Fernando Calvillo Álvarez
View from the Top

Private Sector Drives Natural Gas Development

Wed, 01/25/2012 - 11:50

Q: In Mexico, the energy industry is very tightly controlled, and Pemex and the CFE have always had monopolies. What could the private sector bring to natural gas distribution that these two entities could not?

A: The private sector can carry out both regulated and non-regulated activities relating to gas: distribution, transportation, storage and marketing. In the power sector, the CFE has the monopoly and that will not change, but private companies do 33% of the power generation even though everybody only thinks of the state monopoly. Obviously, the CFE is the only client and their generation programme is gas-heavy, because of the gas price in comparison to other fuels. Currently, the gas price is at less than US$3/million Btu, while the Pemex gasoline Magna price was US$21.6/million Btu in February 2012. There is a huge gap.

Q: Constructing and operating pipelines is an attractive business as it gives you very steady revenue over a long period of time. Is the public interest in Mexico being served by the private sector taking this interesting business into its domain?

A: With the current natural gas prices, pipeline construction and operation is a less attractive business for Pemex. Producing one barrel of crude oil costs between US$5 and US$15, and can be sold for between US$90 and US$110, so there is currently little incentive to invest in natural gas. Pemex’s focus is on producing crude oil and bringing revenue to the country; that’s the mandate of the company. Why would they waste time and money building a pipeline instead of building a refinery?

We won a bid against a consortium that included Pemex Gas and Petrochemicals and the result was a dierence in net present value of US$150 million. We are more ecient than Pemex. If you look at the Pemex ocial standard of construction of pipelines and compare it with the API standards, Pemex adds many additional standards. I have been doing a lot of number crunching and there is no way that Pemex can be more ecient than us. The CFE will be the one contracting the works for the expansion of the pipeline network, and will lease the transportation service.

Q: Do you think that the potential change of government will have an impact on the transportation market?

A: Of course it will. And not even the change of government: just the fact that it’s an election year has an impact. Mexico doesn’t have long-term plans; we just plan for tomorrow. Government ocials don’t sign anything until they absolutely have to. These US$10 billion worth of pipes currently planned are not new. The Morelos project was originally going to be done in 2000. If you look at the timing, it might take another 10 to 15 years to build them.

Fortunately for Fermaca, our business model and all of our investments are focused on working here. Just this year, we are going to invest US$500 million in Mexico. I have seen American and European companies going back and forth, but we are still here. Of course we will get competition, but it’s the way it should be and not everybody can be patient. Fermaca took seven years to build its first pipeline and we are going to start to build a second pipeline 15 years later. That’s because of another problem in Mexico. There’s only one single producer and marketer of gas. That makes people lazy. Industry in Mexico does not worry about the price of gas aecting contracts, because the only price point is the Pemex price, and the only company in this country that can handle these big projects is the CFE.

Q: Are you also considering entering the power generation market? A: Yes, we have a company in process of development, Fermaca Gas & Power. We have established our first conjoined project for 75 MW and it looks like by the end of this year we will have a contract signed with two or three American companies. It will be a self-supply plant for 75 MW and we will sell heat and power. It will be very close to Mexico City in the State of Morelos, 65km from here. We are negotiating the power-heat-supply contract. We know that there’s a market for 200 MW, but as this is our first project, I’m very cautious and want to do this in the most conservative way.

Q: So the bigger picture vision is to build an integrated energy company based on natural gas?

A: Yes, let’s say a small integrated energy company: an energy boutique. I hope this will happen 20 years from now. In terms of pipelines, we want to be the equivalent of Enagás of Spain. We want to be an important energy shop. With the Chihuahua project coming up, we will be the largest gas mover in this country by 2015. We will be moving 25% of this country’s gas, up to 1 Bcf per day. The Chihuahua project is the most important energy project in terms of pipelines that has been built in the last 35 years. And I think it will be the most important interconnection to the US.

Q: How do you think that your company, a new player in this whole industry on the global scale, managed to outperform other companies that have been around for longer?

A: We succeed because we are patient and very stubborn. I remember when I visited the former Energy Minister Jesús Reyes Heroles, who actually just made an alliance with Morgan Stanley to enter the pipeline business, in 1998. My brother and I sat down and we said that we wanted to build our first pipeline. He turned to me and said, “Fernando, leave this to the ExxonMobils or the Shells of this world; this is for the big boys. Why don’t you go to Pemex and ask for a gas station concession?” I saw him again about a year ago and he actually sent me an e-mail to congratulate me when he saw that we won the Chihuahua bid. In Spain, the country protects Gas Natural and Repsol. In France, the country protects Gaz de France. In Mexico, the country protects Gaz de France and Gas Natural instead of helping the Mexican companies. It has been an experience, but I’m very happy because no one gave us anything and I don’t owe anything to any bureaucrat in this country. It’s just been through the hard work of our team and the belief of our investors.