Pursuant to Articles 14.D.3(2) and 14.E.1 of the United States-Mexico-Canada Agreement ("USMCA"), and with a view toward resolving this dispute amicably through consultations, Talos Energy, Inc. ("Talos") hereby gives written notice of intent to submit a claim to arbitration on its own behalf and on behalf of Talos Energy Offshore Mexico 7, S de R.L. de C.V. ("Tabs Mexico")-a Mexican enterprise that Talos owns and controls-for breach by the United Mexican States ("Mexico") of its obligations under USMCA Chapter 14. Talos Mexico, together with its consortium partners Wintershall DEA (originally Sierra O&G Exploracion y Produccion, S. de R.L. de C.V.) and Premier Oil Exploration and Production Mexico, S.A. de C.V. (collectively, the "Contractor") entered into a Contract for the Exploration and Extraction of Hydrocarbons Under Production Sharing Modality with Mexico on September 4, 2015, granting Talos rights in Block 7 with respect to the exploration and extraction of oil (the "Contract"). Talos Mexico, the Contract, and the investments that Talos has made in Mexico through its ownership in Talos Mexico (some of which are described in Section II below) constitute investments under Article 14.1 of the USMCA.
II. USMCA Provisions that Mexico Has Breached
Mexico has breached its obligations under the following USMCA provisions:
a. Article 14.6: Minimum Standard of Treatment; and
b. Article 14.4: National Treatment
III. Factual and Legal Basis for the Claim
A. Factual Background
After nationalizing its oil industry in 1938, Mexico once again opened its oil and gas resources to private investors in 2013. In 2015, it held its inaugural bidding round for development blocks. The bidding process for Block 7, located in the Gulf of Mexico, was intensively competitive and eventually won by Talos and its Consortium partners. As a result, Mexico awarded them Block 7 and entered into the Contract with Talos as the Operator and Talos' Consortium partners.
Soon after the execution of the Contract, the Contractor led by Talos drilled four wells, three horizontal and a sidetrack, i.e., a secondary well drilled from a pre-existing well in order to reach a new location in the target area, in 160 meters of water on Block 7 at a cost of approximately USD $350 million, of which Talos contributed over $122 million, resulting in the large-to-super giant Zama discovery in 2017. Zama, a Miocene-aged sandstone reservoir, holds recoverable oil in the range of 500-800 million barrels, possibly more than a billion. Due to Talos' substantial investment and technical expertise, the discovery and appraisal program of Zama was completed ahead of schedule and at a cost approximately 25% below budget.
While Talos expended significant time and resources in discovering and developing Zama, Pemex made practically no investment of its own. Despite publicly announcing its intention to drill a well to penetrate the shared reservoir in February 2018, and despite CNH's later recommendation that Pemex drill such a well, Pemex never did so. Instead, in a recent public hearing before the National Commission of Hydrocarbons ("CNH") Board of Commissioners, Pemex removed the well from its exploration plan entirely, despite some of the Commissioners' express recommendation that Pemex drill the well.