TOGY talks to
Call for new E&P playersJanuary 8, 2018
Dionisio Garza, chairman of Jaguar Exploración y Producción de Hidrocarburos, talks to TOGY about the development of Mexico’s upstream sector, the positive impact of the energy reform and why the country is attractive to investors.
Jaguar entered Mexico’s E&P sector in 2017 when it won six blocks in Round 2.2 in partnership with Sun God Energía de México, and five blocks in Round 2.3 as an individual bidder. Focused on onshore field development, Jaguar is wholly owned by investment company Grupo Topaz.
• On existing opportunities: “Pemex is a great company, but it has been draining money for a long time, damaging its research and financing capacity. Therefore, many fields that could have been developed were not. If you have a limited budget, you go to the most profitable fields. For private investors, some of those other fields are still very profitable.”
• On fostering investment: “It is important to understand that it is about investments, new jobs and development of the industry. The role of the federal and state governments is to facilitate this. If you only find bureaucracy and roadblocks, investors will be more reluctant to deploy capital. The government has to support and help investments. In the US, cities fight over investors. The same should be happening here.”
Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Dionisio Garza below.
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How has the upstream investment landscape changed with the opening of Mexico’s market?
We have seen a lot of interest from banks, investment funds and operating companies from abroad. This is a significant change derived from the opening of the market. Also, like us, many Mexican business groups have keen interest in the sector. We are a private company with Mexican capital and employees. We need investments from different places to develop fields, but the main capital of the company is local.
Pemex is a great company, but it has been draining money for a long time, damaging its research and financing capacity. Therefore, many fields that could have been developed were not. If you have a limited budget, you go to the most profitable fields. For private investors, some of those other fields are still very profitable.
There is an opportunity for everybody to generate value. The government and Mexico benefit from the royalties derived from private investment, royalties that Pemex would not have brought in otherwise. Communities win because of the economic activity in their areas, and the investors win as well.
The energy reform is very necessary. Mexico is an oil country with declining reserves. We have to reactivate it. It will generate economic capacity, jobs and growth. There is still a lot to do in exploration, production and infrastructure. I do not understand politicians who doubt the energy reform. They lack information.
What is the importance of having foreign partnerships in the upstream sector?
The government outlines certain capital or technological requirements for every bidding round. Jaguar needed both things. We chose a company that we respect and appreciate. Sun God Energía de México has technology and a solid track record of low-cost operations experience. It’s a great partnership for us.
Mexico needs foreign companies. They have been investing and developing technology and know-how for years. It is very important to complement investments. We still have a lot of learning ahead of us.
What lessons have you learned from participating in both the first and second E&P licensing rounds?
There were great improvements between Round 1.3 and Round 2.2. Everybody has to learn, including the government. This is a new thing for everyone. In the first onshore round in which we participated, the government left royalties open. The ones who offered the highest royalties were awarded the fields. We weren’t awarded any.
The government has changed the terms and there is now a limit on royalties because 40% of 10,000 barrels is better than 80% of 100 barrels. Some companies that offered 70-80% are not producing. Royalties for oil are now 40-45%, and 25% for gas. When royalties are capped, the effective awarding variable is the dollar amount offered as a tiebreaker, which implies that companies that really want the blocks have to commit to doing a serious evaluation of the blocks, since cash is paid up front.
I am very happy to see that the CNH [National Hydrocarbons Commission] is adapting very quickly. We still have a long way to go. These organisms exist to regulate and keep things transparent, responsible and uncorrupted, but they need to move faster. There is a lot of appetite and we have to develop things. Moreover, a lot of people in Mexico are unemployed and developing the industry would increase employment across the board.
What do you think about the streamlining of the prequalification process for E&P and infrastructure projects?
It is great to regulate operations and the environment. I am happy to hear that they are accelerating processes. Permits can take a very long time and we need investments. Exploration and production is very important. It will generate a lot of jobs and money.
Infrastructure is equally important. The US has an amazing network. We do not have this. There is a lack of infrastructure to support the oil and gas industry. We still have long way to go.
How significant are federal and state actors in further advancing the development of the oil and gas industry?
It is important to understand that it is about investments, new jobs and development of the industry. The role of the federal and state governments is to facilitate this. If you only find bureaucracy and roadblocks, investors will be more reluctant to deploy capital. Government has to support and help investments. In the US, cities fight over investors. The same should be happening here.
How attractive are the Pemex farm-out opportunities?
We are not participating in the bids for farm-outs because we have 11 blocks. However, the farm-outs are very interesting for the industry.
Pemex has budget restrictions and it cannot develop everything. Those developments require a lot of money and personnel, which Pemex does not have. If the NOC can share some fields, it should. Some fields are small for Pemex, but very profitable for other companies. It is good for everybody in the sector.
How attractive is Mexico as a destination for oil and gas investments?
There are significant opportunities. I believe that it would be good to finance economic differences to encourage Mexican companies. As a Mexican company, we want to develop the local industry. If this reform continues to be implemented quickly and effectively, it will transform our economy. I am very optimistic.
I invite investors to look at Mexico’s potential. They should come here to invest. We expect that the government will keep expanding its capacity to implement the reform more efficiently. It is a good frame of thinking for everybody.
For more information on Jaguar in Mexico, including the company’s 11 new onshore blocks, see our business intelligence platform, TOGYiN.
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