OPINION: Mexico’s 2013 energy reform was a high point for the international oil industry, and some thought it boded well for the country's future.

A Pemex monopoly which had remained in place for 75 years finally gave way to a more open system, and successive bid rounds attracted a wave of foreign investment.

Building on the exploration done by state oil giant Pemex, international operators were able to announce some exciting discoveries, offering the host nation the promise of rising production and revenues.

One of the explorers, US independent Talos Energy, found significant reserves of light oil with Zama-1, a wildcat drilled in a shallow-water play that had apparently escaped the attention of Pemex.

Oil policy shifts

Mexico’s former energy secretary Pedro Joaquin Caldwell praised the diversification of operators, but this was not a vision shared by the man who became Mexico’s next leader, President Andres Manuel Lopez Obrador.

Talos, Pemex to come up with unification agreement for Zama

Elected in 2018, Lopez Obrador has pursued a state-led vision for the economy, and called a halt to the competitive licensing process. His choice of chief executive for Pemex, Octavio Romero Oropeza, has told the president what he wants to hear.

Romero Oropeza has promised to reverse a 15-year decline in oil production, even as Pemex invests billions of dollars in downstream projects.

Some of the refinery upgrades are necessary, but nationalist symbolism is also in play, and analysts are aghast about plans to build what they see as an unnecessary $8 billion refinery in Obrador’s home state of Tabasco.

Covid-19 brings industry paralysis

With the arrival of the novel coronavirus, Pemex was slower than industry peers to announce big cuts in capital expenditure, and Mexico held out against bigger OPEC-led output cuts, as Lopez Obrador clung to his vision of boosting Pemex production.

The Covid-19 headwinds have exposed the fault lines in this strategy. Pemex now has net debt of more than $100 billion and has suffered a 60% drop in sales. Another massive quarterly loss is almost a certainty.

The scale of payment deferrals and outright suspensions on Pemex contracts now being reported by suppliers and service providers is nothing short of calamitous for domestic industry.

Many Mexican contractors may go to the wall, amid increasing uncertainty about when they will get paid by the oil giant.

It seems increasingly likely that this growing paralysis will undo Romero Oropeza’s promise to reverse the long decline in oil production in 2020, with the current target at nearly 1.9 million barrels per day.

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The Zama discovery has now moved back into the centre of the debate about the Mexican oil sector because a significant portion of the reservoir almost certainly extends onto an area retained exclusively by Pemex.

Talos Energy has drilled wells and carried out numerous tests to appraise its discovery.

Pemex has done nothing of the sort and wants to take the operator role on a structure which looks bigger on the Talos side.

Oil instruction politically timed

The Zama project received an apparent boost last week when the Mexican department of energy, Sener, instructed the two sides to reach a unitisation agreement within 120 working days.

The fact that this instruction coincided with Obrador's visit to Washington, D.C. to meet with President Donald Trump reinforced the impression that such matters are more political than technical.

Yet, with both companies ultimately interested in producing oil rather than arguing about operatorship, the Zama development could still provide an opportunity for the kind of win-win situation that could help Mexico put some common sense back into its oil policy.

(This is an Upstream opinion article.)