Santiago del Valle Toca, Chairman, & Enrique Romo, CFO, Latina, Mexico
“Regardless of the country in question and how open it is to foreign participation, local knowledge and familiarity with culture and business practices is an invaluable and difficult to acquire competitive advantage. Managing the complexities and nuances associated with day-to-day operations including suppliers, workers unions and the regulatory authorities, for instance, is no easy feat and requires an intimate understanding of the local customs.” Enrique Romo, CFO, CP Latina, Mexico.
Santiago del Valle Toca (SVT): The company began operations as a geothermal drilling company, which has grown to the become main geothermal driller in Latin America. In 2008, Latina extended its services portfolio to include onshore oil and gas drilling activities. Moreover, with the recent acquisition and delivery of a number of new offshore rigs, Latina branched out into offshore drilling in 2013.
Over the long term, our goal is to consolidate our leadership in geothermics and expand to other areas in the energy sector, including oil, both in Mexico and abroad, with the purpose of becoming one of the main private companies in the energy sector in Latin America.
How proactive is Mexico’s government in promoting a more diversified energy mix for the future? Is enough being done?
SVT: We are optimistic that the energy reforms currently being discussed in Mexico’s Senate will eventually promote investor participation in geothermal energy generation. Geothermal energy in Mexico is, after all, a very attractive option given its generally attractive economics, sustainability and widespread abundance in the country. Mexico has the third greatest geothermal energy production and is also home to the largest geothermal power stations in the world, the Cerro Prieto Geothermal Power Station.
More specifically, there are less than a handful of geothermal fields being developed in Mexico, but there are a dozen more under consideration by a number of private companies. The issue today is that all power generation activities are carried out primarily through the Federal Electricity Commission (CFE), with the exception of a few smaller plants designed for private industrial power generation. In other words, there are no private power generation plants being used to feed into the national grid. However, with the passing of the new energy reforms, we expect this to change soon, attracting a slew of new market players seeking to take advantage of this abundant renewable resource.
In comparison to your geothermal activities, what is the relative importance of the oil and gas sector to your operations and performance?
SVT: Prior to commencing our offshore activities, geothermal represented approximately 60 percent of our revenues while the remainder was derived from our onshore drilling activities. Now, as we ramp up our offshore operations, we expect this figure to be reversed, having the majority of our income generated from oil and gas related activities.
To what extent do the exploration and drilling services in oil and gas share synergies with geothermal and enhance your capabilities?
Enrique Romo (ER): The primary synergies lay in the services surrounding the two activities. Clearly, this applies to onshore oil and gas drilling since offshore drilling entails a whole set of different challenges.
The drilling rigs we operate onshore are generally interchangeable and can perform drilling for oil and gas, as well as geothermal energy. In doing so, we are capable of achieving higher asset utilization rates. In addition to this, both drilling activities share a range of common services far beyond the rigs themselves. This, for instance, includes directional drilling methodologies, hole cementing and conditioning, as well as resource extraction procedures. In that respect, we have established a number of activities designed to streamline both geothermal and oil and gas activities. We have, for instance, established a support company that inspects and certifies the pipelines and tubing we install in the wells we drill.
Latina has recently made significant investments into the offshore industry. What is the vision behind this?
SVT: As we look to expand our drilling services portfolio, the acquisition of two Keppel FELS jackup rigs is a strong base for us to establish a foothold in the Mexican offshore market. The KFELS B Class jackup will be able to operate in water depths of up to 400 feet and drill to depths of 30,000 feet. Both of these rigs, La Santa Maria and La Covadonga, have already been delivered to us ahead of schedule in August and December of this year, respectively, and are already chartered to Pemex for deployment in offshore Mexico.
How will the implementation of these reforms impact the contractual terms of your charter agreement with Pemex?
SVT: The contractual terms will not be affected in any way. In light of the reforms we have worked diligently through the year in order to lock in these contracts. After all, what happens following the reforms is anyone’s guess and we wanted to limit our exposure to that risk.
ER: I believe our ability to secure these contracts during these relatively turbulent times represents strength for our company and we are rather proud of that. In fact, CP Latina is the only company that was able to lock in not one, but two, seven-year contracts with Pemex for the charter of offshore drilling rigs. This is rather unusual as by comparison, the average tenure of a similar contract around the world is far less than that, lasting between six to twelve months at a time. Perhaps more importantly however, I believe this clearly demonstrates CP Latina’s operational and managerial capabilities, especially once you take into consideration Pemex’s stringent technical and operational requirements it expects of its contractors.
As a company focused on drilling and support activities in the geothermal and hydrocarbons sphere, what identity or brand image does Latina want to build for itself?
ER: Considering the expansion of Latina’s traditional services portfolio and target markets, the company is currently in a transformational stage of its development.
As noted earlier, Latina was traditionally a geothermal drilling company that only began its transition into onshore oil and gas drilling in the past five years. With that, we began to focus on the onshore drilling contracts that Pemex was tendering. Up until that point, you could say that Latina was a drilling company. Although we help to extract geothermal resources, we could not be viewed as a geothermal energy company, for example, because Mexico’s energy sector has certain limitations in terms of private participation. Similarly, we could not be quoted as an oil company because we do not produce any significant volumes of hydrocarbons, yet.
Looking ahead, there are a number of onshore production-sharing projects in the pipeline targeted at integrated services providers that are designed to further develop the country’s mature onshore fields. As we aspire to evolve Latina into an energy producing company, we are eager to participate in these tenders and realize the next step in our company’s evolution. Factor in the impending energy reforms that are set to liberalize Mexico’s energy sector, as well as our recent investments in offshore rigs, and Latina is slowly but surely headed in the right direction towards becoming an energy company.
What is the importance of private investors in developing Mexico’s oil and gas industry to international standards, such as in the US?
SVT: It would be difficult to overstate the importance of private players in revitalizing Mexico’s energy industry.
ER: On average, foreign direct investment in Mexico over the past five years has remained relatively flat, at approximately $20 billion per annum. Concurrently, in its drive to increase production, Pemex has estimated that it will need to make capital investments amounting to some $30 billion per annum over the next decade. Considering these figures, it is clear that no one company alone can realize such a level of sustained investments for a decade, no matter how large. In aggregate, all of Mexico’s pension funds and savings systems represent some $150 billion. Although this is a good source of capital for the state-owned company, it is but a small proportion of what is needed to truly develop the country’s energy resources.
In this regard, there is no one solution or source of investment that can satisfy the investments Mexico’s oil and gas industry so needs. This will only be realized through various partnerships, public and private investments, as well as all other forms of capital investment vehicles. In terms of Mexican based firms, most of which are family-owned, I believe the way forward for them will be through the formation of strategic partnerships with international players. In this way, they will be better positioned to satisfy the enormous amounts of capital required to support the development of the country’s oil and gas resources.
Looking at the other side of the coin, to what extent do international players need local partners to leverage the opportunities present in Mexico?
SVT: In today’s operational environment, there are a slew of rig operators looking to penetrate the local market. However, the fact of the matter is that Pemex gives priority to homegrown players in a bid to enhance national content and value creation.
ER: In addition to this, regardless of the country in question and how open it is to foreign participation, local knowledge and familiarity with culture and business practices is an invaluable and difficult to acquire competitive advantage. Managing the complexities and nuances associated with day-to-day operations including suppliers, workers unions and the regulatory authorities, for instance, is no easy feat and requires an intimate understanding of the local customs. This takes both a lot of time and investment to achieve. There are countless examples of international market leaders coming to Mexico, only to leave in a relatively short time.
SVT: Assuming the implementation of the reforms occurs in an advantageous and effective manner, we would like to transform CP Latina into a generator of geothermal energy as well as a producer of oil and gas. Simultaneously, we aim to continue expanding our asset base and services portfolio in the offshore drilling sector, which is poised for aggressive growth in the near future.
ER: Indeed, we do have great aspirations for the development of business, however, despite that, the future is difficult to predict and we must be prepared to face all the challenges we encounter. Having said that, being a privately held company, the most critical factor for us is to generate value for our shareholder and ensure the long term sustainability of our business.