MEXICO CITY (Reuters) - When U.S. oil firm Talos Energy TALO.N found nearly a billion barrels off Mexico's southern Gulf coast two years ago, it marked the first discovery by a foreign firm since the oil industry was nationalized eight decades earlier.

FILE PHOTO: A sign of state-owned company Petroleos Mexicanos (PEMEX) is seen at a gas station in Monterrey, Mexico June 17, 2019. REUTERS/Daniel Becerril/File Photo

Now Mexico’s state-run oil firm Pemex wants to take over the lucrative project, according to two former Mexican energy officials and two company executives with knowledge of internal Pemex discussions.

The Pemex push to run drilling in the oilfield comes amid the ongoing drive by leftist President Andres Lopez Obrador to return more control of Mexico’s energy sector to its state oil firm. His predecessor, Enrique Pena Nieto, ended Pemex’s monopoly and started auctioning off oilfields to private companies in 2015.

Talos was the first to find oil, in a shallow-water field it named Zama after the Maya word for dawn. Wresting control of the project from the company now would strike a symbolic blow to Mexico’s biggest economic policy change in decades and could further chill investment by the world’s top energy firms, oil executives and industry experts told Reuters.

Pemex has a potential claim to control over Zama because it has drilling rights to an adjacent field. The oil deposit likely extends into Pemex territory – although the firm has yet to prove that by drilling. The two companies began talks last year about a merged project and will later negotiate how to split revenues and who gets operational control. If the talks deadlock, Lopez Obrador’s Energy Ministry would settle disputes and appoint one company to oversee drilling.

“If Pemex does end up operating it, that would not send a good signal to private investors,” said one executive from an oil major with several offshore projects in Mexico.

Neither Pemex nor the Energy Ministry responded to requests for comment. Lopez Obrador’s office did not respond to written questions.

The liberalization of Mexico’s energy sector has stalled since Lopez Obrador took office in December. The president last week heaped new criticism on his predecessor’s energy policy, calling it a “giveaway” of public resources to corporations.

Under Pena Nieto, from 2015 to 2018, Royal Dutch Shell RDSa.L, ExxonMobil XOM.N and BP BP.L snapped up drilling rights at auctions. At the time, executives lauded Mexico for competitive investment terms that made drilling there as attractive as Brazil's prolific deepwater acreage or the booming shale fields of Texas.

While Lopez Obrador’s government vows to respect existing contracts, it has indefinitely suspended further auctions and is instead offering private oilfield services firms more restrictive partnerships that give Pemex more control. The shift has made Mexico less attractive to oil firms as Brazil prepares another huge auction later this year and Guyana recently announced a series of offshore discoveries.

“The door is closed on newcomers in Mexico right now while it’s wide open in places like Brazil and Guyana,” said George Baker, the Houston-based publisher of Mexico Energy Intelligence.

Some firms are already packing up, including some of the original stakeholders with Talos in Zama. Sierra Oil & Gas sold its 40% stake in Zama, along with the rest of its assets - all of them in Mexico - to the company now known as Wintershall DEA. Premier Oil said last month that its 25% stake was for sale.

Premier said in a statement that it continues to see a “significant opportunity” in Mexico and that it remains committed to developing three other energy projects in the country.

Wintershall DEA, which absorbed Sierra, in a statement expressed confidence the government understood how “critical” it was to be fair in the negotiations over Zama.

The company added it had a long-term commitment to Mexico and was eager to participate in any future oil auctions.

One of the two industry sources who told Reuters of Pemex’s plans for Zama said Sierra sold in part because Lopez Obrador’s energy policies cast a “dark cloud” over the sector that made it hard to raise capital.

BATTLE FOR CONTROL

Energy Minister Rocio Nahle, who also serves as the chairwoman of the Pemex board, hinted in a news conference with Lopez Obrador last month that the government might steer the project to Pemex.

“We definitely have to talk to Pemex, to Talos - another company that’s there - to see who will be in charge of the operations, because Pemex has a big part of it,” she said.

If Pemex takes over, Talos would retain its 35% stake but give up operational control, undermining its attempt to establish itself as an international operator with its first project outside the United States.

Talos would also have to rely on Pemex to execute drilling efficiently and profitably. That is no sure bet given that Pemex - the world’s most indebted oil firm - has seen its production decline by half since 2004 as the company struggled with aging fields and underinvestment.

Earlier this month, Lopez Obrador’s finance ministry gave Pemex $5 billion to pay down debt, the latest in a series of subsidies. The government has so far failed to convince international investors that the bailouts will work or that it can finance ambitious plans to expand Pemex. In June, rating agency Fitch downgraded Pemex debt to junk status..

Pemex likely has a claim to about a third of the oil in the deposit that extends into the Zama field, Consultancy Wood Mackenzie wrote in an unpublished draft report reviewed by Reuters. But the firm’s efforts to prove its share by drilling have been delayed “multiple times.”

The Talos-led consortium, by contrast, has drilled four wells and spent $250 million. Talos Energy Chief Executive Tim Duncan said the partners could spend another $3.5 billion over the life of the contract.

The two companies have until September 2020 to conclude a preliminary negotiation over a merged project. Under Talos’ current contract, the Mexican government would get nearly 70% of net profits from Zama.

Talos CEO Duncan declined to comment on Pemex’s takeover plans or what he called confidential negotiations with the company. He said Talos was best placed to run the project, citing its progress so far and Pemex’s large portfolio of competing projects.

“We’re fully prepared to go execute this project, finish it, wrap it up and get it into production,” Duncan said in an interview.

Pemex is determined to operate Zama, said one of the industry sources with knowledge of Pemex’s plans. “For them, there is no other scenario,” the source said.

‘EXCEPTIONAL’ LEASE RENEWALS

Last month, Lopez Obrador’s energy ministry laid the groundwork for a claim on Zama by requesting and receiving an “exceptional” lease renewal from Mexico’s oil regulator for Pemex’s next-door block, along with 63 others. Pemex needed the renewals because it had not discovered oil on the leases in the past five years. The renewal sidestepped a policy instituted by the previous government, which sought to force oil firms to explore their holdings or risk losing them.

Three of the regulator’s four commissioners backed the renewals, citing Lopez Obrador’s suspension of oil auctions. The dissenting vote came from Sergio Pimentel, one of the few Mexican officials who has publicly criticized Lopez Obrador’s energy policy.

“I think we are demanding too much of Pemex - much more than is desirable or logical,” Pimentel said.

(GRAPHIC: Mexico's declining oil production link: )

(GRAPHIC: A billion barrels off Mexico's coast link: )

(MAP: A dispute among neighbors over oil link: ).