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Keiser Montero

Oil Discoveries Suggest Mexicos Bet to Open Energy Sector Is Paying Off

July 12, 2017

When Mexico gambled on ending decades of state control of its energy industry, officials said
they hoped the move would promote investment and give the country access to technical
expertise. That wager now appears to be paying off.

The government began auctioning off rights two years ago to drill in parts of the Gulf of Mexico.
On Tuesday, an international consortium of energy companies said they had discovered a large
oil field, and another firm said it had discovered more oil than expected in a separate area.

The overhaul of the Mexican oil and gas sector in recent years eventually ended the state energy
companys seven-decade domestic monopoly on exploration and production. The aim was to
arrest years of declining oil output, blamed on a slow-moving public sector that lacked the
technology to exploit opportunities in deep-sea drilling, or shale oil and gas.

The two announcements on Tuesday appeared to suggest that Mexicos strategy, which was met
with criticism when it was first pushed through, was succeeding.

The consortium, made up of Premier Oil of Britain, as well as Talos Energy of Texas and the
Mexican company Sierra Oil and Gas, said that it had discovered a field containing more than
one billion barrels of oil in shallow water 40 miles off the Mexican coast. Riverstone Holdings,
an American private equity firm that specializes in energy investments, owns 45 percent of Talos
Energy and 43 percent of Sierra Oil and Gas.

This is the most important achievement so far in Mexicos overhaul, said Pablo Medina, a
Houston-based analyst at the consulting firm Wood Mackenzie.

The companies won the rights to drill in the zone in 2015, during Mexicos first auction of
exploration rights.

In an interview, Alfredo A. Marti, a former BP executive who is now a Riverstone managing

director, said that high-tech data processing indicated that the Mexican governments estimates
for the amount of oil in the field might have been too low.

But after drilling, he said, we found that even our bullish expectations were conservative, and
we have something much more interesting.
Because of Mexicos rich resources and proximity to the United States, Mr. Marti continued,
we think that over the next few decades, Mexico is going to be a very important source of
growth in the oil and gas sector.

Also on Tuesday, Eni, an Italian oil company, said a well recently drilled to test a previously
announced discovery had shown that the trove also held more than one billion barrels of oil
much more than previously thought.

Enis chief executive, Claudio Descalzi, said in an interview that the oil would be cheap and easy
to produce because it was in shallow water only a few miles from shore. He added that his
company, which won the rights to explore the field in 2015, would keep drilling in the area and
that the size of the find might grow.

I imagine that after these big discoveries, the appetite of other companies will increase, he

Oil companies have long eyed Mexico for exploration and production of energy, banking on the
rich geology that has produced so much oil and gas in American waters in the Gulf of Mexico.

Geologically it is part of the same big basin, Tony Durrant, Premiers chief executive, said in
an interview.

Mr. Durrant said that while the American side was completely pockmarked with oil wells, the
Mexican side was not as heavily drilled because the state-owned Petrleos Mexicanos, or Pemex,
had long been the only game in town.

Last year, Mexicos oil production averaged 2.5 million barrels per day, making it a midsize
producer, comparable with Brazil or Venezuela. But output has been declining, and last years
figure was more than a million barrels per day fewer than it was a decade earlier.

Those poor levels of production compelled the government to take on nationalist pressures and to
bring in competitors to try to turn around one of the countrys most important industries.

But the timing of the overhaul coincided with a sharp fall in oil prices, which had been at more
than $100 a barrel but are at about $48 a barrel now.

With companies chopping exploration budgets, interest in Mexicos early auctions was muted,
allowing companies like Eni and the consortium including Premier to pick up what are turning
out to be gems.

Now, most major oil companies have acquired positions in Mexico. After this discovery, it is
going to be quite hot, Mr. Durrant said.