🛢UBS On Mexico's Energy Reform Setback #TALOS #PEMEX

• On Friday, the Mexican Ministry of Energy announced that Pemex will be the sole operator of the Zama oil field, one of the ten largest oil fields ever discovered in Mexico and believed to have between 700mb -1000mb in reserves. The Zama oil field was found by a consortium led by Talos Energy of the US, which was awarded exploration rights on one of the first blocks to be auctioned off under the new energy reform back in 2017.

• Pemex did not bid on that block. The Zama field stretches into an adjacent block owned by Pemex, which is why the question of who and how the oil field should be developed first arose. However, it is the private consortium that made the discovery and that has done all the preliminary drilling, having invested upwards of USD 350m up to this point.

• The Ministry of Energy has argued that Pemex has the financial and engineering expertise to undertake this project, as well as being able to benefit from existing infrastructure nearby. However, Pemex's finances are already challenged — witness the capital injections made by the government to the company— and the Zama field is deeper than those Pemex traditionally drills. Moreover, the decision to leave the consortium out of Zama's operation is seen as the last instance of energy nationalism under the AMLO administration, and one that is likely to dissuade private investment in the energy sector further.

• It is likely that the Talos consortium will look to redress this situation in the courts, including in international ones under the auspices of trade treaties such as USMCA. Expect growing friction with the US and other trade partners over energy.