Mexico chose state-owned Pemex to run a major shared oil find over the private consortium led by a U.S. oil company that first discovered it, in the latest win for President Andres Manuel Lopez Obrador’s nationalistic energy policies.

The disputed deposit, believed to hold some 700 million barrels of oil, is thought to straddle two neighboring blocks in the southern Gulf of Mexico, one belonging to Pemex and the other to a private consortium of oil companies led by Houston-based Talos Energy.

It was the first major oil discovery by foreign companies after reforms spearheaded by Mexico’s previous administration opened up the country’s energy sector to foreign and private producers, which Lopez Obrador has battled to roll back.

The Mexican government awarded Pemex the rights to operate the potentially lucrative offshore Zama discovery in a letter from the energy ministry dated July 2, even though the Talos-led consortium initially won the exploration and production contract in a 2015 oil auction.

Talos, which announced the discovery of the Zama well in 2017 that gave its name to the deposit and argues that it should run the project, said in a statement it was “very disappointed” by the ministry’s decision, adding that it would explore all legal and strategic options to maximize value for its shareholders from Zama.

Talos and its partners have invested nearly $350 million in the project, drilling four exploratory wells so far, while Pemex has yet to drill on its side of the shared deposit.

U.S. officials have in the past highlighted Talos’ legal rights to the project, and some have suggested it could be subject to a challenge under the investment protections of the USMCA, the trade pact between the United States, Mexico and Canada.

The other members of the Talos-led consortium are Germany’s Wintershall Dea and Britain’s Harbour Energy.

Split Rift

The energy ministry’s letter cited Pemex’s technical know-how and nearby oil infrastructure as reasons giving it an edge, and cited a third-party study that concluded that Pemex’s block holds a slight majority of the oil below.

The letter backed heavily-indebted Pemex’s claims from June that it had the financial capacity to develop the project and had nearby infrastructure for receiving, storing and exporting the crude.

Miriam Grunstein, an energy expert at Rice University’s Baker Institute for Public Policy who has written extensively on oil contracts, said the decision made it clear the Mexican government wanted Pemex to have control over the project, calling it a “political” move.

“They wanted to give Pemex the medal, but it will come at a high cost,” she said, pointing to the risk of failing to produce results from the project, which she said could lead to lawsuits from Zama's other stakeholders.

Last year, Talos commissioned a study by an independent appraiser that concluded the Talos block held about 60% of the deposit, while the Pemex side held the remaining 40%. Pemex has used that same appraiser in the past.

The field, located in water at a depth of 550 ft (168 m) is deeper than most of Pemex’s shallow-water projects in the southern Gulf.

Talos and Pemex had been negotiating for more than a year over which side would run the project and what the preliminary split of the project’s reserves would be.

Talos has significant experience developing projects at similar depths on the U.S. side of the Gulf.

In May, Talos criticized the results of an initial evaluation by the third-party engineering firm engaged by all the companies that calculated an initial reserves split of 49.6% for the consortium and 50.4% for Pemex.

Neither Pemex nor the energy ministry responded to requests for comment.

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