An essential role for private players in Mexico

January 24, 2022

Warren Levy, CEO of Jaguar E&P, talks to The Energy Year about prospects in Mexico’s hydrocarbons sector, why the company is excited about its recent Spinini discovery, and how it approaches sustainability goals. Jaguar E&P is a Mexican upstream player that operates 10 blocks in Tamaulipas, Veracruz and Tabasco.

What market prospects and investor sentiment do we find in Mexico’s hydrocarbons sector?
One of the challenges Mexico’s private sector faces is the general misconception surrounding the nature of private operators’ fields in their portfolio. While Pemex holds maturing brownfields, private actors have secured smaller marginal blocks that have attracted investment. Exploration done by these private firms will, in time, turn into production.
The lifecycle of an exploration project stands at around two to six years. The exploration success of private operators is above the average. That suggests we will see significant production growth from private firms moving forward, with these players being essential for advancing the hydrocarbons sector in Mexico.
For its part, Pemex has the technical capacity to increase its production. The company is a referent for the industry in Mexico. The government has made the appropriate adjustments to tackle its tremendous debt, a burden for the firm and the industry.
In December 2021, the government reduced Pemex’s debt burden by USD 3.2 billion through a refinancing scheme, which is a very positive indication for the market. The administration has understood that Pemex needs investment to maintain production levels. They can only do this by giving assurances to debt markets that those bonds will not be defaulted on.
Pemex’s operations are profitable but not profitable at the level of the debt they have. That’s the most significant risk the sector has right now because it drives the perception of risk in the market.
This situation has also made the capital markets wary of funding projects in Mexico. Around 80% of the operators depend on capital markets to shift from exploration to significant development. Debt markets are also very nervous about funding any energy-related operation in Mexico due to macroeconomic challenges.
Nevertheless, there is much potential growth simply because of Mexico’s subsurface potential, added to its lower drilling density compared to the northern Gulf of Mexico. Mexico’s part of the basin is practically untapped. All that it needs now is a favourable environment that allows capital to flow in.

How should private and public entities together exploit their potential to make Mexico’s upstream flourish?
Production growth in Mexico must come from two areas: state and private. Considering the maturity of the projects private players are developing, they are on track to deliver what is expected from them. As a result, we will see a rapid increase in production in the coming years. There is also significant acreage that is idle, either in the blocks that were reverted to the government in Round 0 and never bid out or acreage that Pemex has chosen not to develop. There is significant untapped potential in these areas.
The government is also very interested in pushing service contracts. Still, it will get limited traction because the contract model that has been chosen is very difficult to finance. If service contracts, farm-outs, or partnership agreements allowed one to obtain capital and finance the project, one will see a much faster pace of growth. Hopefully, we will all come to terms with the fact that it is in the country’s best interests to find a way to let capital flow into these projects. Is it truly relevant whether the operator is Pemex or a private company for most projects? What’s most important is its capital efficiency and the ability to grow the production and reserves base for the country.
The government is focused on bringing Pemex back to its “golden age” and misses seeing the potential from all operators participating together in a collaborative fashion. There is no single company in the oil industry anywhere in the world that can do everything well, and each firm should exploit what they are good at.
Pemex, for example, has mastered the operation of large projects, with Cantarell being proof. It is the second-largest producing reservoir globally to have been developed by a single company. Pemex would be better suited to focus on larger-sized projects, making the most of their scale and infrastructural capacity. Other smaller assets could be better operated by smaller companies with the capacity to focus on the development at a smaller scale.

How can a more attractive and efficient E&P entry gate be achieved?
Given the high level of administrative burden to run an oil and gas business in Mexico, it is difficult to justify operations that do not meet a minimum production threshold of say 3,000-4,000 bopd. This is the level at which interaction with the regulators and handle permitting efficiently. The great thing about the Mexican hydrocarbons sector is that regulations are extremely regimented – one can map out everything, and the government responds on time, but there is a larger administrative demand than in other countries.
Looking back, the previous administration did an excellent job in rolling out the bid rounds and adjusting the terms to make sure they were more effective. At the same time, although very common, the pressure on operators to invest in a short amount of time can turn out to be counterproductive. It causes you to sacrifice the geoscience and the technical work, which are key. The subsurface studies and engineering preparation are not costly, but they take time to be done properly.
One thing that could improve the situation is allowing permits to be processed in parallel instead of being contingent on one another. This would allow the same level of rigor in the oversight by the government, while reducing the time it takes to have all of the required permits in place.

How unique and prospective is the recent Spinini discovery for Jaguar E&P?
We drilled 12 wells between 2020 and 2021, 11 of which were exploration and delineation wells and one was a development well. Five of these dozen wells had commercial success, and two others had discoveries that we are still analysing. Our most important discovery was Spinini, within the TM-01 block in the Tampico-Misantla Basin, a gas and light oil discovery.
This is a unique project because it’s a new type of geology that has not been tested in Mexico before. We discovered 40 million boe of liquids and 170 bcf [4.81 bcm] of gas. Many other Jaguar commercial successes were in and around our existing fields in the northern part of Burgos. We’re very excited about the Spinini discovery as it opens a whole new play type in the area.
Not only is the discovery’s size attractive, but it being on the coast gives us much flexibility as we aim to move the product anywhere in Mexico. This location is ideal as it is easier to move products by barge than by truck. The discovery was found in one of the most prolific producing areas in the world: the Golden Lane [Faja de Oro].
Here we find an array of different fields with a narrow line of wells that have been drilled – the most famous being Cerro Azul-4, which is the most productive well in Mexican history, with a daily initial production of 260,000 bopd. Three legacy fields from the Golden Lane are in our block.

Tell us about the full-stream rationale behind Jaguar E&P’s gas developments in Northern Burgos.
Our prospect inventory is significant, with almost 100 prospects with an estimated potential side of over 16 tcf [453 bcm]. We currently have 10 blocks with 3,046 square kilometres spanning four basins: five in Burgos, one in Tampico-Misantla, two in Veracruz and two in the Sureste Basin. We’ve drilled one or two wells in each of our blocks.
In Q1 2022, we’re shifting gears and aiming to develop a programme in the northern part of the Burgos Basin, where we have our most significant proven reserves which are development ready. In the second half of the year we will return to doing exploration works all over the country.
The first stage in our overarching development is to tap into the Burgos North programme. We aim to hit 100 mcf [2.83 mcm] per day by 2024. Currently we are producing 11 mcf-12 mcf [311,520-339,840 cubic metres] per day with another 27 mcf [764.640 cubic metres] per day tested and behind pipe.
We’re in the process of obtaining permits in Northern Burgos for three interconnect points to be able to sell our gas. Q2 should complete the first of these, and we will finish the rest in the second half of the year.
A fundamental question is: how can Mexicans have access to an efficient, cost-effective and clean power? Ultimately, our aim is to make sure that all Mexicans have access to gas in their homes, which is a cleaner and cheaper alternative to what is currently being used. We are also looking at ways to decouple production from pipelines, having secured the permit for our first virtual pipeline in 2020. We’ve seen value in compressing the gas we extract at the wellhead and selling it by truck. We are now working to obtain the permits and import LNG units to commercialise more gas at a greatest distance from the wellhead.
We are looking at different parts of the country, such as the south and southeast, to enhance the accessibility of gas, as many of these regions still rely on biomass. We know how to drill and operate and how to operate plants and transport gas. We need to sell it, and we are willing to work with partners to make this happen whenever and wherever it makes sense.

What sustainability goals and positive impact is Jaguar E&P pursuing?
We have set ourselves the target of becoming “carbon positive” in 2022 – meaning our overall carbon impact will be not just neutral but positive. There are several steps to achieve this. The first step is to eliminate emissions from our operations. To this end, as an example, we have replaced all our pneumatic pumps in the field with electric pumps which are solar powered. As a result, we have eliminated fugitive emissions, and operation costs have gone down.
Moreover, we are now focusing on all sources of fugitive emissions. We are going to import a special methane camera to physically inspect every pipe and wellhead to measure the actual emissions. Also, we are looking to bring dual-fuel rigs into the country, which will reduce carbon emissions by over 40-50% in our drilling operations.
Parallel to this, we are working with a company focused on drone monitoring of pipelines with methane imaging cameras. Passive methane monitoring is also a solution we are interested in pursuing. Instead of guessing the volume of emissions on every production site, you accurately measure it. Lastly, we are designing and will import flare catchers into Mexico. Instead of burning the gas, you compress it to create CNG, eventually commercialising it. With this, we aim for zero flaring from all our operations.
Furthermore, we want to compensate for any existing emissions. In Mexico, you have two options: the company can either pay taxes for wrongfully impacting land or remediate land elsewhere. We chose the latter, hence our concept of “carbon-positive gas.”
For example, we are developing our first reforestation project in Veracruz. Now we’re working with biologists to see the extent to which this project can safely generate income for the local community.
Our objective is not just to be carbon positive but also to be land and water positive. The whole concept is to invest in the long-term health and success of our communities, ensuring that these communities receive twice the value of our investments in the form of tangible benefits. We want to spur economic growth and development.

What conceptual and structural barriers does Mexico encounter in the energy transition?
The transition will all depend on how the government conceptualises Pemex. If Pemex is set to continue as an oil and gas company, then its role in the energy transition will be limited to reducing its emissions. This being the case, the NOC will not get involved in a more fundamental transition.
For the energy transition to work effectively in Mexico and at a healthy pace, one needs to holistically look at the entire energy spectrum. For example, the country produces high-sulphur heavy oil in excess, which is the most damaging emissions source in Mexico. There are also plenty of inefficiencies in the electricity grid, not to mention the lack of current focus on renewables.
The key to the question lies in the need for substantial investment. The government has a fundamental role in setting the conditions that will either ease or burden the flow of capital into the country.

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