Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.

This 32nd Q&A in the series is with Warren Levy, CEO of Mexico’s Jaguar E&P, a Mexican private company established in 2014 by Grupo Topaz with a conviction to strengthen the national energy industry and develop local communities.

Jaguar E&P is currently the private company with the largest number of license contracts for exploration and production of hydrocarbons on Mexican onshore fields, and is involved in exploration, production, and operation activities. The young company is currently producing around 1,500 barrels of oil equivalent per day through 61 wells on five of its onshore blocks.

Levy, who joined Jaguar in 2019, has worked to develop natural resource companies for more than 24 years in more than 20 countries. He has contributed strategically to the economic growth and development of the industry in Latin America in executive positions at companies such as Estrella International Energy Services, Schlumberger, Pentanova Energy Corp., and President Petroleum. He has also been a Board Member of several oil operators & oil services companies such as Miramar Hydrocarbons, Montan Energy, and Quad Energy.

Levy graduated from Queen’s University with a bachelor’s degree in engineering and engineering physics in 1996.

NGI: Jaguar E&P really burst onto the scene in Mexico when it won 11 blocks in an onshore auction in 2017. Can you give us an update on the status of those blocks and an overview of Jaguar E&P’s current operations in Mexico?

Levy: Yes, so, we were able to win 11 blocks in total and the focus has ended up being much more natural gas than on oil, even though in the bid rounds a number of the blocks were nominally qualified as oil blocks. The reality is there is much more potential in natural gas across the whole portfolio, with the exception of maybe one block.

What we’ve been doing the last two years has been reactivating the legacy facilities that Pemex had left and returned to the government. This was never the primary focus for us — as you know the bid rounds were exploration bid rounds — but five of the blocks actually came with existing fields that could be reactivated. That’s given us an operational presence in the fields, so we’re out there operating, and we’re able to have an operating presence, meaning the communities see us and we interact with local landowners and suppliers.

Because we have an existing operating presence, it has given us the ability to start drilling operations and in a very successful fashion without really any challenges whatsoever, even though we started the drilling process right at the start of the Covid pandemic. We were able to mobilize a rig from the U.S., get the crews up and running, and then successfully drill two wells so far. And we are continuing to drill now.

So, really the last two years we have focused on field reactivation and seismic reinterpretation. The quality of data that’s available in the national database at the National Hydrocarbons Commission (CNH) is extraordinary because you often have access to the original field gathering data. You have the ability to go back and do fundamental reprocessing on all the seismic data, but that takes time.

We’ve really been focused on reinterpreting the data, picking the right locations, and then doing all of the paperwork and getting the plans and approvals submitted to the CNH to be able to drill.

The seismic information that’s available is really extraordinary. You don’t just have whatever Pemex had interpreted, but you also have the original field data and the original information that allows you to do fundamental reinterpretation, which is very rare. Normally what you’re trying to do in an exploration process is take whatever seismic you have and tweak it a little bit to make it a little bit better or you are faced with having to shoot new seismic. What we’re doing is, four or five and sometimes up to ten different types of reprocessing on the fundamental data and getting 2020-quality seismic interpretation out of data that may have been shot in the 1980s, 90s or early 2000s.

NGI: Jaguar is currently producing through 61 wells at five of its onshore blocks, is that correct?

Levy: Yep, that’s correct: 61 wells at 18 fields on five blocks. We’re also in the process of reactivating four or five additional wells right now from the existing well stock, and we’re also working to begin production on the two wells that we recently drilled.

NGI: In what regions of the country are Jaguar E&P’s blocks located?

Levy: We’re in Tamaulipas, Veracruz and Tabasco. We had five blocks in the Burgos basin, one in the Tampico-Misantla basin, two in the Veracruz basin, and three in the southeast basin.

NGI: You mentioned the Burgos basin and, in a recent webinar, you spoke about the notion that Mexico should consider developing more natural gas in the Burgos basin and that you see it as a potential attractive play for the country. Could you speak about the opportunity and upside that you are seeing in the Burgos region?

Levy: The geology in the Burgos basin is identical to what you have in south Texas. So, if you look at the drilling density and the production density in south Texas versus what you have on the Mexican side of the border, clearly there’s an aerial opportunity to do more in the existing acreage.

I think what really happened was that in the late 1990s, Burgos was not a focus area for Pemex and they started to give a lot of acreage within the basin over to service companies to operate, and it became more about drilling wells rather than optimizing the reservoirs and optimizing the production. So, the service company contracts were incentivized to take the least amount of risk possible, and that of course meant they weren’t going to drill exploration wells.

At that time, Pemex really didn’t have the capital and personnel to look at everything. In the late 1990s, they were trying to revive Cantarell, for example, so turning the Burgos basin over to third parties made sense conceptually.

What happened as a result is that the Burgos basin never got looked at as a fundamental exploration area. And what you have in the Burgos are multiple geological play types that overlay one another that are all potentially productive. We’re blessed in Mexico with very rich source rock which ensures that if you’ve got a valid trap, you’re likely to find hydrocarbons. It’s the same richness of geology that has been so successful for development in Louisiana and Texas on the northern side of the Gulf of Mexico.

So…if you come back and look at this area with a fresh set of eyes and apply modern exploration techniques and updated seismic data, we think there is a great opportunity to make economically viable projects.

What we’ve seen as we’ve gone more and more into the Burgos blocks — especially the northern blocks that we have – is that the interpretations that were done by Pemex on the older quality low-resolution seismic often identified fields that were discrete, when in reality they are part of a very large complex.

So, a lot of what we are understanding about Mexico is that there’s way more potential there than what was identified. And the market has now evolved to the point where there’s increased natural gas demand in Mexico and that it makes a whole lot of sense for everybody involved for more of that to be produced from Mexican rock, and to keep more of the money in Mexico rather than it going to U.S. suppliers.

What we see is huge geological potential and, on a medium-term basis, a market dynamic that suggests that Mexico is going to continue to demand more natural gas and that it can be cost-effective and profitable to produce in Mexico. So, we’re excited about that potential, and we see a great opportunity to further develop the understood acreage, and also look at new concepts that will potentially bring new life to the basin.

NGI: The Energy Information Administration (EIA) put out a price forecast for Henry Hub prices in 2021, and it seemed positive in the sense that prices are predicted to rally to above $3.00 again. Does a forecast like that – and the idea that prices will rally — provide even more incentive for Mexico to reconsider conventional drilling for natural gas?

Levy: I think people in general and people in the region over the last couple of years have come to understand that the cost associated with developing conventional gas, including tight gas, is a whole different order of magnitude lower than non-conventional gas developments. We’ve gotten into this mentality in North America that gas is expensive to produce and therefore it’s not really a target, and that most of the new gas that came online in recent years was really associated gas from the non-conventional oil developments.

The reality is that the lifting cost for conventional gas is extremely low. The development costs are low as well because the scale of what you have to do to get these wells into production is lower. We feel like we can make money even with Henry Hub prices at $1.80 or $1.70. Obviously, if the price goes back up to $2.50 or $3.00, it becomes a much more attractive business and would be good for everybody, because it’s more royalty revenue and cash revenue going into the economy.

NGI: Currently Mexico imports around 70 to 80% of its daily natural gas demand. In your opinion, what would be an ideal balance to strike in terms of what percent of Mexico’s natural gas demand is produced locally and what percent is imported from the U.S.?

Levy: There is a political and social element to this question, which is: what makes sense for the country politically and socially? This depends on what the beliefs are about the importance of energy sovereignty and to use Mexican resources to support Mexican development, and the opinions likely vary on this quite a bit.

The reality is that there’s been expensive infrastructure that’s been built, and at a certain point if you’re not using that infrastructure, at least at its critical volume, it starts to become cost ineffective.

So, if you lowered imports to below half of where it is today, you are probably going to be in a situation where the infrastructure becomes very expensive to use relative to the cost of gas.

What we do expect to see is a significant increase in demand for natural gas in Mexico over the next 5-10 years. If you think 5-10 years out, Mexico could very comfortably be importing 20% of its gas and it would still make sense economically to use the infrastructure that’s there. That would obviously require a huge increase in natural gas production in Mexico to make that happen.

I think in the short term, you will see natural gas production increase in Mexico, but I think that growth will be in line or maybe even lower over the next couple of years than the growth in demand. As a result, I think we are going to need to see a significant ramp-up in activity and a lot of resources in Mexico committed to increasing natural gas production to displace imports. We’re hopeful that by the end of 2021 and early 2022 that we’ll start to get to a place as an industry where we begin to displace significant volumes from the import market.

NGI: Jaguar E&P works onshore in the northern regions of Mexico, such as the Burgos basin, that have high levels of insecurity. Do security concerns impact Jaguar’s operations in any form?

Levy: It is something that we need to talk about as an industry because it exists and — for anyone who has lived in Mexico or spent any time doing business here — we are all aware of the fact that there is a very difficult situation in Mexico related to security.

The positives about Mexico are that, over the last 10 years or so, you’ve seen an evolution in the industry and I think an end evolution in society where there’s kind of been an accepted understanding that it is not good business for the criminal elements to engage with the oil industry because the government will respond to it, typically with military response.

So, the result is that you don’t see a high degree of incidents between the industry and organized crime because rules of engagement have been established where we stay away from them and they stay away from us. We’re both vaguely aware of the presence of the other, but we operate in different circles, so to speak.

The challenge that we face is that there is a level of investment that needs to be made in understanding what’s going on and working with the suppliers, working with your communities, and understanding what are the bounds under which you can operate safely. And that changes as you go through Mexico in the north, where it’s very specifically limited to organized crime. While the farther south you go it gets more into a mix that involves much more community issues and social engagement.

And at the end, the right way to do business in these areas is to maintain a low-profile approach and very community-friendly approach. We believe passionately that ultimately if we’re doing things right — if we’re taking care of the environment, if we’re taking care of the communities that we work in, if we’re working as much as possible with local suppliers — ultimately that is the best way to operate in Mexico.

What we’re starting to see are the very beginnings of a shift in the mindset of the people that we work with, and that they are starting to think that the oil industry isn’t bad and that Jaguar isn’t a bad company. They recognize that we’re trying to do things the right way, and if we can win that battle and get to the point where we are seen as a good neighbor in the communities, we think it’s entirely feasible to operate successfully in Mexico over the long-term.