What are Pemex Gas y Petroquímica Basica's main products?
Pemex Gas is one of Pemex's four subsidiaries and is responsible of processing wet gas coming from EMP, as a result we are producing natural gas in an approximate amount of 3.5 BCF a day and we are producing liquids coming from gas. Among these liquids we have LPG with a current production of close to 220 thousand barrels a day; natural gasoline with a production close to 90 thousand barrels a day; and sulfur among other basic petrochemicals.
Could you give us some of the 1999 figures, volumes of exports through your subsidiary MGE and also the number of employees, being one of the main employers in this country?
There is a difference between Pemex and Pemex Gas. Pemex employs approximately 130 thousand people. Pemex Gas is the smallest subsidiary with around 11,000 employees.
In '99, our profits totaled approximately 470 million dollars mainly as a result of our natural gas and LPG sales. As I said, we produce 3.5 BCF a day of natural gas and 220,000 barrels a day of LPG. In the foreign trade, last year we were more or less in balance regarding natural gas. We were exporting approximately 150 million cubic feet a day and we were importing approximately 130 million cubic feet a day. This will not be the situation for the year 2000 and the future. In the case of LPG, we have been big importers. Last year we imported about 100,000 barrels a day. The reason behind this is that Mexico is one of the largest LPG importers for commercial and residential use. The culture for natural gas has not rooted in these markets. Natural gas is more oriented to the industrial business. We believe that little by little we will be able to change that perception in the market and we will have a more balanced situation between natural gas and LPG. For the same reason, it has been a problem to sell LPG at the market price in Mexico. Considering that the main users are the residential consumers, we want to reflect that the international price for LPG at the current level of prices has been a bit of a challenge. We were able to do that in '98 but in the second half of '99 as a result of crude oil prices rising close to 30 dollars a barrel, this had an effect on LPG prices and we were forced to apply a different price for LPG in Mexico.
Were LPG prices influenced by external factors rather than domestic factors, like American Companies?
In the case of, LPG as any other product, we have an international reference. This international reference is related to the WTR. Remember when the crude oil price rose like a rocket last year and especially this year? It is now over 30 dollars a barrel in the U.S. That has an implication on the LPG prices. It's not an external factor, it's an international market. We must remember that Mexico is part of the North American market: Canada, U.S.A. and Mexico, and from the energy point of view there is no border between these three countries. So the price of the commodity should be the same and the only factor that may have an impact on it is the transportation of natural gas. We are talking about the molecule of natural gas. The price of natural gas is exactly the same in the three countries. I believe that very soon Mexico will be in a position to reflect the LPG international prices. One issue that will help us to do so is to create more competition between natural gas and LPG.
Nevertheless, it is true that many industrial companies we have interviewed have complained about the rise in prices, particularly natural gas prices. Some of them suggested that the solution could be the development of the futures market. What are the solutions you would advise to those entrepreneurs and when do you expect prices to normalize?
First of all we need to acknowledge that we are talking about a single market and this means that the borders are open and any company today is able to import or export natural gas into or from Mexico. As a result, in Mexico we need to reflect the real price, otherwise it would be one single company able to import natural gas at international price and to sell this gas here at Mexico prices. To do that, you would need to close the borders. We opened the natural gas market in '95 and it would be impossible to close the borders now. In that sense, the volatility in the market is there. As any other commodity, natural gas is moving in the market every day. For many years the price of natural gas was on the downfall, it ranged from 160 to 240 dollars per million PTU. In recent years, there has been a gap in the U.S. between demand and supply. The demand has grown rapidly, not only in the U.S., but also in Mexico. This kind of volatility in the market, in this case of natural gas following the crude oil prices, obeys to competition with fuel oil. If fuel oil prices rise 3.5 per cent, so will the prices of natural gas. It is my impression that we are going to see new levels in the price of natural gas in the coming years. This new level is going to range from 3 to 3.50 dollars per million PTU. That, without doubt, is a change in the structure of natural gas prices, which we will have to foresee today. In June, the price for natural gas in Southern Texas was approximately 4.22 dollars per million PTU. In July it was almost exactly the same price. We expect a price around $4 dollars, today it is slightly lower. What could we do in order to deal with volatility? One thing is volatility and another the level of prices. We could deal with volatility in order to try to maintain a steady price during the year but at the end you are going to pay the markets price. What helps reduce volatility is the paper market. For example, if today you go to the paper market and ask a broker what the price for my company would be from September 2000 to September 2001 he wouldn't give you a quotation. This quotation today in Southern Texas is approximately $3.69 for the whole year. So it is a company's decision to fix the price from September 2000 to September 2001 at that level or to take a different course of action according to factors or signs which indicate otherwise. In wintertime you could be paying around $4.50 and in summertime $3.45 to $3.50. So the average is $3.60 but in winter there will be a great difference. So when you fix the price in order to reduce the volatility you are reducing the risk of high prices in the market.
In this sense, we need to create a culture in Mexico for companies to follow in the market. Today, any company could import or export gas and sell it in Mexico. The other issue is that paper market companies could also offer that service, Pemex is offering it. A large company and another two small companies have been taking hold of a position months ago in the market and are not suffering at the moment. They took a position months ago to cover the price at $2.90. Of course, to cover next year's price, it would have to be at $2.90, today it's $3.69, but you know in advance what level of price you will pay for that product. Likewise, you are able to have enough time to decide how you are going to reflect in the process that new price for that commodity.
From December '96 to January '97 the natural gas price ranged from $3.60 to $3.70 dollars per million PTU, and of course, every one was nervous. But then with a big difference, the U.S. started to see on the screen lower prices for summer. So they saw a temporary problem but in a short time the situation would be different. It is my impression that today, even though we will again see lower prices during the summer ($3.00 to $3.50), both in Mexico and the U.S. companies will surely have to follow the market and the distribution companies will have to advice customers following the rule of the open market. I understand the kind of problems these companies will face.
Companies which are the main consumers?
Companies using natural gas in their process are the ones suffering the most. I don't have the crystal ball. This week we will have the meeting again. We are not sure what will happen with the production. If production increases, it will have an impact on crude oil prices. Every member of the natural gas is competing against hydro-carbide products.
Is your pricing policy sufficiently clear in terms of differentiation between the gas provided for residential purposes and industrial purposes and could you explain the present situation?
The policy for prices is complex and it would take a while to explain. The price in Reynosa, which is the border between the U.S. and Mexico, is the same as the price in Southern Texas. For example, we add to this price the transportation cost from Reynosa to Monterrey. The natural gas price for this area is the Reynosa price plus transportation cost from Reynosa to Monterrey. To calculate the price in the southern part of Mexico, for example, Ciudad Pemex, we subtract the cost from Monterrey to Ciudad Pemex in such a way that when you add the transportation cost from Ciudad Pemex to Monterrey, it's equal.
So, in that sense, any company could check quality price of Southern Texas. The transportation cost calculated by Pemex every month. There is a system filed with the CRE which is the Mexican regulator that verifies we don't take advantage of the freight cost. In summary, we add the transportation cost to the cost of natural gas to calculate the prices.
For residential customers we could talk to distribution companies for we don't want to reflect that kind of volatility. As a result, we have an agreement with the distributors to reflect the price of the market, of course, without subsidies. But in winter, when the volume is higher, the price is lower and in summer, when the volume is lower, we have a lower price. In average, it's the same price but we don't add the two variables to the residential customers: volume and price.
Gas in Mexico, both GLP and natural gas, has a tremendous potential. It replaces or at least fills the gap that the insufficiency of generation of electricity leaves. You have made important efforts in this respect and you are continuing in this line granting concessions to the private initiative for distribution and transportation. What have you already achieved in this process and why aren't you going to award any more distribution concessions but will award them for transportation?
This year we concluded all the distribution area we had in the plan. We finished with Guadalajara, the divestiture of all the distribution areas so Pemex is no longer a distribution company in Mexico. We are happy about this. I believe that our business is more oriented towards big companies and large volumes. That is why distribution companies are now taking care of this area. That is the main reason why Pemex only takes care of the transportation business now. Also, distribution companies are assuming a new responsibility. We need to offer a better service for the final end user. So the end user is the most important issue, not only for the distribution companies but also for Pemex and at the end of the day we are able to supply a good service to these customers. We keep in touch with the distribution companies in order to reduce volatility for the end consumers.
You claim that safety, health and environmental control are at the top of your priorities, at the same level as sales or costs. What is your policy in these respects and how do you monitor all those new companies which are operating your concessions?
When we talk about concessions, we are talking about distribution companies.
After the terrible accident we faced in July 26,
1996, we totally changed our policy regarding environmental
protection and safety. In that respect we have been
applying a very strong policy in the company. Safety,
environmental protection and health are at the same
level as production, finance, or whatever other
activity. Having that on mind, we have been able
to reduce the accident frequency index, from 4.80
in '96, (even during the peak of the accident it
was 4.7) to less than 1. Today we have a frequency
index of approximately 0.65, which is comparable
with any other company in the natural gas business.
We have an agreement with Dupont. Dupont has been
helping Pemex to apply the new system to Pemex Gas.
The system is simple, it mainly consists of four
books: the red book, related to safety; the green
book, related to the environment; the blue book,
related to mechanical integrity; and the white book,
related to health. This system is working well in
Pemex. |
We apply it every day. In my computer I receive whatever injury or accident which may occur in whichever facility. In the new project we will announce in July 31st, there is a page that describes our safety indexes, describing the accidents and the gravity of each accident on a daily basis. Therefore, I could say that this program is part of Pemex Gas's culture and it has given good results but it is a system we need to track on a daily basis in order to make sure we are indeed achieving good results.
Could you tell us about the new portal Pemex Gas is about to launch, its main applications and its potential in the area of e-business?
The gateway has two areas: one for the general public to know what Pemex Gas is, what we are doing, how we produce gas, the distribution of gas in Mexico, which terminals are providing the gas needed in different parts of the country; the other area is related to our customers. In that case our goal is to start with a nomination in Internet for orders. We receive gas nomination via Internet and we answer by the same mean. We have already finished the Escadia, the system responsible for real time pipeline information, where customers will be able to see on the screen the volume and quality they are receiving on a daily basis. With that information we have two main systems: one for transportation, ETMS; and the other for marketing, EMS, which receive the information coming from Escadia, works with it and sends it to the SAP. The SAP will have all the invoices. At the end of the day, you have nominated a volume so you receive an invoice for it, following the control during the whole process of receiving the gas at your system.
What is the status today? The gateway's central is ready for the general information and for companies to check everything related to the financial aspects: note of credit, invoicing, volumes, whatever. By November of this year we will be able to integrate the other system integrated in the gateway we are currently working on with SAP and Microsoft. And by then the whole process may take place through Internet.
You are supposed to be the leader in liquid gas?
The second after the Saudis. In Latin America we are the leaders in wet gasoline. We have many liquids to recover.
We want to be in a position to have the same tools as any competitor in the market. We are confident about what will happen by the end of this year. We are convinced that e-business is a tool our company has to use in order to take advantages of al the opportunities which may be found through Internet.
What about investors? What services will you have on-line or through other mechanisms to let investors know what the main opportunities are? What are the main opportunities you are currently offering investors? Also, explain the concept of PID?
Now that the natural gas market in Mexico is going to grow, (if today we speak about a 3.5 BCF market, in the coming years we'll be speaking about a 6 BCF market, comparable with the coal portfolio, by the end of the next administration, it will range from 7 to 8 BCF a day), it will imply different investments. To give you an example, speaking about production, today we are in a building process in which we are going to build a new cryogenesis plant in Reynosa. We have already received a list of 16 participants, including American, Mexican, European, Southeastern companies. We will grow in the production of natural gas, (remember part of this gas, associated gas, needs a process to be sold in the market), and we will need to remove the H to X acid from the natural gas and the liquids. After this we have a product ready to be delivered to the market, so a new plant will be considered in the next six years. The main plants we are talking about are swiftening plants to remove the H to X and cryogenic plants to separate natural gas from liquids as well as some fractionating plants to separate different liquids: propane, butane, natural gas.
Therefore, I believe many opportunities will lie in the compression of the pipeline systems. We will require additional compression capacity to duplicate the volumes we are currently moving. Our objective is not for Pemex to spend money in all these projects. It's important to see new companies investing in Mexico in compression and pipelines. We should be capable to level all the investor's interests. To give you an example: today, we are going to need additional compression in Hermosillo to supply natural gas for the area.
There is also a great potential for the alternative industry in Mexico.
I'm not sure. My only doubt has been why in the U.S., a country that is consuming 20 times as much natural gas as ours is consuming, natural gas has not been used as an alternative as fuel for automobiles. I don't have the entire answer, but if my neighbor is consuming 60 BCF a day, and they have enough natural gas to use in cars, why are they still using gasoline? Perhaps if you give me the answer, I'll be able to give you an answer.
The president of the Camara de Industria Azucarera y Alcoholera was more optimistic. He sees a great potential for ethanol (or some other gas)
I believe natural gas has a great potential for cars in places where you don't have alternatives for use of natural gas such as Argentina or Venezuela. As a result, in Venezuela they don't have a market to allocate natural gas so their only alternative is to use that product in a different service. In the case of Mexico, we are connected to the main natural gas market. A big dilemma in Mexico is that we have very low production costs but very high opportunity costs. I have always asked myself: I have a big market to sell this volume at international prices, should we, as a company, lower the price for other services? As a company, the answer would be not to. Perhaps the government's or the political point of view could differ, but as a company Pemex has the responsibility to allocate the product at the higher market price and coincidentally, that price is paid in the U.S. market.
Two final questions. The first is related to Pemex Gas's export markets. Should the goal of diversifying its exports market be part of its strategy?
The strategy for Pemex Gas is quite simple. We need to be as any other commercial company. As a trading company, I need to be in the market every day buying and selling products. The problem nowadays is that when I'm in the market everyone knows I'm there for one reason, to buy and sell, but I am there. Having a daily position the market won't notice when Pemex Gas has special requirements. As a result, at the current volume level we need to develop a trading company with the same tools as any other natural gas enterprise. It's our intention to have this trading company ready this year, to receive the authorizations from the new government. As a trading company we could have a position here in Mexico and also probably in the U.S., (we already have an office in the U.S), and we have the alternative to have local traders if necessary. The Southern Texas market is very important for us. To develop experts in that market is going to be a priority in the coming years. So, to answer your question, we need to have a trading company comparable with any U.S. trading company.
You know that one of the most controversial issues during the last years has been the privatization of the petrochemical industry here in Mexico. One side says "Yes, we should do it", others oppose saying it is a symbol of the country and we should never touch the petrochemical industry. May I have your opinion on this issue?
It's not my area. I could say that private investment is going to be required in the future. The petrochemical business is a difficult one. We should have in mind that it operates in cycles. You have the good cycles when the prices are up and you have the bad cycles when the price is low. What happens in the industry when prices are down is that you invest in order to feedback, to renew your units to be ready for the new cycle. Unfortunately my personal opinion of Mexico of the time when the government tried to discorporate some petrochemical unit was not the market's best time price-wise. Therefore, it will be necessary to take a new decision regarding on how to do it. Pemex will decide in what areas it will concentrate more and will have a greater profit and which other areas need to be discorporated such as the distribution of natural gas. I believe it's a company's decision, not only Pemex's but also the government which is the owner as well as all the Mexicans and, of course, we need opinions and authorizations. But at the end of the day we must realize we are a company and as a company we need to express our point of view regarding why it is profitable and why not.
Finally, during Zedillo's term, this country has been the one to open more markets in the world and the only to find free trade agreements with the world's two mayor commercial blocks. As the head of a very important company here in Mexico, I would like to have your assessment on Zedillo's six-year term and your opinion on the transition period the country is going through.
I would like to answer from the company's point of view. We were definitely able to face big challenges during President Zedillo's administration. The opening of the natural gas market was one of them. As a monopoly, the concept of having competition isn't easy. So, with the gateway, with the Escadia system, the Dupont system, the investment in new plants I believe Pemex Gas has been preparing the company to face competition in the future. From that point of view it has been an excellent decision to open the natural gas market. From my perspective, the only way to compare the performance is to have other players in the arena. A company is as strong as its markets. In that sense we are now aware of what a market is, what competition is and we are happy about it. Currently, we are in the process of doing the same with LPG. We have taken very important steps and I believe LPG will soon be in the same position as natural gas.
Talking about the transition, I believe that Pemex gas is an important company in Mexico and as a result whatever new direction Pemex Gas takes in the future will move towards this transition because everything is on place. Our plans aren't ready for whatever happens in the year 2000, they are ready for whatever happens in the following ten years. Of course we can always modify these plans but at the end of the day one thing is impossible to modify: to competitively supply the products the Mexican market will require. I don't see any problems in transition and in Pemex Gas's growth.
Thank You. |
PEMEX Gas y Petroquimica Basica