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Interview

with Germain Manchon , Country Manager, GDF Suez Mexico

12.09.2011 / Energyboardroom

Different to some of your colleagues that we have interviewed in developing countries you have a very different scenario. For example, Mister Treffer in the Netherland is very enthusiastic about EP activates in the Dutch Continental Shelf, while Mister Jean Lettellier in Australia is very excited about the Bonaparte LNG project. What is it that keeps you busy here in Mexico?

First of all we have to manage, as well as we can our existing assets because we have a sizable footprint in Mexico. We are the number one private sector natural gas transmission company in Mexico, with over 900 km of pipelines constructed, and we are the second most important natural gas distribution company in Mexico, serving 400,000 customers through our 6 distribution companies. We also have some participation in the power sector with over 300 MW of cogeneration installed capacity.

We are also trying to extend or consolidate our existing assets; reaching new areas of opportunity and/or bringing new services and new capacities to our clients.

So, I would say that in one hand we are dedicated to managing our assets, and serving our clients the best way we can, by providing valuable services. On the other hand, we also dedicate a major part of our time to the pursue of new opportunities in different areas in the energy sector, most of which are intended to cover the critical need for infrastructure in Mexico. In this context, we follow and participate in the international tenders of both PEMEX (Mexico’s NOC) and the Federal Electricity Commission (CFE).

Currently the CFE is tendering three premium transmission pipeline projects: (1) Morelos , (2) Chihuahua, and (3) Tamazunchale.

I am proud to be part of GDF Suez, a great energy company, and also to participate in such an interesting market as the Mexican one is.

As you said earlier there are different things that keep you busy here in Mexico and seems things are going well for GDF Suez here since it is the leading private company in gas transmission and the second largest natural gas distribution company. How will you keep that position and, most importantly, are there any plans to become the largest natural gas distributor in the country?

Well, it all depends on how you measure being the largest gas distributor. Do you measure that by the number of customers? If so, we are managing 400,000. But in terms of the volume we are moving in our grid we are extra significant because a good portion of our clients are industrial customers, who consume significantly higher volumes than the residential market we also serve.

You can have different models in the natural gas distribution business, one of which is a focus on the number of customers. My focus responds more to the nature of our assets and our location. Serving a mix of residential customers, and more big industrial customers, I would like to have a nice combination.

In terms of your other question, and as I mentioned before, I think one thing that distinguishes GDF Suez from other companies is our continue focus in service and quality. We are a solid group, with vast international experience. We provide integrated energy solutions, and that is what we want to offer Mexico and our existing customers.

Mexico consumers do not know what natural gas is and what are its benefits of this Triple A fuel. How challenging do you find to promote the use of natural gas and what kind of projects has GDF planned to promote its consumption among the residential customers?

I believe the answer to your question involves several fronts.

First of all, we need to keep in mind that the Mexican natural gas residential market is different than other countries, mostly because in Mexico, people do not use natural gas for heating or cooling their homes. Natural gas is mostly used for cooking and heating water, so consumption volumes are significantly lower. As you know, distribution grids are very capital intensive, so the lower the consumption levels; the more difficult it becomes to extend the grid.

Secondly, you need to consider the cultural and economic dynamics in Mexico to understand why despite of the environmental and security advantages of natural gas, the country continues to be the highest LPG consumer in the world.

Economically speaking, pricing policies in Mexico have affected the attractiveness of natural gas, desincentivizing its consumption. Natural gas prices are defined with reference to the free international market, while LPG has been, and is still today, subsidized. So you do not compete with reference to an open market where the qualities of the companies providing Triple A fuels can be assessed and appreciated.

Culturally speaking, I believe that in Mexico one of the challenges is to educate people about the advantages of the fuel, convincing them that natural gas is a worthy energy.

A lot of people in the country still mistakenly think natural gas is dangerous, because there has been a misinformation campaign. Also, people do not understand the convenience of natural gas, and the positive impact the fuel could have in their daily lives.

Just as an example, with LPG you have to give access to your house or someone has to be at your home to receive it. In the coming future more and more people are going to work outside their homes – in a more North American or European way of life – so less people, especially women, are going to be able to stay at home to check the LPG cylinder and open the gate of their houses. This for sure will create more opportunities for natural gas.

As I said, the challenge is to convince people that natural gas is a worthy energy. It is safe, clean and saves you time. People have to be educated into using natural gas. It is a lengthy process that takes time.

When we talk to Mister Humman he commented to us that there are two main challenges. The first is the government subsidization of the LPG gas, which creates unfair competition. However he said that the principal problem was the slow growth of the natural gas distribution system mainly due to the lack of proper infrastructure. How has this affected GDF Suez’s business here and how can a private company help (“intervene”) in improving the infrastructure?

I believe that as private companies, all we can do is try to be efficient and competitive, offering the most valuable options, and let the people in charge to decide.

We are one, of few companies, that have shown loyalty and commitment to Mexico over time. Fifteen years ago, a lot of companies came to Mexico to take part in one or two bids in the energy sector. Then as things didn’t go as they expected, they pull out of the country and sold their assets. In the contrary, we have been present in the energy Mexican market for over a decade. We are active in ongoing bids, and this is the best way to show the people in charge of decisions that we want to take part in the development of new projects, and that we are here to stay.

I believe that in order for things to move better, authorities need to define the correct framework to allow private investment. GDF Suez is a serious partner and investor and this is proved by our global reputation and performance.

As you have mention there is a big need for infrastructure in the country. Among our interviewees we have heard that sometimes it is difficult for a company to get back their investment in infrastructure?

I would not say that. I would say we have to find the kind of economic model or business model that will work. Obviously infrastructure investments require a clear commitment and stable rules over time. Because if we invest in infrastructure, we are looking at returns over 25 or 30 years. So when you take a risk for 25 or 30 years you need regulatory certainty and a stable legal framework that is well-designed.

As an energy infrastructure developer, you sometimes find that federal, state, and municipal interests are not necessarily aligned, and this is something that we need to address.

I believe that in terms of infrastructure planning, a long term vision is essential for developing a strong and efficient energy industry.

With regards investment to the correct framework I understand that a few years ago GDF had big plans to invest around the world and Mexico was one of the countries where that might happen. How challenging is it for you to convince the company to invest in Mexico?

For GDF Suez, Mexico is part of the emerging markets, and clearly a country where we want to consolidate and grow our position.

There is no doubt that Mexico’s economy has significantly evolved over time. Nevertheless, structural change in many key sectors of the economy, including energy, still need to be launched and has taken a longer time than anticipated.

In this context, we know things are going to happen, but we are unable to say when, and this makes investments complicated.

Mexico will definitely need to invest on its energy future, developing infrastructure that enables the kind of growth a country this size requires and GDF Suez wants to be a part of this effort.

Do you think that one reason for the slow pace and that things are taking time is because PEMEX is still involved in things when they should not be?

No, I would not say as much. This is not a matter of public vs. private. Both PEMEX and CFE have significantly contributed to the growth of the country, and they have operated under the rules and framework established by the Mexican authorities.

In my opinion, what is needed for Mexico’s energy sector to really reach the levels of growth it requires is a stable and strong regulatory framework, with a clear view of where we want the sector to be. A long term strategy, immune to political agenda and cycles, is essential. And of course, once this strategy has been defined, authorities need to have the will and commitment to see it through.

I think that we have to try altogether – the authorities and the private companies – to find a good way where things can work for Mexico. That is what we should be focusing on. For example, organize the market in a way where things are clearer, so private investments can really flow into the country and support the development of much needed infrastructure.

Coming back to what is going to happen in Mexico. In the North natural gas is quite well distributed but the South is nowadays totally closed. It seems in the coming months something is going to happen in the South…

In the Center South.

Some of the bids of the CFE are mainly dedicated to structure or to permit a better supply of gas in the center of the country, and to complete the interconnection, or begin to interconnect the East and West coasts and different injection points of the natural gas grid.

So that will create some opportunities?

If the regulatory framework is well organized it could provide significant opportunities. However, so far projects have been mainly dedicated to covering the needs of the CFE, so we still have to figure out how to develop the gas market. The central region is the one that requires infrastructure more urgently, and consequently where the opportunities will be to accommodate growth among residential customers. Also, and maybe most important in the short term, is to give access to industrial customers, since this is key for consolidating or extending the competitive structure in Mexico.

As you said Mexico does have opportunities so what are your ambitions for the Mexican operations in the next five years?

I would like to be the first integrated energy company in Mexico, with a well balanced gas and power portfolio that replicates the structure of our Group internationally. Globally speaking, let us say we have one third of our interests in power, one third in the natural gas business, and one third in the environment. In Mexico, we do not have the size of footprint that we should have when it comes to power. So I think we should grow in this front, however, this is clearly going to be dependent of the needs of CFE, and of the needs of the market.

That said, in the medium term (let’s say 5 to 7 years), there are going to be a lot of opportunities like the second wave of IPPs for the increase in capacity that is going to be launched by CFE. At GDF Suez Mexico we also believe in opportunities in co-generation.

In terms of natural gas, based on the needs of the country and the new pipeline projects CFE requires, we could begin to see in the next 10 years a huge need for infrastructure. GDF Suez is a world leader in terms of the management of pipes and infrastructure, so I believe we have much to offer. Gas distribution of course is also important because Mexico needs to incentive a higher market penetration.

Additionally, we are also increasingly thinking on how we can introduce an environment service in our offers. GDF Suez is already involved in the distribution of water in Mexico but I am talking about environmental performance services related to energy.

So I think that as the integrated energy company we are, it is not only about offering infrastructure, natural gas, or kilowatts. It is about offering the best integrated energy solution, maximizing the value of the entire chain for the customer. I think GDF Suez is the only company in Mexico that can do this, covering all the elements in the energy value chain. Hence I am trying to prepare the field for the next 5-10 years.

As you said earlier Mexico is part of that emerging market where GDF Suez wants to further consolidate. What is the most interesting part in working in an emerging market like Mexico?

I would have to say the high rates of growth. Mexico, as an emerging economy has a lot of needs to be cover. We are lucky that both the energy and the environment sectors are pulled by economic growth. The higher the economic growth, the higher energy required. Recently there was a study made by HSBC saying that by 2050 Mexico is going to be eight economy in the world, in terms of GNP, above Italy, France and Canada. These are exciting news and we are happy to be part of this.

What do you want to be our final message to our reader about the energy sector in Mexico?

Mexico is an enormous market –over 110 million people, with interesting opportunities and challenges.

I believe that when it comes to energy, Mexico will start playing a more international role. Not only with the United States, but also with Latin America, Europe and Asia, taking advantage of its privileged geographic location.

GDF Suez wants to be Present in Mexico and help the country develop the energy infrastructure it requires. The tenders we secure in the coming years will provide us with work for the next five or ten years. Our main strategy is to stay committed to Mexico to participate in all of the opportunities that the energy sector presents to us.

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