Mexican gas sector beckons despite turmoil: Jaguar

Mexico's natural gas sector could still provide fresh investment opportunities amid ongoing turmoil in global crude markets, independent operator Jaguar E&P said.

"It would be extremely difficult to invest in the oil sector right now due to Pemex's financing overhang," Warren Levy, chief executive of independent Jaguar E&P said during the La Jolla energy conference today. "But we see real potential for the natural gas industry to be one of the few bright spots over the next 12-18 months."

Mexico is heavily reliant on US pipeline gas — 67pc of domestic consumption was covered with imports in March — as domestic production has been sidelined in favor of abundant and cheaper imports from the Permian basin.

But given the vast, "under-drilled" natural gas reserves in northern Mexico's Burgos basin and along the Gulf coast, investing in gas production could relatively quickly increase energy security and create economic growth, especially in areas currently affected by cartel violence, Levy said.

Mexico has 32.4Tcf of 3P natural gas reserves, 37pc of which are found in conventional resources, according to the latest information from oil regulator CNH.

The Burgos basin, in particular, is attractive for investors — despite security concerns — given its location close to service companies in the US' Permian basin.

"From a technical perspective, it is much easier to work here than anywhere else in Latin America. You simply do not have to put any equipment on a boat," Levy said.

Northeastern Mexico has high levels of organized crime but E&P companies operating in the region "understand the rules of engagement," Levy said. "You leave people to operate during certain hours of the day and then they leave you to operate too."

Jaguar E&P won five contracts in the upstream rounds held following the 2014 energy reform.

The natural gas sector has been spared the price volatility seen in crude markets and prices could even benefit from reduced associated gas output as low crude prices force US shut downs, but Mexico's investment climate is challenging.

"The government is playing a dangerous game with its non-investment friendly policies at a time of external refinancing needs," Levy said.

Pemex, the world's most indebted oil company, already struggling to reverse a more than 14-year decline in crude output, will suffer an additional hit this year from the crash in oil demand and prices precipitated by the Covid-19 pandemic.

Financial analysts and ratings agencies think it likely that Mexico will be forced to seek external refinancing early next year, shortly after they renew the annual hedge that protects federal revenues from declines in crude prices.

Despite Pemex's fragile financial situation, industry members and analysts do not foresee any policy changes.

"Covid-19 has not injected pragmatism into Mexico's energy policies, but has spurred a massive power grab," Pablo Zarate, analyst at FTI Consulting, said during the conference today.

Rather than changing its course, Zarate sees the courts as the only way in which existing investment will be protected.

Over the past year, the energy-nationalist government has forced natural gas pipeline operators to re-negotiate their contracts, tussled with independent operator Talos Energy over the operation of the giant Zama discovery, and in the past month, pushed through wide sweeping regulatory changes within the power sector that threaten to decimate private investment.

"Lopez Obrador is famously un-persuadable and so my hope is a showdown in the Mexican courts where they unanimously decide to uphold the constitution," Zarate said.

By Rebecca Conan