Warren Levy
CEO
Jaguar E&P
/
View from the Top

Mexican Company Leading the Natural Gas Charge Onshore

By Peter Appleby | Mon, 04/20/2020 - 14:20

Q: Jaguar won 11 blocks in the onshore Rounds 2.2 and 2.3. How are the blocks coming along?

A: Five of our blocks are producing through 61 wells. There are 19 fields within the five concessions that have some form of legacy production. We have been able to increase production in liquids and gas since we took over the fields, nevertheless a great deal of the process so far has been around preparing ourselves for exploration drilling. This means ensuring presence in the fields, looking at operational efficiency and making sure the legacy facilities we have taken over – whose conditions range from good to poor – are in sound enough condition whereby they can be used. We went through the assets and, as we reactivated them, dealt with the issues that came up. As a result, the legacy facilities present on our fields will be ready to take the incremental production that arrives from the exploration program.

Currently, we are at 1.5Mboe/d in production. That figure would be sufficient for some companies, but this is only a fraction of what we expect to achieve when our exploration program is executed. We have started drilling in the Burgos Basin, and depending on how conditions develop, we will decide when to ramp up our drilling during the year. We currently have 18 wells that we plan to drill, of which we would name five as development or near-field evaluation and would expect to have some of the production online before the end of 2020. The 13 others are larger step-outs; exploration or evaluations that are more remote from existing infrastructure. The timing of the plan is dynamic, and depends on how things develop with the government shutdowns in April and the logistics challenges which have been added during the COVID-19 global crisis. We are firmly committed to drilling all of our commitments on our blocks.

 

Q: How will Jaguar roll out its drilling campaign?

A: We have contracted and mobilized a rig from Parker Drilling, one of the few US rig contractors that stayed active in Mexico throughout the last five or six years. Additional rigs have been prequalified and will be mobilized when we are certain that all permits will be able to drill without delays.

Ideally, we will have one rig operating in the northern part of the Burgos Basin that will operate continuously for two years and move forward to add additional rigs in Veracruz, Tampico Misantla and the South West basin in the coming months.

Jaguar wants to provide consistent work for local people. Over the last 10 years, Mexico’s drilling activity has been unable to provide that continuity for locals, and this damages the service industry’s ability to provide better-quality service.

 

Q: What optimization techniques has Jaguar employed ahead of its drilling campaign to increase the blocks’ profitability?

A: There are a number of aspects to our drilling plan and operation that are new for the country. One is the intensity and complexity of our seismic reprocessing programs. We are applying the best standards in the world and as many techniques as we can to requalify the subsurface before we use the drill bit. Gladys Gonzalez, our Director of Geophysics, is a world-renowned expert in reprocessing and has led the decisions as to which companies we have hired. We have had eight different companies involved in total, all of which have offices in Mexico. Some reprocessing work is being done in-country while some is done in the US.

Mexico has not yet seen the concept of factory drilling or the intensification of operation be applied all that frequently, which is something we will be looking at. This is for three reasons. The first two are cost efficiency and infrastructure efficiency, while the third is that these techniques minimize the environmental footprint of the company and its drilling operations. As we are living and working in these areas and communities for 30-40 years, we must do anything possible to minimize our impact. This will be beneficial for the communities and beneficial for our relationship with them. This is not something we would apply until we are in full-scale development, but it will be used.

 

Q: What have been the greatest challenges in bringing your blocks up to speed so far?

A: We are developing fields that were discovered in the ‘70s and ‘80s, were in production in the ‘90s, and were then effectively shut. This means we are taking over equipment that is old, has been corroded and requires maintenance in order for it to work. This has been a challenge that we have been involved in during our management of the fields.

The other challenge we have faced is that PEMEX, as many big companies do, chooses standard designs across its fields. This does not always make sense on every field, due to a number of factors. We have ended up with a number of mismatches between equipment that was used in the fields we now run, and what the fields are actually capable of doing. That said, none of the quality is too bad because PEMEX used its offshore mentality in the onshore environment and, if anything, overengineered its fields. The NOC has been superb in its communication with us and we are a happy partner. Operationally, it has been very cooperative and provided solid support in solving problems and overcoming hurdles. Jaguar owns the wells, but PEMEX owns the facilities, and therefore our problems are shared.

We have only had a few minor bottleneck issues in using PEMEX’s facilities on the gas production side, but because most of our capacity is in the Burgos Basin, where there is existing trunk pipeline that was used to send gas to the US, there is capacity available. We believe, ultimately, that if we are able to replace gas capacity from the US, then the logical decision would be for everyone to buy in Mexico rather than import from the US.

Today, 100 percent of our hydrocarbons are being commercialized through PEMEX facilities. We are in discussions with a number of third parties that are looking to either buy at the wellhead or invest in infrastructure to have access to the molecule. We are also looking at commercializing into the regional grids, which we are allowed to do due to Mexico’s open-access rules. As the production numbers are low, it does not make sense to negotiate an offtake contract, but we will consider this in the future.

 

Q: Jaguar reduced its drilling activities on its Area VC-02 asset. Why did the company decide this and what have the consequences been?

A: This decision came from a problem we face every day and is related to the ways that the concession agreements were set up in Mexico. The laws were arranged for operators to have an exploration block where operators must comply with exploration commitments before submitting an evaluation plan followed by a development plan. This logic means that no operator has anything to evaluate and develop until it has been explored. However, Jaguar, and other onshore operators, have existing fields. We are therefore evaluating the fields to review the feasibility of putting them back into production. After this we have our exploration commitments. But our overall work commitments are the combination of the two connected plans. We therefore chose to reduce commitments on Area VC-02’s evaluation plan and increased them on exploration, which actually increases our total amount of investment into the field. The legal framework, and the investment commitments that are specific to one field, mean that there is a degree of financial juggling based on the prospectivity of that field.

We are working with CNH to find a way that we can be considered as a single company, with the combination of our blocks, rather than 27 separate different companies due to the 27 plans we have in front of CNH. At the moment each plan must be dealt with individually. There are other problematic frameworks. For example, it is prohibited for any of the operators’ plans to make reference to any of its other plans. This causes problems between the evaluation and the development plans of the same field as development plans depend on decisions made during the evaluation of that field. CNH is open to discussion and we are optimistic.

However, the administrative process is grueling and permitting processes can take six months. This reduces an operator’s exploration time. With only a two-year exploration period, there is a great deal of pressure on the effectiveness of the program and often operators choose to drill wells because they are ready and aware of time constraints, not because these are the best wells to drill. Time restrictions in Mexico can be problematic and reduce the quality of decision-making during exploration. In the long-term, we would like to see an adaption of these requirements so that operators can receive more time to work, as long as they are meeting certain requirements and moving forward in good faith.

 

Q: Jaguar’s blocks are natural gas-focused. Why should natural gas be central to the Mexican energy matrix?

A: Jaguar is the only operator in Mexico focused on natural gas and we feel we can be a fundamental part of shifting the energy balance conversation in Mexico with respect to natural gas. Ultimately, the benefits of natural gas are felt in the same way wherever it is used. It is a transition fuel, a way to reduce a country’s carbon footprint and a method for improving power generation efficiency. From the Mexican perspective, there is solid infrastructure from the north down to Mexico City so there is no reason why over 90 percent of Mexico’s northern energy consumption should not be natural gas. It is widely available.

Cost competitivity is key. Clearly the US provides cheap gas but for Mexico it makes much more sense to buy within the country. When importing, only 25 percent of the value will stay in Mexico. Buying in Mexico allows for 85 percent of that value to stay in the country. Employment, taxes and royalties, and even payments that go to service land owners, are all delivered to the country. This helps communities massively and also supports the national economy.

Long-term, we believe that the access of very inexpensive associated gas from non-conventional liquids developments in the US are likely to decline as activity lowers, and we expect the gas market to recover accordingly. Medium to long term, natural gas is key to the health and wellbeing of the Mexican energy matrix.

 

Q: How is the company helping change the conversation about the role of small and medium-sized operators in Mexico?

A: It is logical and necessary for any country to understand that having multiple oil and gas operators generates a healthy energy outlook. The variety of size of companies is key for Mexico. This is because there are hundreds of fields in Mexico that large companies like PEMEX could never operate profitably but are great business for small companies. This is also integral to the industry’s development in Mexico and has been seen in other countries of Latin America, including Argentina and Colombia, where junior companies graduated to become midsized operators. This has changed the industry dynamics and generated a robust sector in these countries. When this happens, a healthy secondary market is born. Large operators shut off assets that they cannot profitably produce and are taken up by the smaller companies. In Mexico, there are vast amounts of resources that are orphaned because it is not a priority for PEMEX. Now it should be. PEMEX must produce the mega fields like Cantarell at 2MMb/d, not the small 5Mb/d fields.

We also have a key role to play in demonstrating to Mexico that it is possible to operate with social responsibility and to improve the communities we are operating in. This is part of what we do. We want to be part of a healthy community and contribute to it. This is why we take a long-term view of our commitments and invest in education. We reduce our footprints and understand that our communities will be the source of ideas for the future. As part of this push, we are attempting to modify our company objectives from measuring how many barrels of oil a day we produce, to how many families we provide energy to.

 

Q: What are the skill gaps that Jaguar has seen working onshore?

A: Jaguar has had wonderful access to bright, well-trained young professionals who are entering the market in Mexico. But the pre-Energy Reform scenario did not generate a productive relationship between PEMEX and service companies. PEMEX’s vast size and unique position in the market led to a situation whereby the supply chain was convoluted and disconnected from the creation of value. This means that members of the middle generation of industry personnel, who have 20-25 years of experience but have worked only for PEMEX, are in general not dynamic or independent enough to fit into Jaguar. The senior generation, with 30-35 years is fantastic and many of them are experts in what they do. But because of that middle-generation gap, we are finding it difficult to locate appropriate personnel and we have therefore had to supplement our Mexican team with some internationals. This brings new ideas, which is always valuable, but we have had to focus on training more young people. Despite this, our workforce is still 90 percent Mexican and we are firmly committed to develop our talent pool.

Peter Appleby Peter Appleby Journalist and Industry Analyst