which include the recent designation of Pemex as the operator of a yet-to-be unitized asset, cause loss or damage to the company as an investor and as the operator of CNH-R01-L01-A7/2015 (Block 7) offshore Mexico.

The company also said that the actions by SENER constitute violations of the agreement between the United States of America, the United Mexican States and Canada (USMCA), and the Bilateral Investment Treaty between the United Mexican States and the Belgo-Luxembourg Economic Union (BLEU-BIT).

Explaining the move, Talos said that these notices of dispute provide the opportunity for an initial phase of negotiation and consultation between the parties in an attempt to resolve the controversy. If successful, this would avoid the need for further legal action, including international arbitration. Talos will diligently seek a fair and mutually beneficial agreement and will continue to engage in good faith with the institutionally appointed representatives of the Government of Mexico.

The filing of the notices of dispute is consistent with the company’s attempts over almost three years, since the signing of the Pre-Unitization Agreement, to work constructively with Pemex and SENER to finalize a Unitization and Unit Operating Agreement (UUOA) for the Zama field.

Talos’s President and Chief Executive Officer, Timothy S. Duncan, commented: “Despite SENER’s current designation of Pemex as the operator of the Zama field, we are still hopeful that a negotiated outcome that fully respects the rule of law is achievable. The filing of these notices of dispute, along with the concrete, mutually beneficial proposals we have presented to Pemex and Mexican authorities in the past, demonstrates our commitment to maximize value for all stakeholders, including Mexico.

“We respectfully call upon the Government of Mexico to engage with Talos in meaningful negotiations and consultations considering the full body of evidence regarding the ideal operatorship structure for Zama and the safeguarding of our rights as a foreign investor”.

On 2 July 2021, Talos was notified by SENER that it had designated Pemex as the operator of the Zama unit, just three days after SENER received a letter directly from Pemex arguing for operatorship. Under Mexico’s own unitization guidelines, SENER was required to “consider the principles of economy, competitiveness, efficiency, legality, transparency, best practices of the industry and the best use of hydrocarbons”.

Talos claims that SENER has not demonstrated how these legal principles were followed, disregarding the company’s formal requests.

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Talos was awarded Block 7 in Mexico’s Round One in 2015 and the Talos-led consortium discovered the Zama field in 2017.

Upon completion of the appraisal program, the technical view was that the Zama discovery constitutes a shared reservoir that extends outside of the boundaries of Block 7 and into the neighbouring Pemex AE-0152-Uchukil block. Under Mexican law, a shared reservoir requires the contract holders of the two blocks to create a unit in which they will jointly develop the entire reservoir instead of each developing their own side.

The Talos-led consortium has already invested almost $350 million in Zama, drilling the exploration well that led to the discovery as well as three successful appraisal wells allowing for complete delineation of the field.

Talos pointed out that, although Pemex executives and Mexican government officials had claimed that Pemex would drill a confirmation well on its neighbouring contractual area to provide complementary geological data, the Mexican company repeatedly delayed the well for several years until ultimately cancelling all plans to drill it just a few weeks before SENER designated Pemex as the operator of the yet-to-be-finalized unit.

Talos has advanced a complete Front-End Engineering and Design (FEED) study, which is now investment-ready. The company estimates that the project could generate over $30 billion in total revenue for Mexico in addition to Pemex’s own share of the revenues and profits of their ownership interest in Zama.

Talos concluded it would continue to explore all strategic and legal options to maximizing value for its shareholders from its Zama asset.