Work Still Needed to Know State of Inherited FieldsThu, 09/28/2017 - 10:00
Q: What main challenges do onshore operators, such as Jaguar, face in the Mexican market?
A: The top two challenges operators face in onshore fields are dealing with security and with communities. To handle the community aspect, we become closely involved in the social issues of the communities in which we work. As each community has a different set of needs and concerns resulting from our operations and as there is no specific pattern to follow when dealing with them, each area represents a different challenge. We follow the guidelines established by international best practices by being respectful with all the people we interact with, as well as with the landowners, is crucial. On the security side, when dealing with any kind of criminal activity that may be present in our areas of operation, we follow procedures and recommendations that are put in place by our security consultants from top security firms that showcase specific expertise in the areas we operate.
A third challenge is the lack of information and the inconsistency of information between sources. There is still a lot of work to be done before operators can get a final sense of the true state of the fields they are inheriting, be it infrastructure conditions and availability, social components or environmental variables and potential damages. Comprehensive data surrounding these key variables is critical and even more so to have at hand for consultation prior to acquiring the blocks. Potential environmental damages need to be accounted for and by any means necessary avoid taking operators by surprise. Although we consider these risks in our economic models, it takes work and time to get to know the true state of things. The portfolio of assets Jaguar was awarded call for a case-by-case analysis. The process is meticulous because we have to make strategic decisions, which is time and work that takes us away from of our true value-creating activities.
Q: What was Jaguar’s strategy to win 11 blocks in Rounds 2.2 and 2.3?
A: Jaguar’s solid team of geologists, geoscientists and reservoir engineers allowed us to obtain an accurate and conscious evaluation of the assets, which is crucial when it comes to crafting winning offers. We did not offer bigger down payments because we have more money but because our expert team saw a value in the fields that was comparable to the down payment we offered. The fact that we invested in an oil field in the Caribbean last year also helped a lot. This investment has been a good experience and helped us learn and get some boots-on-the-ground experience, which was helpful for the bidding processes where we won the 11 blocks. Still, in terms of capital commitments, we are 99 percent focused on Mexico. We developed a very good partnership with SunGod from the beginning, and that will make us even more successful once operations start. Its experience in Canada is important, but one of the most significant characteristics SunGod brings to the table is that it is very focused on costs and lean operations. That is an asset we need right now, especially in the Burgos region where prices and costs are important. Now that we have won 11 blocks we can apply economies of scale. The steep learning curve during the process also prepares us for the next rounds, with assets already in place and the capacity to make strategic offers. In the first phase, our funding sponsor, Grupo Topaz, has pledged a strong commitment to sign the contracts, start operations and to continue at least until the end of 2018. As the projects are developed, the subsequent cashflow will continue funding our operations. The next phase implies focusing on strategic activities, such as appraisal wells in some of our operating areas and workovers in cash-flow attractive areas to put our business plan to the test. Once that part is done, raising capital will prove easier to fully develop our five-year development plan. Capital markets, debt markets, public markets are all under consideration to that end.
Q: How is Jaguar preparing for operations in its 11 blocks?
A: The skillsets we require have changed completely and our priority is to attract the highest quality professionals from the Mexican industry. We are working to assemble a regional staff that will bring local knowledge and expertise to our team, such as local operators and maintenance crews who know the assets and the land. We are moving to get this done as quickly as possible. We have found quite a good regional offer; there is a sufficient and robust number of Mexican companies that offer national products and services. The true problem is not finding them but quantifying and reporting the national content and complying with the required documentation. That will take a lot of time. Jaguar is also open to developing partnerships and alliances with service providers and other operators that want to co-invest alongside Jaguar, and although we will gladly hear them out, we will also be very cautious when deciding who can offer a higher added value and operational expertise.
Q: How would Jaguar rate the work of the government agencies to promote investment in the Mexican industry?
A: While the industry’s regulators have gone through considerable lengths in crafting a solid regulatory framework inspired by global best practices, there is still room for improvement across the government agencies. We truly appreciate the willingness and openness of the latter in taking note of operators’ feedback and acting on it. Streamlining the drilling permit obtainment process is among the most noticeable advancements. Honorable mentions include CNH and ASEA. Dealing so closely with them and their requirements has also created the need to hire more personnel to deal with the different administrative processes. Those resources used for administrative procedures take away from our core activities, and that is something we would like to avoid.
The fact that the awarding mechanism changed to put a cap on royalties was a true tipping point for the industry. It was a game changer for the licensing rounds. The cap allows companies like us to actually invest in the development of the assets. The 25 percent royalty for the natural gas block in Burgos is comparable to the royalties offered in similar fields in Texas, which makes the assets in Mexico competitive on the national and international markets. Another significant change is the opportunity to nominate blocks. That works to the benefit of both parties because it helps CNH invest less work in selecting the blocks. At the same time, it allows operators to show specific interest and to be prepared if the blocks they nominate are included in a round.
Q: What kinds of companies are best suited for Jaguar’s procurement system to add value to its supply-chain?
A: There is a pool of companies we are paying close attention to. Some have experience operating gas fields, others are service providers that developed a business with operators that own the fields, while others are companies specialized in workovers or compression-system maintenance. Our portfolio of assets calls for a case-by-case analysis to best cater to particular requirements and determine which providers of services and technologies are able to provide the best solutions for each of the blocks. It is a very meticulous process, implying strategic, long-term decisions on that front and we want it done right.
Q: What specific goals is Jaguar looking to achieve in the near term?
A: Our primary focus is to solidify our operations in Mexico and ramp up production on the four out of 11 assets already operational as quickly as possible. Drilling the most valuable exploration wells within our awarded blocks is also among the priorities set for the next couple of years. Jaguar E&P is fully determined to successfully tackle the inherent complexities of our plans. Unconventionals are up in the 3.1 licensing round and some modifications in the cost-recovery provisions were implemented, which made sense given the high CAPEX of the considered resource. As long as future rounds continue carrying the idea of incentivizing investment and the mechanism works, Jaguar E&P will eagerly continue to participate in the following rounds.