Fernando Calvillo Álvarez
President and CEO
Fermaca
/
Insight

Pipelines and Peak Shaving as Pillars for Success

Wed, 01/22/2014 - 14:49

“Mexico’s natural gas industry did not open up all at once. It is better to think of the process as a set of activities that have gradually opened up to private investment, through joint ventures, investment agreements, and bidding processes,” says Fernando Calvillo Álvarez, President and CEO of Fermaca. Considering natural gas availability and prices in the North American market combined with the growing energy demand in Mexico, he urges the country to build more pipeline infrastructure to bring gas across the border and foster industrial competition. Naturally, the lack of cross-border natural gas transportation infrastructure between the US and Mexico also provides an interesting opportunity for Fermaca itself.

Fermaca won the tender to build, own, and operate the Tarahumara pipeline that connects Chihuahua with the southern US. This pipeline, also known as the Chihuahua Corridor pipeline, creates a gas import location at the border that will compete with current infrastructure at El Paso and Tucson. In a joint venture with Enegás, Fermaca recently also won a bidding round for the construction of a compression station in Soto La Marina, Tamaulipas, beating other contenders with a net value difference of approximately US$100 million. Fermaca and Enegás joined forces for the Soto La Marina project because Enegás had problems developing and materializing projects in Mexico in spite of having the necessary funds to invest, while Fermaca had established a track record of successful project execution but was battling a lack of competitive financing. “Enegás brought a large technical base while Fermaca had local knowledge, adaptability, project expertise, and execution capabilities. The alliance makes us stronger than we were individually, which is a reliable and attractive feature for a client like CFE” comments Calvillo Álvarez. “Such alliances in the natural gas sector are important because of the possible risks and competitive environment, while economies of scale and deep financial capabilities are necessary to maintain growth and pull off successful projects.”

Although Fermaca is capable of staying afloat in a tough market, Calvillo Álvarez claims previous administrations made things difficult for local firms, pushing Mexican investors away. “The government introduced so many new covenants in the bidding rules that Mexican companies could not even compete. It was a shame, because we have a lot of advantages to offer. We know how to negotiate rights of way, obtain land permits, and control our development and construction costs.” Even though Fermaca did not win any tenders during the previous administration, Calvillo Álvarez claims that the company was still the cheapest option around. Today the situation is different. Calvillo Álvarez feels his company has achieved a better position in the Mexican market, partly due to current government officials having a longer-term perspective. Fermaca won the first CFE tender during the current administration and Calvillo Álvarez describes the process nowadays as a transparent level playing field. “In the last two years, Fermaca has invested almost US$600 million and can now move at least 20% of the gas consumed in the country. Furthermore, the Chihuahua Corridor pipeline is the first project of its kind to be built and delivered on time to CFE – construction was finished 30 days ahead of schedule – something that most foreign companies have not been able to accomplish in Mexico.” This pipeline was completed considerably faster than Fermaca’s pipeline project connecting Palmillas to Toluca. Calvillo Álvarez says the negotiations with landowners, timeframes, and geographic characteristics of each development were notably different, explaining why both projects took about 14 months in spite of the Chihuahua pipeline being 400km long as opposed to just 122km for the Toluca line.

The Chihuahua Corridor was designed to have additional capacity for parties outside CFE. Calvillo Álvarez explains that natural gas companies are extending their reach along the value chain and eventually becoming gas and power companies. Mexico has seen a raft of critical alerts during recent years as a result of natural gas shortages lasting hours or even days and reducing natural gas volumes distributed businesses, power plants and customers. This means that investing in a power plant entails running a real security risk concerning the supply of natural gas. “It would be impossible to finance a project that is vulnerable to critical alerts and risks running out of fuel. We have been promoting the creation of energy hubs along the pipeline.” Fermaca is preparing itself to enter the power sector through a partnership with an energy producer to overcome the company’s lack of experience in this field.

The fact CFE is the national electricity provider for Mexico has placed the costs of production, transportation, and distribution of electricity outside of the sphere of influence of the general population. “People are indifferent towards daily, weekly, and seasonal swings in electricity prices which result in higher electricity rates unless properly addressed,” says Calvillo Álvarez. “Peak shaving could provide a valuable means to hedge and optimize the dispatching of power plants, safeguard against temporary critical alerts, and manage the use and supply of gas. When large gas quantities are not needed, it is possible to store this resource and use it during scarcity periods or in the course of a contingency to cover a price spike. At Fermaca, we have been developing a peak shaving project for quite some time with a European technological partner.” The company plans to own and operate a facility that will initially provide peak shaving services to power generators, with a capability to cycle up to 20mcf/d, an important first step. Calvillo Álvarez highlights that the window of opportunity that is currently open for players in the gas industry will not remain forever. “Companies like Fermaca need to move aggressively in the next five years before the market slows down again.”