TBY talks to Fernando Calvillo Álvarez, President & CEO of Fermaca, on the Chihuahua Corridor pipeline project.
TBY What’s the significance of the Chihuahua Corridor pipeline project?
FERNANDO CALVILLO ÁLVAREZ At full capacity this pipeline will be transporting one-fifth of the national consumption of gas. I think it’s going to be the most important corridor in terms of gas. It’s a 400-kilometer pipe, 36 inches in diameter, and represents an investment of around $500 million over 18 months. This year and the following one are going to be the most important for our company.
This project was awarded following a highly competitive international tender. What did Fermaca bring to the table to allow it to win the contract?
We’re locals, and we know our market. Fermaca is not the size of TransCanada or Sempra Energy. In truth, we bid for this contract against the state. PEMEX has a company with Sempra that is called Gasoductos de Chihuahua, and it bid. This was not fair. We were swimming against the current, and swimming against sharks. So, what’s the Fermaca formula? This industry opened up only 15 years ago to the private sector. It’s regulated in terms of gas transportation, distribution, and storage. Marketing, however, is unregulated. Being a fairly new industry, and competing against a monopoly, it was difficult, but PEMEX is not very competitive. We knew we could beat it because cost or making a profit is not an issue. It has a mandate from the constitution to supply gasoline, crude oil, and natural gas, and it doesn’t care about costs. As Fermaca, we have no corporation that allows us to borrow money at 2%, so how could we be competitive? We began investing four years ago in this project in Chihuahua to get the regulatory permits, to get options on the right of way, and to get presidential permission in the US and in Mexico. We were investing $5 million to $10 million up front in each project, which no one else was crazy enough to do. This way we minimized the contingencies in our projects and were able to give a better and more competitive price. We allocated our risks. We replicated this formula in many projects. Finally, we were lucky enough to build a good financial package with our banks and offer very competitive numbers. I believe we have a very good business model.
How did Fermaca enter the energy business?
Fermaca turned 50 last year, and the roots of the company were in contracting. We are in energy because of the crisis. We were in such a crisis in 1994; the US dollar went from Ps3 to Ps11.50 overnight. Imagine that you wake up and realize that the politicians devalued the currency while everyone was sleeping. Suddenly you owe $50 million or $100 million because of financing in turnkey projects, and you’re practically broke. When Mexico signed the NAFTA agreement, EPC companies came to Mexico better prepared and with solid finances, and they were in better shape than we were. We really had to reinvent ourselves, and we were lucky to be in the right place at the right time when the energy industry opened up to private investment in the natural gas sector. I was Vice-President of the Mexican Gas Association at the time, and so I had the opportunity to promote the industry. I had a good view of what was coming. We partnered with US companies, and with the help of my former partners we built the first pipeline in 2000. We bought it from Shell because it could not build it. When you want build a 122-kilometer pipe, with 1,600 landowners, imagine what it’s like. We bought the project from them, and 14 months later our first pipeline was in operation. It took us another 10 years to get this project. In the last project, we were the only Mexican pipeline company, though we are not in distribution. However, with this 388 kilometers we will be transporting almost one-fifth of the gas in this country. This means that Fermaca is now a big player in the business.
What is the timeframe for the construction of the pipeline?
We will invest $500 million over the next 18 months to build it. We already provided advanced payments to start producing the pipe, and we expect to start laying it by July this year. In July 2013 we will open the valve to supply the northern half of the electricity market for the Federal Electricity Commission (CFE).
How will that actually impact the electricity market?
The rate that we will offer is 50% less than what the CFE pays today. I think this will be the most competitive rate that the CFE has ever seen. Just imagine the impact. Gas today is $2.50 per million BTU in the US, and it will provide a lot of savings. We have to lower our expectations because we have a view of the long term. Naturally, we have already laid the foundations to have other pipelines interconnect with our system. For us, operating one or operating five pipelines has a minimum cost compared to a new operator. We already have the supervisory control and data acquisition (SCADA) system here, we already own satellite time, and we need only two or three people to be in the field. We have also learnt many painful lessons. For example, we lost three topographical engineers last July, in Chihuahua. The security situation in the country has been challenging, but being local helps.
Are there challenges for the company as it becomes a major player?
With this project, we hope our company will have $600 million in assets. That’s not minor. In the energy business our main focus will be pipelines. I’m quite positive that sooner or later the production of shale gas will end up in the hands of private Mexican companies. We’re looking to buy small drilling companies in the US that have a small amount of gas production. A year and a half ago we opened the gas and power division, and we will most likely build our first project next year. It will be a 75-MW cogeneration project to supply gas and heating for a AAA company. We expect that in the next three or four years we will be investing around $2 billion in projects in our country, and this demonstrates the growing credibility of Fermaca. This year we are facing $10 billion projects in tenders; we’re talking about huge pipelines of 700 to 1,500 kilometers. There are some other smaller pipelines, but to get these projects activated will take a long time. It’s not easy, especially the larger projects. Fermaca will likely be looking to form an alliance with another company. However, there are no local companies that build pipelines the length that we are interested in. There are some international competitors, but the situation in our country doesn’t benefit them a lot. They are not very active. In the global economic crisis, companies from the US returned back to their local market, and I believe something similar will happen if the euro collapses—European companies will go back to their local markets and not take on risks elsewhere. In the last 10 or 12 years, I have seen this cycle of companies leaving and returning. In terms of the energy sector, we have the best team. I’m very proud to be a Mexican company, and I’m very proud of Fermaca.
© The Business Year