Diavaz Group emerged in 1973 as a service company for structures and platforms. Today it is the only private Mexican company with the unique status of oil. KITE Invest me with the President and Co-Founder of the Diavaz Group, Mr. Luis Vázquez, to get his unique “in the know” perspective of the Mexican oil & gas industry, the energy reform and the future relationship prospects with Pemex.
KITE Invest: I would like us to start with an introduction to the energy sector and the implication the energy reform will have in Mexico, which according to our information, will usher in a series of investments of up to USD$50 billion – representing an increase of 1.5 to 2% in GDP. What is your analysis of the current market situation and the consequences of the profound changes that will bring energy reform in the country?
Mr. Vázquez: As you rightly said, I believe that energy reform will increase Mexican and foreign investments in this sector; they are numbers we consider achievable. We will increase production that has been declining, create competition and with the current situation of oil, it can be assured that the numbers perhaps instead of being reached in 2018, it could be 2020 or 2017 depending on how this situation fluctuates.
KITE Invest: What is the legal framework that is accompanying this energy reform? Do you think this gives security to foreign investors?
Mr. Vazquez: I think that from the beginning of the reform, since the change in the Constitution, it has been a very punctual and very exact thing. The rules are clear; they are good; they give investment certainty. There will be a lot of transparency for those who will invest and who will win under these conditions.
There are currently fourteen fields that are tendering. Of these fourteen fields each group will be able to get up to five fields. We are very excited about this part, which is the first of several rounds to be done this year.
KITE Invest: We were with the Minister Pedro Joaquín Codwell who assured us that Mexico remains competitive despite the falling price of crude oil. What is your opinion regarding this issue?
Mr. Vázquez: The price of oil fell; however, the oil extraction price is near $22 per barrel. Given the new international price, it will be important that a substantial tax scheme is established for private companies that win fields. It’s not the same when oil is $100, than when it is $50. Contracts are for thirty years. We believe that oil is going through the same thing that happened in 1982 when oil fell to under $8, which in present values is $35 – $40 now.
KITE Invest: Explain to us the trajectory of Diavaz Group and what have been some of the main challenges and achievements faced to date.
Mr. Vázquez: We started in 1973 with a company to support and provide services to small platforms that were in the Gulf of Mexico near Tuxpan and Tampico. The activity was very low and that’s how we started. I, as a chemical engineer, and my brother, as a mechanical-electrical engineer, hardly knowing how to swim, but we got onto this path and we had the great advantage that in 1977 the diving activity began to increase. We were a small but well organized company, and by 1979 we had 500 divers in our company. At that time, it was the second maintenance, inspection and repair dive company worldwide.
In the same vein, we are now seeing in the new framework of laws, the new opportunities and companies that are coming to participate, and we will have a problem of human capital to manage. However, bringing in foreigners to teach us will not be the first time we have done this and we are convinced that with doing this we will have a very good national plant in the future.
KITE Invest: What is your vision of Diavaz’s partnership with Pemex taking into consideration the reform?
Mr. Vázquez: So far we have been contractors of PEMEX in several areas. We started with diving and began to distinguish ourselves from other opportunities such as compression in Villahermosa where gas is re-injected to increase production or get into reservoirs to increase pressure. We have had contracts of different types over the last forty-two years, which we celebrated on March 1st, 2015.
The energy reform states that there are four fields where we have been the Mexican exploration and production company. There are two companies in Mexico producing oil: PEMEX and us. They produce 2.5 million and we produce 25,000 barrels. Now, what will happen to the contracts we have with PEMEX long term? The option given by the energy reform and that we will be making is to return as members of Petróleos Mexicanos. We are in a process called “migration”. We have the option to migrate or not and we will migrate to become partners. In the oil fields we are in the final stretch to reach a formal agreement, aiming to sign the contract by April 15th. With the gas fields we just began the migration process in February.
KITE Invest: There is much talk of a possible debut in the capital market. What is your position?
Mr. Vázquez: As a contractor, I give you my bill and you pay me. If you tell me that this year we will spend 20 million, I will spend 20 million and with that amount I will increase production thousand barrels. Now when you’re already a member, and not a contractor, you need to evaluate the field, and know when you can get two or three thousand barrels instead of one thousand and if conditions permit. There may be price volatility, be it minor or major. I cannot tell you until we have clear migration.
What is real is that we will require money to increase or decrease production. It is an economic issue. To do this we are considering several alternatives: a bond, in a partnership with one of the companies or in a fund that we can inject money. We are evaluating all these scenarios. What we do have certain is that Diavaz Group needs to expand funding sources. We’ll have to find a new partner. We are talking with several options. We know Mexican oil but we do not know how to finance ourselves for the next forty-two years.
KITE Invest: Many regard London as the financial capital of the world. What message would you send all those in financial community on why Diavaz Group is a company to consider?
Mr. Vázquez: When the law did not allow foreign investment, Diavaz Group always wanted what is happening with energy reform today. In 2013, within the framework of the reform and the Constitution, Petróleos Mexicanos was practically the government and authority. So in that year they started thinking how to make a private initiative that could put money and apply new technologies that could become a benchmark.
Now with this new migration, the first two years we will have to sell oil to PEMEX through its subsidiary PMI, and then we can sell it to whomever we want.
KITE Invest: What does the current situation mean to you personally after so many years?
Mr. Vázquez: It’s a huge accomplishment. It has been forty-two years to see the birth of a company and leading a company with minimal to end up having what we are experiencing now – positioning ourselves as a major player in the energy sector in Mexico. We are the second Mexican oil company and I am very proud to have participated in this growth. The next forty-two years will be equally difficult than the first, but we are on track, we are very careful, we have grown from a gradual way always trying to increase our knowledge.