Mr. Fernando Calvillo , FERMACA
Release Date: 0000-00-00
Different to the oil sector, the gas downstream sector was opened in 1995 to private investment. You were one of the first Mexican companies that partnered with a foreign company to take advantage of this situation. Back in time where did you see the major opportunities?I must admit that all was a bit of a coincidence. 1994 was the year of the tequila crisis and at that time, we were financing projects in US dollars. In a period of 5 weeks, the exchange rate went from 3 pesos/1 usd to 11 pesos/1 usd which created many complications for our business. We almost went bankrupt and had to reinvent ourselves. In parallel, at that time, we were starting to finance a project in Morelos and the governor told me that they needed a natural gas pipeline. So this was a fortuitous coincidence: the tequila crisis and the opening of the downstream gas sector. We saw the crisis as an opportunity and jumped into the gas sector. I believe we were lucky and found ourselves in the right place at the right time. This business ensures steady long-term revenues since pipelines are a cash machine, working 24 hrs 365 days a year constantly without any stop.Having caught this opportunity, we contacted the law firm representing us in Washington to help us look for an operator partner. In 1996, we formed a joint venture with an American company ONEOK. To be precise, we were only the second company in Mexico to obtain a natural gas transportation permit. While working on our first project, we found that Shell in 1999 had a pipeline project issue to Tejas Gas de Toluca, but couldn’t bid for it. So after a few months of negotiation, we bought the pipeline project and 14 months later the pipeline was operating. This specific project was in 2000 and we realised it in partnership with Occidental Petroleum. Since then, we have been operators and we are the only Mexican company working as distributors. This is a different kind of game. The investment going into a pipeline is huge, meaning there are major risks. There are a lot of required permits and licenses which make things rather complicated. But if you’ve been doing work for a third party (the government), and you can replicate that formula to your business, it is much better. We therefore decided to keep moving in that same direction.
Is there any risk that a Mexican private company manages a pipeline?
I don’t believe so. We serve the public interest. If we don’t give proper service and don’t comply with the rules, our business will be shut down. We are a regulated company, and have general terms and conditions for our service that have been approved by the Federal government. If we don’t deliver gas or don’t do things correctly, our permit is cancelled. Activities like the ones we’re involved in can’t be suddenly closed. Imagine if, one day we shut down the valve because we didn’t get paid; most of Toluca would be without gas. And I’m sure that, in that situation, the army would intervene to open the valve! We can’t leave hospitals, power plants, business and people without gas. There are a lot of very competitive markets around the world, where the government is not involved. We have to understand that sometimes the government is not the most competitive entity to be in charge of certain things. As a private company, I have to be competitive and run a good competition; otherwise I wouldn’t get paid. Taking the example of companies like Pemex, what kind of incentives do they have?None, they have the constitutional right to supply gas and energetic but nobody receives a bonus for good performance. So who cares if they are spending the money wisely or not? No one. Companies like Pemex work like employment agencies rather than real companies. I say that because, unlike Pemex, we run our pipeline operations with 2 people that work around the clock all year round. We need competition so that the end user will always have a better service. I am a strong believer in open market since it is beneficial for all. However, if our government civil servants are in favour of foreign companies instead of better supporting the local companies, things get more complicated. There has to be a better promotion of Mexican players along the value chain.
Why do they support this type of companies? Does the government think that they are more capable or reliable?
Maybe. But for us as a Mexican company, it hasn’t been easy to build our name and reputation. In Mexico, most of the international players do fairly well but what about Mexican companies? When you have a huge energy market like Mexico’s and you want to promote investments in the country, you need to have a strong national content, which is the case for Brazil and Norway. It’s vital to promote national companies and be aware of who the national players are. Though not perfect, things have improved and we are getting there. Today we have the new incentive contracts, which I doubt the Majors would be interested in, but nonetheless, this should be recognized as an encouraging step to move forward.
One month ago you were in Houston attending the road show where Mr. Suarez Coppel was promoting the incentive contracts to the executives in the oil community. Most of your business being in gas, why were you attracted to attend this show? With the success that you have had with foreign companies do you look forward to team up with foreign companies to bid for contracts?
We don’t have the technology nor the financial ability to do so. At a certain point in time, the companies which will win the bid will need someone who knows how to build all the surface facilities like pipelines. It is not a question of just arriving and drilling. You need a lot of services around exploration and we know our way. We know what we are talking about and companies will need a local partner. With the new contracts, companies will have to deal with locals without any doubt. We are thus betting that international corporations will need guidance from a local partner such as ourselves. We are the best candidates, since we know our business. As you said companies like yours have capabilities to make things better in the sector. However one of the drawbacks of the gas sector is its poor infrastructure ( including transportation). We have noticed that today Pemex Gas is having quite a few operational problems. How can the private sector help to improve this situation? With regard to helping, all the Mexican companies are there but today the question is not whether we want to be there or not; the question is to be competitive. Our country has to open up and establish partnerships with Statoil or Petrobras, and our country needs to move on to different grounds, such as going into deepwater for example. This will require a huge amount of investments and the questions are the following; where will the country take all these investments from? Do we have the money or the technology? Would anyone give all this to us, for free? No one. So we need to share, and get there, and therefore, the country must open up more. If we take a look at other energy markets like Russia, the national companies are not alone. They have some foreign partners. Pemex, by contrast, does not. We are the most closed; and even more so than other Latin American countries like Venezuela, Bolivia or Cuba. While I understand the importance of taking pride in our sovereignty and protection of national resources, we need some help to be more efficient. If we really consider that Pemex is the patrimony of the Mexicans we have to find the way to make it more efficient. This is not happening today.
Why should Mexican companies do the infrastructure, meaning we saw that a couple of years ago, you lost the bid in Manzanillo against an international company?
We didn’t win; the world financial crisis limited our access to financing. Our competitors were stronger in that front. Following our commitments to banks & investors, our company policy forbids financial investments that don’t generate double-digit return.
In a way, things don’t look easy for Mexican companies... What are be the benefits of being in this business?
Shell started from somewhere so did Exxon Mobile. When Rockefeller started building pipelines in the USA they thought he was crazy! At some point this industry will further open. If we are pioneers in the industry we will have great benefits. I may not see them but for sure my grand children will.
One of the current projects that you have today is an alliance with Energy Transfer that is looking to build a pipeline from el Paso till Chihuahua. Could you please comment on this initiative?
As a JV between Fermaca and Energy Transfer, the whole project is fully permitted in both sides. From the Mexican side, already 450 million USD have been invested but we are waiting for the Federal tender to come. We are looking forward for the tender since we think that this time we are going to see a real tender which will be formed point to point and the winner will be responsible for everything. This is what we will be preaching all the time; let us compete in the same bases than anyone. The government should not seek just for the benefits for someone. They should leave the bidding process open and let’s see who is the most competitive.
Any plans of internationalization?
Fermaca is an international company in Mexico. In our company we have foreign staff and we partner with American, German, French and Dutch companies. I believe that our company is very international and our standards are aligned on the international ones. We can compete with any other company in the world. However today we focus on Mexico. We eat, sleep and breathe Mexico. Our investment policy is 100% generated to the country. Once we gain more projects and reputation, we can start to consider going abroad.And what about IPO? Yes we would like to become public in the next 5 years.
What would be one reason why the financial readers of our magazine should look closely into your company?
We always like to be in the eyes of companies that are willing to compromise. We look for long term partners because when we invite someone we put one dollar VS one dollar. At Fermaca we don’t represent companies; we are not facilitators. We are a real corporation; investing & committing with equity.
| Company: | FERMACA |
| Country: | Mexico |