From Pipeline to Project OperatorTue, 01/22/2013 - 11:03
Q: After the construction of the Chihuahua pipeline, Fermaca will be transporting over 20% of Mexico’s gas. What should be the role of the private sector in Mexico’s natural gas imports?
A: In the future, Mexico will import around 35-40% of its gas from the US, as there is no incentive for the Mexican government to produce this hydrocarbon if it can buy the cheapest natural gas in the world from the US. Around the world – in Europe and the Far East – natural gas is priced between US$8 to US$12 MMBtu, while in Mexico it is priced at around US$3.00 MMBtu. However, if we want to have more interconnections at the border to import more gas, we need to plan ahead, just as Pemex is doing with the Los Ramones pipeline. Another obstacle in pipeline construction is the fact that Pemex has other budgetary priorities: exploration in deepwater, for example, is extremely costly, which means that only a small portion of its budget is left for pipeline construction. No one is going to give a free ride of equity to Pemex, and as a result, I believe they should oer these projects to companies like Fermaca.
Q: How many interconnections are there currently at the border? How does this aect Mexico’s gas imports?
A: Mexico has currently around five or six interconnections at the border – without counting the Chihuahua pipeline – and all these interconnections are connected to the El Paso Natural Gas System. This could be a potential problem for Mexico, because if the Americans ever close the valve, we have no other way to import gas. It is impressive that Mexico has vast energy resources and we are still importing gasoline, gas, LPG, and diesel.
Q: Given your experience and success as a pipeline construction company, why would you shift your focus to becoming a pipeline operator?
A: First of all, Fermaca should go into pipeline operation because we strongly believe there is a window of opportunity, even though many companies disagree with us. Furthermore, we are interested in becoming pipeline operators because we have been able to acquire the funds needed, and we have a group of partners that understand the risk-reward balance in this market. We have been hasing projects in South America and the Caribbean; we recently signed a joint venture with a company in Abu Dhabi, but when we came back and made a fair analysis of the opportunities at home, we realized the potential today is greater in Mexico than in any other part of the world.
Q: Which obstacles could impede you from becoming a large pipeline operator in Mexico?
A: The greatest obstacle we find to becoming successful pipeline operators is the atmosphere of insecurity that currently exists in northern Mexico. In January 2012 we lost three engineers in Chihuahua; they were murdered. However, instead of backing out, we were able to unite the team and make them realize the time to move forward is now, especially because most of our competitors are American companies, and I do not see them competing for projects in this specific region.
Q: How do you secure your financing, and how are you able to compete with larger competitors?
A: Due to our size, we take a very aggressive approach on projects during the first phase and invest US$5-6 million: acquiring options and obtaining permits to ensure that our contingencies are as low as they can be. That way, we can compete with the bigger corporations.
Today, the project finance market is very di·cult, following the global financial crisis there are not many banks involved in project finance. Before, you could raise US$500 million with two banks. Nowadays, to raise that amount of money, you need six or seven banks, because they want to spread the risk. We have contact with a group of banks; they know us very well and they have seen the progress of our projects. They are very eager to continue helping us, so we already have a credit line. We do not have binding commitments because we do not have the tenders yet, but we do have the letter of interest of all of our banks to keep participating with us on these projects. It helps that our client, the CFE, has a good credit rating, which essentially is equal to a Mexican government bond.
We believe that once we win two more CFE projects, is the time for Fermaca to become a public company, which is something we have been working towards since 2007. That will be our next step, and we expect it to happen in 2015. Right now is not a good moment for an Initial Public Oering (IPO), and we do not want to do our IPO in Mexico, even though there is a lot of cash from pension funds and savings, because there is limited knowledge about energy projects. Sempra announced it was going public in Mexico last year; I want to see what happens because IPOs in Mexico are not very successful. Furthermore, energy projects need a lot of investment and Fermaca has the structure to go public in Canada or the US.
An example of what we could do is create a master limited partnership (MLPs), which combines the tax benefits of a limited partnership with the liquidity of publicly traded securities, just like Energy Transfer. An MLP does not pay taxes – the ultimate shareholder is the one that does – so the company produces a lot of cash flow, and if it keeps reinvesting its profits then there only a dividend tax. Energy Transfer used to be our partner. When I first met Kelsey Warren, CEO of Energy Transfer, his company was a small intrastate natural gas pipeline operator worth US$25 million. Three years later, when Fermaca and Energy Transfer started collaborating and developing projects together, it had become a US$ 250 million company. Today, Fermaca has a market value of around US$650 million and Energy Transfer one of the largest and most diversified investment grade master limited partnerships in the United States, worth around US$25 billion, operating approximately 111,000km of pipelines. This is just an example of what is possible for an MLP, and this is only for the gas, oil and power industry. However, we are still in the process of analyzing what will work best for Fermaca.
Q: Would it make any sense for Fermaca to start investing in pipeline infrastructure in the US?
A: It would be very interesting, but the market is extremely competitive. It is di·cult because as a foreign company we cannot acquire permits from state o·ces. We would have to get our permits from the Federal Energy Regulation Commission (FERC) in Washington DC, and that is five to ten times more di·cult than acquiring them in any given state, such as Texas or California. Besides, the companies operating in the US, such as Williams Companies, have over 65,000 km of pipelines compared to our 16,000km in Mexico; they have more resources, more experience, and the competitive advantage of being local and acquiring their permits in their home states. In reality, for the time being it does not make a lot of sense for us to invest in pipeline infrastructure in the US.