Preheat oven to 425 degrees F (convection mode is best if you have it).
Heat a large pot over medium heat with 1 tbsp of the olive oil. Add the shallot and garlic and cook, stirring, until just tender, about 2 minutes.
Add the butter, salt, and pepper and melt.
Add the uncooked pasta, the milk, and the water and bring slowly to a boil (I keep mine over medium heat). Cook, stirring often, untilt he pasta is tender and most of the liquid has absorbed, about 12 minutes.
Remove from heat and stir in only 2 cups of the shredded cheese, sour cream, the green chiles, nutmeg, and the paprika. Taste and add more salt if desired.
Transfer the mac and cheese to a casserole dish and top with the remaining 1/2 cup of shredded cheese.
In a small bowl, combine the panko breadcrumbs with the remaining tablespoon of olive oil. Toss until well combined, then sprinkle evenly over the mac and cheese.
Transfer to oven and bake (uncovered) until the cheese and panko are golden brown, 8 to 10 minutes, being careful not to burn.
Remove from oven and let cool for about 5 minutes before serving. Garnish with freshly chopped cilantro (if using), serve and enjoy!