On a sultry Sunday during the long Fourth of July weekend, the team drilling the Zama-1 well offshore Mexico emailed an image back to their boss in Houston, oilman Tim Duncan. The rig was drilling through an Upper Miocene sandstone at the time, on Block 7 of the Sureste Basin.

“I went up to the office and we were about 100 feet into the pay section, so we ordered some wings and then we watched the monitors as a group in our ‘war room,’” said Duncan, president and CEO of Talos Energy LLC.

“Then 24 hours later when we were still in pay, the food and beverage at the office improved significantly.”

Indeed, some fine red wine was brought in to celebrate—for Talos had drilled through 1,100 feet of gross pay—and discovered what it estimates could be 300 million to 550 million barrels of recoverable oil on the block.

“It isn’t often that you drill over 1,100 feet of gross section,” said Duncan. “We had a scenario that it could be this thick, but when it works, you just tell the team you’re proud of them. I was texting my wife and posting updates to our board members. It was a pretty exciting Fourth of July!”

This is the first exploration well drilled offshore Mexico in 80 years by the private sector that was not done by state-owned Petroleos de Mexicanos (Pemex). It is also one of the 20 largest shallow-water fields discovered globally in the past 20 years, according to Wood Mackenzie consultancy.

“I didn’t want to look back on the opening of the Mexican Gulf of Mexico and say, ‘I didn’t even think about it,’” Duncan first told Investor in 2015. The Talos group of partners won over 160,000 acres on blocks 2 and 7 at Mexico’s first offshore round in July 2015. Two years of intense seismic reprocessing and other technical studies, and even a social impact study, followed.

Privately held Talos, formed in 2012 with backing from Apollo Global Management and Riverstone Holdings, has had notable success before on the U.S. side of the Gulf in shallow and deepwater areas, always relying heavily on seismic interpretation.

Talos holds 35% interest in Zama as operator. Premier Oil, the London E&P with worldwide offshore expertise, holds 25%. Sierra Oil & Gas LLC has 40%. The latter is historic as it is one of the first private, and private-equity-backed, E&Ps based in Mexico City. It’s also funded by Riverstone.

Reprocessing the seismic data provided by the Mexican government as part of the early bidding round proved to be significant.

“We realized it had quite a bit of similarities to the U.S. GoM and really, we were shocked by the opportunity,” Duncan said. “But again, one company in the form of Pemex can only do so much in a hydrocarbon province as big as the Sureste Basin, which has produced over 60 billion barrels of oil equivalent to date, according to Premier Oil’s website.”

Zama was finally spud this past May by the Ensco 8503, a deepwater rig Talos has used before. Because Talos’ lease is in 546 feet of water, the rig was moored. The crew was split between U.S. and Mexican workers and Talos also used both U.S. and Mexican-based support services.

A crucial well

Zama is as important to Mexico as it is historic, for the country needed a success like this to justify to critics the reforms in its energy sector. About one-fifth of Mexico’s federal budget comes from crude oil revenue—yet the country’s production has steadily declined over the past 30 years. It averaged a bit more than 2 MMbbl/d last year. The government’s resulting constitutional reforms, which now allow international E&Ps to operate there, led to this moment.

“We were bidding on a production sharing contract (PSC), so a portion of government profit oil, not upfront cash. Once we sized and risked the prospect, we put in a sharing arrangement that we thought would be competitive, but also allow us to achieve a target return, and we got lucky,” Duncan said.

“The bidding become more competitive over time, as we suspected, so it was critical we try to win early, when fewer people expected us to be there and the process had a bit of uncertainty. Now, looking at the Round 2.1 results just a year later, it might be the most competitive exploration basin in the world.”

After the partnership recovers its capital and expenses through initial production, the Mexican government will receive a 68.99% profit share from every barrel produced from Zama, and up to 80% when taking into account taxes and fees over the life of the project, Sierra said in a statement to Reuters.

Zama is about 37 miles offshore, situated between Eni’s Amoca appraisal well in the Lower Pliocene, and Pan American’s Middle Miocene appraisal, Hokchi 2. Both of these were discovered by Pemex but not appraised until now.

“Between the three of us, we’re exploiting different parts of this basin, which helps the industry’s understanding of the whole basin,” Duncan explained.

Details

Zama encountered a contiguous oil-bearing Upper Miocene sandstone interval of about 650 feet of net pay, and no water contact. Resource estimates range from 1.4- to 2-Bbbl of oil in-place, plus associated gas.

Premier Oil has indicated it could have 550 MMbbl of recoverable oil and 1 Bbbl to 1.5 Bbbl of oil in place, in-line with predrill expectations, according to a report from Tudor, Pickering & Holt & Co. “But, reservoir properties were better than expected; porosity is in the mid-20% range and net-to-gross ratio was about 50%,” TPH said.

It’s too early to assign a firm number, but Duncan thinks when you encounter more than 1,000 feet of gross pay, the rate out of any one well isn’t the issue.

“It will come down to how many wells on the platform are needed to maximize overall recovery, but similar fields have produced 125,000 to 150,000 barrels a day at peak, once it’s a fully developed asset. It may take quite a bit of time to get to that point—that is certainly not first oil, but because we’re in shallow water, we have several options to develop this. The question is, what is the most efficient output and how many wells do we need?”

Next steps

In July the Ensco rig returned to the U.S. Gulf to drill an appraisal well at Talos’ Tornado discovery in Green Canyon. Meanwhile, Talos and partners will spend the rest of 2017 examining all the data from Zama, and look again at the seismic to identify smaller, satellite drilling prospects near it. Duncan said they already have at least 10 prospects in mind.

“We spent eight days logging it and ran every kind of tool, so we have a lot to digest,” he said.

Appraisal comes in 2018. Block 7 is in its primary term to mid 2019. The partners will follow-up with the Zama Deep side-track and what Duncan called “a pretty fulsome idea set” of 10 to 13 other prospects/leads with about 2 Bboe of recoverable resource potential within blocks 2 and 7.

Drilling on Block 2 will begin in 2018 or early 2019, and if oil is found, design and FEED could begin in 2019 and first oil perhaps in 2022, since Block 2 is in such shallow water.

Duncan said other than the fact it takes a little longer to get started with customs and local offshore logistics--and the shales behave a little differently offshore Mexico—it is a pretty standard GoM well, normally pressured.

“We’re in a very manageable depth. This was kind of like being in Ewing Banks in 1985.”

Seismic

The seismic data provided by the Mexican government was a collection of late-1990s to mid-2000s speculative surveys shot by the same vendors one finds in the U.S Gulf. “We were able to gather up several surveys and engaged in a 9,000 square-mile reprocessing effort, which created a huge imaging uplift,” he said.

“There is less well control and these are Lower Pliocene traps close to the coast (note Eni’s Amoca project) and Upper and Middle Miocene as you move away from the coast. The targets we are interested in seem to respond to geophysical modeling, similar to the U.S. Gulf.”

With the nearest well (a dry hole by Pemex) being almost 20 km away, Talos had to do some guessing on the velocities and age, which also means getting the most out of each new well in terms of data will be critical going forward.

“The main prospect had multiple and very large three-way closures with positive AVO (amplitude versus offset) and flat spots, which can indicate fluid changes, so we were hopeful. We will likely test some potentially deeper sands, and although these sands are less prospective, it will be critical data for the lower portion of the Upper Miocene and Middle Miocene, where there could be subsalt potential in other parts of our 160,000-plus acres under lease.”

In Zama, Talos will also test shallow amplitudes “just to see what they mean, as well as a series of well-defined amplitude based targets as the main prospect, and then a deeper section to help us regionally. We have an entire portfolio of ideas and regardless of the outcome, it will help us unlock value somewhere else,” Duncan said.

Talos is in water to the west of Pemex’s production, where there is not significant Pemex infrastructure, so it needs to delineate the discovery pre-FID, he said, and it might also want to test something else in shallower water, “to really understand our long-term infrastructure needs. These are global-scale exploration and development projects we’re doing, and the basin needs non-Pemex controlled infrastructure in the long term.

“We first need to finish the well, then, although not as perspective, we are going to take a look at some deeper targets also, to help develop well control that we can use in our subsalt plays,” Duncan said.

“This is all good stuff. Next year will be a busy year on our acreage.

“This is a long-term play for us to compliment what we do on the U.S. side. This is a 20- or 30-year type of asset. We understand that we’re not the type of company people thought would go first—we are not the Statoils or Murphy Oils of the world (good companies though they are), so we knew we had to make sure we exceeded expectations operationally on this well in an effort to provide additional credibility for smaller operators. We announced it ahead of the two-year anniversary of winning the blocks, so we’re very proud of that.”

Leslie Haines can be reached at lhaines@hartenergy.com.

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