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Amidst the uncertainties surrounding the oil price downturn and
global production rollback due to the COVID-19 pandemic, the
Mexican ministry of energy, SENER, in collaboration with the
National Hydrocarbons Commission (CNH), is urging the Mexican
national oil company, PEMEX, and Talos Energy to reach a
unitization agreement for the operatorship of one the world's
largest shallow water in the past 20 years, the Zama field.
The Zama oil discovery is located in the shallow waters of Block
7, in Mexico's Sureste Basin. During the CNH Bid Round 1.1 for
shallow water in 2014, the consortium formed by Talos Energy,
Sierra O&G (now owned by Wintershall DEA) and Premier Oil, was
awarded Contract Area Block 7 with a term of 30 years, starting in
September 2015, and 2 possible extension periods of 5 years each.
The discovery was announced in July 2017. The field is estimated to
hold approximately 810 MMboe (million barrels of oil equivalent) of
recoverable resources (2P volumes) which also positions it as the
first and biggest discovery made by an IOC in Mexico.
Figure 1: Mexico's most important oil discoveries
On October 5, 2017, Talos Energy notified CNH about the
possibility of a shared reservoir with PEMEX entitlement block
AE-0152 "Uchukil", which is located on the west side to Area Block
7. To date, there are no significant exploration or appraisal
activities on this block, and only one exploratory well, Asab-1EXP,
has been planned for 2020, according to CNH approved exploration
plan, on December 3, 2019.
Zama sets a precedent in Mexico's oil and gas industry due to
the unitization process which is needed for the shared reservoir.
In March 15, 2018, SENER published the "Lineamientos que establecen
el procedimiento para instruir la unificación de yacimientos
compartidos y aprobar los términos y condiciones del acuerdo de
unificación" which seeks to lay down the guidelines to establish
the procedure to carry out the unitization of shared reservoirs and
forms the basis to reach an agreement on the consequent activities
to name an operator for the shared reservoir. Following this, Talos
and PEMEX signed a Pre-Unitization Agreement on September 18, 2018,
with a term of 2 years, which allows both parts to share
information about the discovery and establish the process to reach
the final agreement. In January 2020, following an independent
technical study commissioned by the consortium, Talos stated that
60% of total field reserves lies in the block operated by Talos,
while Pemex holds 40%.
On May 7, 2020, CNH confirmed the hydraulic connectivity between
Area Block 7 and the entitlement block AE-0152 "Uchukil", which
further established the existence of a shared reservoir. Based on
this information, on July 7, 2020, SENER encouraged PEMEX and Talos
Energy to reach a unitization agreement for the shared reservoir
within 120 days. In such a case, if an agreement is not reached
between the parties, a decision will be taken by SENER with the
help of an independent expert while keeping in mind the best
interests of Mexico.
Due to the need to first determine Zama's operator, there is
currently no published development plan for the field. Hence, for
the analysis presented here, the assumptions about the development
concept for the Zama field were made taking into account the
preliminary plans released by Talos Energy, the total recoverable
resources, average well productivity, proximity to facilities and
the quality of the oil. 22 production wells were considered along
with the utilization of three PDUQ (Production Drilling Utilities
and Quarters) platform, each one with oil and gas pipelines
connected to a subsea tie-in assembly, with oil exported to an FSO
(Floating Storage and Offloading Vessel), and gas exported to Dos
Bocas Port in Tabasco, Mexico. A field life of 29 years was modeled
by starting in 2024, reaching, after 3 years of production, peak
production of 167,000 bbl/d (barrels of oil per day) for 3
years.
Figure 2. Schematic development concept for Zama, made with
IHS Markit Questor®, software which provides concept screening,
optimization and detailed oil and gas CAPEX/OPEX cost
estimates.
Under these considerations, the key economic indicators for this
project are presented in Figure 3. According to our analysis, made
with IHS Markit Vantage®, and which lies in agreement with the
consortium expectations, the point forward break-even oil price for
Zama is expected to be lower than $20/bbl, which lies below the
break-even oil price of most projects in Mexico, which is above
$30/bbl.
Figure 3: Key economic indicators obtained from IHS Markit
Vantage®.
To evaluate the profitability of Zama field, sensitivity
analyses obtained from IHS Markit Vantage®, and based on varying
capital expenditure and operating costs are presented in Figure 4
and Figure 5, respectively. We have considered variations on
construction labor times, such as the time of installation of
infrastructure, following by an increase in personnel costs, such
as the number of crew members on each production platform, amongst
other things.
Figure 4: Zama sensitivity analysis
As the capital expenditure goes up by 10%, the Net Present Value
for Zama actually goes up. This is because of the gold plating
fiscal regime, a balancing act between cost recovery and profit
share, which is that as the cost of the project goes up, the
company can recover more via cost recovery. And hence the Net
Present Value of the asset seen a slight jump.
Figure 5: Zama sensitivity analysis - operating costs
value
A delay in the development of the Zama asset has an adverse
impact on the NPV of the asset. A delay on production date from
2024 to 2027 leads to a loss of more than US$200 million for the
partners involved in the field, as shown in Figure 6.
Figure 6: Zama sensitivity analysis - production start
year
The relevance of this field lies not only in the size of its
reserves and in the profitability presented under different
scenarios, but also in the precedent that it sets for the Mexican
oil and gas industry. This would be the first unitization process
implemented in Mexico. Success in the development of the field
would send a positive message to the oil and gas and the investment
community. The Zama asset has a strong positive contribution to the
overall portfolio of all the partners involved and any delays will,
as seen in our analysis, have material adverse impact on the total
returns that can be achieved from this world class resource. Other
important outcome of the proven commerciality of this field, is
that it opens a new exploratory perspective for the Tertiary Play
in the shallow region of the Sureste Basin.
