Fermaca’s energy projects spur economic growth in Mexico

With increased investment and technological advancements, Mexico could jump up from its ranking as the 10th largest oil producer in the world, says Fermaca

Workers stringing pipe on the Chihuahua Pipeline. Fermaca’s background in construction has put it in good stead to deliver complex and time-sensitive projects
Workers stringing pipe on the Chihuahua Pipeline. Fermaca’s background in construction has put it in good stead to deliver complex and time-sensitive projects 

The controversial reforms to Mexico’s oil and gas industry that were approved in December 2013 may have drawn howls of anger from opposition leaders, but they mark an encouraging turning point for the country’s economy. For years, many of Mexico’s most important industries have been closed off to foreign and private investors, with state-backed monopolies enjoying complete control. One of President Enrique Peña Nieto’s key election pledges in 2012 was to reform the country’s monopolised industries, opening them up to fresh investment from the private sector and overseas, in an effort to give the economy fresh impetus and attract billions of dollars worth of foreign and domestic investment.

The reforms have offered global energy powerhouses like Royal Dutch Shell, BP and ExxonMobil the opportunity to secure a part of Mexico’s under-exploited energy market. The country is already the 10th-largest oil producer in the world, but it is thought it could jump up the rankings with increased investment and technological advancements. The natural gas market is also considered to have huge potential, with Mexico estimated to have the sixth-largest shale gas reserves in the world.

With many companies hoping to be able to capitalise on this newly opened up market, a local level of expertise is vital. One of the country’s leading local firms is Fermaca, which has a long history of construction and engineering in Mexico, and in the last 15 years has dedicated much of its resources to building pipelines for the natural gas industry.

Rich history
Launched 50 years ago, Fermaca originally began life as a construction company, helping to build much of the country’s infrastructure during the second half of the 20th century. Octavio Berron, Fermaca’s CFO, says this was mostly for government-sponsored schemes, and included “a lot of highways, water systems and sewage works, hospitals, and telecom infrastructure.”

The speed at which Fermaca has constructed the pipeline, as well as the way it has navigated the many permitting and routing hurdles, has won praise from the industry

However, due to the financial crisis that hit Mexico in 1994, Fermaca faced a difficult situation. Many leading national companies were failing, while the huge increase in interest rates hit Fermaca hard. “At Fermaca, we started to restructure the company and decided that this situation, [with] these ups and downs that is inherent to the construction industry, was too much to handle. So the owners decided to diversify into new activities and to move the company towards a more stable operation,” says Berron.

Around the same time, several legal changes were being made to the country’s natural gas regulations, which allowed for private sector involvement in certain aspects of the industry. “Those reforms opened up the commercialisation, transportation, storage and distribution of natural gas to the private sector. By having the skills of an engineering and construction company, Fermaca began to learn about the oil and gas business,” says Berron.

The company’s first major break into the energy market was towards the turn of the century, when Shell auctioned off a pipeline project it had been developing in the central region of Mexico. The pipeline, in the Palmillas-Toluca region, had taken Shell four years to develop, and the company had experienced huge cost overruns in the process without laying a single piece of pipe. Eventually they auctioned it off to Fermaca, who built the pipeline and turned it into a successful project.

“Fermaca stepped forward and acquired the project, putting forward a new construction plan,” says Berron. “14 months after the acquisition had taken place the pipeline was built and the gas was flowing. This was the first pipeline the company had constructed and it was in operation around 2003. There have been no incidents or accidents since that point, and it has been delivering gas and serving the communities of Toluca reliably and safely.”

Chihuahua pipeline
Fermaca saw the success of this market and sought to take on another pipeline project. In 2011, the Comision Federal de Electricidad (CFE), which is the Mexican government’s electricity utility monopoly, called for bids to build three major pipelines in Mexico that were devoted to providing natural gas to power plants. “We won the second project, which was the Tarahumara Pipeline, also known as the Chihuahua pipeline,” says Berron. “This is a 380km pipeline that delivers gas from the border between El Paso City and Juarez City to supply the state of Chihuahua.”

He adds that the reason Fermaca was awarded the deal was simple. “We put together a proposal that complied with all the technical aspects, as well as the financial aspects, and we offered the lowest present value of the service for the 25-year contract to CFE.” The success of the Palmillas-Toluca pipeline is also likely to have contributed to the company’s ability to design, integrate and cost out pipelines.

It hasn’t taken long for Fermaca to look ahead to new projects

The speed at which Fermaca has constructed the pipeline, as well as the way it has navigated the many permitting and routing hurdles, has won praise from the industry. Berron says the company was able to achieve this in part due to its rich history in other areas of construction. “We were able to secure 100 percent of the ‘right of way’ in a record time of just five months. This is really important, as there is no pipeline in Mexico that has achieved this and done it with internal resources. This goes back to the origin, where all the background in construction – the technical team, surveyors, environmentalists, topographers – has paid off. It was a very interesting and challenging process.”

Regional development
The significance of the deal is huge, says Fernando Calvillo, Fermaca’s President and CEO, as it is the only Mexican pipeline independent from the government’s oil and gas monopoly that is connected to the US. As the market opens up to more entrants, this border region will become more significant. “We have the capacity to transport one fifth of the total consumption of natural gas in the country. Seeing [as] natural gas imports [are] open to anyone, we will be able to bring extremely competitive gas prices. Mexico has until now regulated prices with Pemex. I think this corridor will become a hugely important region. The Chihuahua project is the most important connection into the US that is not owned or controlled by government companies. Therefore, it can provide a huge impulse to private industries along the entire northern corridor of Mexico.”

Since the pipeline began operations in July last year, Berron says there has been increased interest from companies in Mexico and over the border. “We have been approached by an important group of companies that are considering the strategic location of the pipeline and the availability of gas on the other side of the border. The market conditions there, and the prices, mean they are approaching us to expand capacity and support the needs of companies that are in very different sectors. These include companies in power generation or petrochemical activities and all sorts of industries looking for the most efficient and competitive way of using energy. It puts us in a position to serve the local distribution companies. They have also approached us and they acknowledge that our proposal is more efficient, reliable and competitive. This will translate into lower prices for the individual users of gas in the Chihuahua region.”

New projects
It hasn’t taken long for Fermaca to look ahead to new projects. Just a week after the delivery of the Chihuahua pipeline it was awarded another project by the CFE. This time it was to provide compression services to CFE through the Soto la Marina Compression Station. “Soto la Marina is an area of the country that is in the Gulf of Mexico in the State of Tamaulipas,” says Berron. “We are building a 45,000-horsepower compression station to add compression to one of the largest components of the national pipeline system, which is the backbone of the gas grid in Mexico. This project, which we have in a joint venture with Enagas, the owner and operator of the Spanish gas pipeline grid, is scheduled to be in service in December 2014, and we are actively working towards that.”

Financing such projects can be tricky, especially in the relatively uncertain economic environment of an emerging market. However, Fermaca achieved it by putting in a considerable amount of equity and obtaining substantial project finance. “We put together a package and looked at a typical type of project finance,” says Berron. “We injected 20 percent of equity [in the Chihuahua pipeline], which was $98m, and fully funded up front. The rest was from a group of seven international banks and Mexican development banks. These included Citi Bank, Scotia Bank, and Bank of Tokyo.” Securing investment for future schemes will likely get easier now that the government has passed its reforms for the industry.

President Peña Nieto’s reforms to the energy markets are long overdue, but have proven very difficult to secure. Opponents and protestors, although in a clear minority when weighed against the general Mexican population, sustained a long but ineffective campaign suggesting that Peña Nieto was selling off one of Mexico’s most valuable industries. Nonetheless, the reforms were secured after congress voted in their favour and the vast majority of state congresses endorsed the vote. The government is keen to attract billions of dollars worth of foreign and national investment into the industry after 75 years of state control, and Calvillo describes the passing of the reforms as “an enormous feat in Mexico’s economic history. We are hoping that a whole new era of opportunities in the energy market will present themselves. We want to be positioned to seize these opportunities and to continue building the infrastructure and energy facilities of Mexico, such as pipelines and terminals.”