The Business Year

Fernando Calvillo Álvarez

MEXICO - Energy & Mining

Reservoir of Faith

President & CEO, Fermaca

Bio

Fernando Calvillo Álvarez has a degree in law from the National Autonomous University of Mexico (UNAM), and has a wide range of experience in the construction and energy industries. He has been the President of Fermaca since 1999.

What opportunities might the energy reforms open up for Fermaca? For a long time, the energy infrastructure of our country has been eroding away and always falling short of the […]

What opportunities might the energy reforms open up for Fermaca?

For a long time, the energy infrastructure of our country has been eroding away and always falling short of the expanding national needs. Even worse, in the last 10 years, crude oil production has declined alarmingly and Mexico is importing increasing amounts of liquid fuels, petrochemicals, and now natural gas. The causes include a lack of investment and a vicious cycle where 40% of the federal government’s budget depends on PEMEX, because the government is hard-pressed by building hospitals and schools. The government is also sustaining an overgrown Congress and political parties, paying its current expenditures and a full bureaucracy—all without enough support from tax revenue. A lot of noise was made during the past administration about a large reservoir found in deep water, which was held to be one of the largest in the world, but until hard barrels are sold it is worth zero. Mexico is not rich until we make the necessary investments to materialize this wealth. I recently heard that the budget authorized for PEMEX is $25 billion per year, but the largest proportion of that budget goes to PEMEX E&P in order to keep up the production of the crude that’s still available, and to pay the unreasonably large number of people the company maintains. For PEMEX to tap into deepwater oil, it needs investments of another $20 billion or $30 billion. We have remained like this since 1938, when another government expropriated oil resources in Mexico. Now, we are in 2013 and we need to change. I hope the country will open up the energy industry to private investment fully. The majority of oil companies in the world today leave midstream and logistical operations to other private companies that can do the job better and more competitively and care more about being productive and safe. Everywhere in the world, production-sharing agreements, block auctions, and risk-sharing contracts exist. Countries like Norway, Canada, China, the UK, and the US have accomplished a monumental industrial base thanks to the crucial role of private companies in oil, gas, and power, with governments collecting an enormous amount of taxes and royalties from them and populations with higher income. In the specific case of natural gas, this product is essential for the country’s energy transition and for industrial competitiveness, but is not economic for PEMEX given the price relationship between crude at $100 per barrel and gas at $4 per mmbtu. PEMEX continues re-injecting natural gas into the oil reservoirs, whenever it’s available, and not investing in developing new gas reserves, leaving the country without this vital fuel. I believe there are strong foundations now to implement deep changes in our energy industry: I expect an opening for the production of shale gas, for example, where the most valuable liquids can be delivered to PEMEX, dedicated to petrochemicals companies, or exported. The methane can then be delivered to power generators and industrial and residential users. I would even recommend that the government auctions shale gas blocks to private operators in order to sell reliable and long-term supplies to the national power utility company, CFE, which relies on natural gas for 40% of its current generation. Fermaca is already engaged in delivering gas to our customers, and through our Chihuahua pipeline, which is 90% complete now, we will own and operate the Mexican gas highway of the North flowing from East Texas into the Chihuahua Corridor. If a new round of energy reforms takes place in Mexico in the near future, Fermaca will be prepared to enter the upstream operations and perform many of the logistical services that are badly needed now.

What projects do you have planned for the future?

We have targeted both the large government-sponsored pipeline and compression tenders, as well as non-government projects in gas and power. Fermaca is ready to invest more than $800 million in new projects between 2013 and 2015. We will expand our activities to power generation and will look at addressing the lack of energy infrastructure and fuel deliveries in Mexico, reaching users that could not be served by pipeline. We are analyzing the new Ramones pipeline project, recently reviewed by PEMEX Gas after a failed kickoff by the previous administration. This is a large pipeline project of around $1.8 billion, and this time hopefully the bid rules will be clear, efficient, fair, and transparent. We have confidence in the new Mexican government because it brings a new generation with new ideas, a good vision, more professionalism, and different political and ethical principles than what we have had in the last 12 years.

Is there a lot of competition for these tenders with PEMEX?

It depends on how the tender is structured. One thing is bidding for a construction contract, and another very different thing is providing pipeline transportation services to PEMEX for the long run and becoming a regulated system trunkline. As a true pipeline project, such as Chihuahua or Ramones, you build, own, and operate the pipeline. You have to develop the project, acquire the permits, buy all the land, make the investment, and become fully responsible for the safe operations over the life of the contract. You give PEMEX a tariff for the transportation of gas, like a highway. You charge for the use the of highway, and this is a highway of gas. There are not a lot of companies that can take care of this here. I think real competition is restricted to a small number of companies. Most foreign companies do not understand Mexico or how the industry works, and they are not competitive unless they receive undue protection or special treatment from the government. But even so, serious problems were provoked with this method by the past administration due to the cost of permits, right of way difficulties, project delays and execution troubles, and regulatory and monopoly issues. Fermaca is very competitive in our own country—we have been here for many years, we have efficient, modern, and streamlined operations, we know the land, and we have the people and the money to do it. Provided there is a level playing field, we can compete against anyone. We have demonstrated this with the strategic Chihuahua pipeline. I know some people may still be hurting for this, but the sun rises for everybody and the industry must recognize that we must all be honorable and respectful under a free, competitive market.

“Energy assets are a large opportunity for us—both new and refurbished.”

If the energy reforms happen, what will be the main opportunities for you?

We are very much looking into building and expanding our asset base. I believe there could be an important opening in refined products pipelines. Although we are not anticipating crude oil pipelines yet, we do see the potential for refined products and internals. Energy assets are a large opportunity for us—both new and refurbished. We can see much of that coming. Also, if we are successful in changing the legal and policy framework for mature fields and shale gas, it will be music to our ears. We will need an enormous amount of infrastructure, from wells and pipelines to compression, processing, and pumping and storage facilities. We are an asset-based company engaged in the logistics of energy products. We expect that a lot of the opportunities will be open for us and we are very positive about our country. We will continue fighting for it, to be sure.

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