Geo Estratos General Director Vicente González discusses with us the impact of the energy reforms that the government of President Peña Nieto is implementing in the Mexican Oil & Gas market, the company’s participation in Round 1 Phase 3 and his value chain based strategy to remain competitive in a low-price oil scenario.
The World Bank and the IMF forecast Mexico’s economy will grow by 2.6-2.8% during the next year, well above the regional average and Brazil which, in fact, is forecasted to shrink. How do you think this scenario will affect Latin America and what role do you think Mexico will play given the ongoing structural reforms the Government is implementing?
The main opportunity for Mexico lies in the reform process pursued by the Republic’s government. President Peña Nieto opens the door to change the ways that we have followed for 100 years.
Our company has understood that building the future requires understanding the past. Historically, after 1938, we failed to capitalize on the opportunities to the extent other countries did. Today, this brings an opportunity for the region. You certainly have to go against the stagnant mindset to move forward.
Mexico has a huge potential, which is globally unique in terms of energy. The region must seize the opportunity offered by the energy reform. And we need to see the oil business as an energy business not just in the context of national demand, but as the main demand-driven opportunity for Central and South America. The only way in which we can capitalize on this opportunity is by understanding that oil business needs not only see oil as a commodity, but grasping the entire value chain.
Geo Estratos was awarded with four contracts in Mexico’s Round 1 Phase 3. What was your strategy? Where do you see the opportunities coming from in this outgoing reform process and how these current reforms have influenced in the consolidation of great partnerships like the one with MX Oil?
The strategy that we have followed in this tender was defined many years ago, including through the enactment of the energy reform itself. We had to win those four fields, so we had defined the factors that were necessary to achieve this. Our approach is not based on the amount of royalties to be paid to the government, but on the chain of additional value that we can get from these operating licenses.
MX Oil is a small company in London, which, just like us, could understand the future needs in the short and medium term. Our approach to the following rounds is certainly completely different than the one they pursue as a financial-sector company. Our specific purpose as a company has been fulfilled with Round 1 Phase 3. However, for us the value chain represented by our fields is just the beginning. The results of the round were not surprising to us, since it was well-planned for the purpose. In fact, we did not care if someone was going to be 2% or 50% below our royalty premium, because our strategy is not based on obtaining dividends from oil as such. Our strategy is based on the value chain, where the gains lie in obtaining derivatives and raw materials — which currently sets us apart in terms of gas, for example.
The regional market is at least three times more expensive energy-wise than what we are going to offer. Our strategy is based on commercializing not oil and gas, but energy. This means procuring energy at a price that can compete with Texas or Qatar. It is possible to compete against any generator that has no choice but to buy gas and oil for its value chain and bring it from the US or another country. A tender like this allows us to directly access raw materials, convert them into the specific purpose, pay to the government the portion that is due to it as a commodity, and get future benefits in the value-added chain.
Rumor has it that your company is seeking a joint venture with the large national company, PEMEX. How much truth is there to this?
No, it is not that we are seeking it[VZ1] . Yes, we are interested in it, but it is not our foremost purpose. PEMEX has many problems to solve where we could be of help. The truth is that we were born as a service provider whose main purpose was to pursue market services, while today it is to generate energy. I’m not saying that partnering with PEMEX is of no interest to us, but perhaps we follow different paths. On the other hand, we are always open to assisting and doing what we can while relying on anti-corruption practices, always following institutional processes, and being highly consistent in our development process.
They talk about promoting low-cost energy products and solutions, which are allegedly more innovation-intensive. What do these efforts of theirs mean to you, and what opportunities can they bring for your company?
For us, the value of oil and gas is not measured in terms of their calorific value, API density or gravity. Oil deposits offer a real treasure chest of opportunities where we see the net present value of propane and the net present value of obtaining CO2, or other types of derivatives. To develop the value chain, you need to have energy capacity. For example: If I were the CEO of Iberdrola, with four thermoelectric plants working in the region, and had to import gas at a price of three or four dollars, I would care a lot about the regional capacity in order to reduce costs. Because in this case the US has a huge track record of developing production capacity and ensuring gas production. There is no way in which Iberdrola could, for instance, approach buying gas at the same price as Texas. It would have to pay an extra cost for transporting that gas to the port of Altamira, for example. So if I were the director of Iberdrola, I would team up with an oil company, whose role would be to develop a value chain and ensure the procurement of raw materials at a cost lower than import.
You have developed technology that has allowed boosting the yield of oil wells by up to 20%. What part of it do you feel most proud of personally?
Actually, all patents and processes we have developed have the specific purpose of reducing costs. In the end, we have been preparing our business for many years in order to produce oil, even at a price per barrel of US $18. Our problem is not that a barrel is down to US $15; the problem is whether we are able to meet the technological challenges created by the reduced costs. Therefore, we do not create patents to sell the intangible. The sole purpose is to be competitive in the worst price conditions of the energy market.
For this reason we have developed additional value chains, where our aim is to be economically, environmentally, and socially sustainable through using technology that allows us to have greater capacity without bearing R&D or indirect management costs that make it impossible to grow without low operating costs.
How commited is Geo Estratos to its home country Mexico? What steps is Geo Estratos taking to help Mexico occupy its deserved place on the global energy map?
In general, our mission is to be a technology-driven company recognized internationally for developing solutions with a highly efficient cost–benefit ratio. In Mexico, our purpose — regardless of the challenges of removing the stigma of inefficiency, technical inability, corruption, terrorism, government relations with no lawful processes, and so on — is to boost domestic development, however not through a culture based on corruption, but through one relying on technology and patent development. A patent indicates that you are on the cutting edge to achieve true capitalization of knowledge.
We will not beg the government to support us with economic benefits that don’t come with the fair and sole purpose of promoting the development. For Geo Estratos, our responsibility as Mexicans manifests itself in that for 10 years we have been truly able to remain one of the most important companies in the world, a company born from a culture different from the traditional global perception of Mexicans as a nation following corrupt and non-institutional processes.
How does the current situation and the products that you are developing divide the company’s history into “before” and “after”?
When the heyday is left behind and the prosperous management environment is gone, at least for now, we get the opportunity to align our business in terms of production costs and investments.
For us, the focus in this regard is on what the market is going to get from a company that is able to meet the commitment it made to align the investments made by an oil operator for restoring or starting the production of oil with the production costs as a direct function of the sales prices. If you are going to charge a certain amount for a service without committing to deliver the result, you’re likely doomed. You won’t survive in the business environment if you don’t produce oil at low cost; you won’t survive if you are a service provider or operator who does not understand that you cannot contract something beyond what you are ultimately going to get in return.
How important is this market and the participation of Mexico and, in particular, Geo Estratos in the OTC? What can Geo Estratos get from the OTC?
In terms of business opportunities, for us this event means focusing strictly on any technological developments that surpass our capabilities and represent a technological advantage. We are hardly going to partner with someone who does not have this profile, as we are not discussing whether some financial companies have lower or higher financial costs. What we hope to find in the OTC is companies whose technological developments will allow us to align our cost reduction efforts more efficiently.
Thus, we are not looking for partners for the sake of creating partnerships. Our goal is to create partnerships as long as they contribute to reducing exploration and production costs.
So you’re open to new partnerships with potential investors?
Absolutely, provided they comply with anti-corruption policies and policies of investment into education and social, environmental, and, of course, economic sustainability. A partner with these characteristics should understand that research and development work requires investments that as such do not give as much returns as one could expect from oil wells. Research and development is a constant and ongoing process and is one of the aspects that we would seek in a financial partner.
Are you looking into participating in a new tender? What are your earning prospects in the short and medium term?
Our outlook is more focused on our ability to certify reserves. What I mean by this is that regardless of how many contractual fields we win, our minimum goal in the rounds after Round 1 Phase 3 for the next 10 years is to have a booking capacity of at least 5 billion barrels of oil and 10 trillion cubic feet of gas. We already know where they are, we already know what we have to do, and we are pursuing a research and development process to understand what would be the most effective strategies not only to tackle the competition (which is a given) but also to capitalize on in the next 50 years.
Did you think that Geo Estratos could achieve its current standing and even have the prospects it has today?
Yes. In fact, the current outcome is a result of a plan that is more than 20 years old. When the business started, my desk was a plastic laundry basket, I was a sophomore student, and the company was actually born as a result of searching for a living — a way of living — in the early 1990s, when oil prices were close to the ones we have today.
For me, the current process is really the result of trusting in personal capabilities and not being subject to the temptations of the market or the practical means of obtaining or achieving goals. I was always focused on R&D-driven investments — and I think it was the right thing to do.
So today, as the time has passed — and I can say this with certainty — we see results of a years-old process, not only of planning but also of maintaining medium and long-term goals through a very disciplined and objective approach. That is why I have no doubt that in the next 20 years we will achieve the goals that we have set.