SPAIN'S DOWNSTREAM RESTRUCTURING, PRIVATIZATION PUSH STILL ON TRACK

Spain's downstream petroleum sector has weathered major changes the past 2 years.

Mo changes have been linked to participation in the single European market that took effect Jan. 1. The most critical change has been an end to a 63 year old state monopoly on distribution of petroleum products in the country.

Integrated companies around the world continue to scramble for market share in Spain's refining/marketing sector as it opens further to private investment and foreign ownership.

During 1990-91, considerable progress was made in liberalizing the oil sector, beginning with the process of breaking up state petroleum products distribution company Cia. Arrendataria del Monopolio de Petroleos SA (Campsa).

That in turn has led to development of new retail outlets, a new price system, and involvement of multinational companies in Spanish refineries. The latter has perhaps been the most important single factor behind the changes in the Spanish oil scene.

The emphasis during the rest of the 1990s will be on consolidation as the semipublic giant company Repsol SA presses privatization and restructuring. Those efforts underpin ambitious expansion plans upstream as well as downstream at a time when introduction of free market forces spurs more streamlining at other companies.

BACKGROUND

Spain must import more than 60% of its energy requirements.

The only energy generating resources it possesses in large amounts are coal, uranium, and hydropower. Although the oil crises of the 1970s spawned efforts to reduce dependence on oil as the dominant energy source, those efforts have plateaued.

In 1979, oil accounted for 67% of primary energy demand. By 1991, the figure had dropped to 53%, or 1.028 million b/d. Despite the declared aim of the socialist government of Prime Minister Felipe Gonzalez, campaigning for a fourth consecutive term this year, to move away from oil dependence, imported oil will continue to account for almost half of Spain's energy needs for the rest of the decade.

Oil demand continues to grow-up 2%/year since 1991-while domestic production accounts for only about 2.5% of primary oil consumption.

PROGRESS IN LIBERALIZATION

The first stage of Spain's liberalization process began in 1984 when Campsa, whose assets were owned by Spanish refiners, acquired from the state Spain's only petroleum transportation network.

In 1985, state owned National Hydrocarbons Institute (INH) began transferring most of its equity interest in Campsa back to the refiners.

In July 1990 the motor fuels price system dating to 1927 was changed to a ceiling price system, with Campsa setting prices by taking into account international market prices and a reference to net domestic prices free of taxes and duties of six European Community member states.

As of January 1993, Campsa ceased to set the price, although the Industry Ministry still maintains a ceiling price.

Despite the loss of oil supplies from Iraq and Kuwait-and resulting price spikes-during the Persian Gulf crisis, Spain's industry association Aserpetrol maintains the system has worked reasonably well.

A contributing factor to supply stability has been the growing role of imports of Mexican oil. Since 1989, Mexico has accounted for more than 25% of Spain's oil supply. Mexico's state owned petroleum conglomerate Petroleos Mexicanos acquired a 5% equity interest in Repsol in 1990.

Last year began with the lifting of archaic restrictions on imported oil products from the European Community.

That was followed by the final stage of the breakup of Campsa's assets among equity owners Repsol, private Spanish refiner Cia. Espanola de Petroleos SA (Cepsa), and British Petroleum Co. plc unit BP Oil Espana SA, a move described by Repsol Chairman Oscar Fanjul as one of the most complex operations in the world oil sector.

The three companies are the sole refiners in Spain.

The end to Spain's retail monopoly followed lengthy, tortuous negotiations between Madrid and Brussels, although an EC ruling to end state controlled monopolies had officially sounded the death knell for Campsa as early as 1985.

Repsol will take control of the Campsa brand name for wholesale gasoline distribution and logistics, while retail gasoline sales outlets and other related commercial assets will be parceled out according to each equity owner's stake in Campsa.

Elsewhere in the refined products sector, breakup of the Campsa distribution monopoly, which also covered gas oil, industrial fuel oil, and domestic heating oil retail outlets, as well as refined product stocks, will leave buyers free to purchase from any source, including foreign.

As in the gasoline market, Repsol dominates with about 60% of the distillates market, with Cepsa accounting for the next biggest market share. There has been no formal division of assets, as with Cepsa's gasoline distribution network, but Repsol is likely to hold onto its market share position.

Officials at the companies say, however, that contracts will reflect location of their refineries, with competitive prices and efficiency dependent on proximity of supplies to customers.

WATCHWORD: CONSOLIDATION

The past 2 years have seen a major restructuring of Spain's downstream market. Two foreign companies, BP and Ste. Nationale Elf Aquitaine, have established a significant presence in the country, and Repsol acquired the private refiner Petroleos del Norte SA (Petronor).

But there is more consolidation to come, notably with Repsol.

Repsol, which dominates the Spanish oil market, is the country's most profitable firm and in 1991 ranked in terms of total assets as the seventh biggest integrated petroleum company in Europe and 18th biggest worldwide (OGJ, Sept. 28, 1992, p. 72).

The company's exploration/development, liquefied petroleum gas, chemicals, and refining/marketing divisions are now complemented by a natural gas unit. Repsol controls 30% of the recently formed gas concern Gas Natural.

Founded in 1987 as a result of restructuring of state controlled INH, Repsol under Fanjul continues to push for privatization by the end of the century. The company currently is about 65% owned by the state.

Since 1989, when the state carved out for sale a 27% interest out of its 100% stake, a seemingly inexorable move toward full privatization has been under way, a move described by Repsol as "a logical process."

In June 1992, the government disclosed plans to sell a further 20% of its interest in Repsol by yearend 1993 in two blocks, thereby losing its absolute majority in the company. The first sale, to small investors, has gotten under way. The second, to foreign and institutional investors, is expected before summer (OGJ, Jan. 25, p. 50).

The company plans to market the international share issue vigorously in the U.S. and Japan and particularly in Britain. The sale is expected to raise more than $500 million.

The government says it is quite happy to lose its majority in the company. Even after the second share issue, it will still retain about 45%, making it the single largest shareholder.

UPSTREAM EXPANSION

Repsol's restructuring and privatization is intended to free more capital for furthering an aggressive program of expansion in international upstream operations as well as to help consolidate its downstream presence in Spain.

Repsol's 1991 worldwide oil production of 170,000 b/d was an increase of 9% from the previous year. Of that total, 8,800 b/d was domestic.

During 1991-92, Repsol stepped up efforts to acquire interests in big foreign oil exploration and development projects. It invested 9.1 billion pesetas ($78 million) in development start-ups in several oil fields in 1991, even though that was the first year in which Repsol received no state aid for that purpose.

The company also has acquired exploration rights from Chevron Corp. in the North Sea, from Royal Dutch/Shell Group in Indonesia, and from BP in Egypt. Repsol also acquired Elf's exploration rights in Spain, as well as a 50% stake in Argentina's Vizcacheras oil field.

Profits for 1991 were 70 billion pesetas, and the company is confident that it can fund its 800 billion peseta capital investment program for 1993-95. Senior executives at Repsol insist, however, that the company will stick to its "slow but steady" policy aimed mainly at consolidating the home market and improving internal management.

Repsol reported virtually flat profits for first half 1992, a result considered positive when investment costs and the weak results of many of its larger rivals are taken into account.

U.K., FRENCH FIRMS MOVE IN

In 1991, a three way deal was set up among private refiners Cepsa, Ertoil, and Elf. Cepsa bought out Ertoil's interests, while Elf took a 34% stake in the newly enlarged Cepsa.

The convoluted transaction required EC Commission clearance before its confirmation. Ertoil was originally acquired by Elf from previous owners Ercros, in turn controlled by the Kuwait Investment Office.

Also in 1991, BP took over independent refiner Petromed, one of the single biggest investments made by the U.K. company in continental Europe, giving it 10% of the Spanish market.

Madrid has given its official blessing to the entry of international participants in the retail service station market. At present, aside from BP and Elf, the only foreign multinationals with a presence in the Spanish distribution market are Shell, Agip SpA, Conoco, Portugal's Petrogal SA, and France's Total, with about 170 stations among them.

Spain has about 5,000 service stations. Repsol owns about 3,000 of them.

Acutely aware of the challenge from other European as well as U.S. companies, Repsol aims to build 200 stations/year and hold onto 55% of the domestic market. Cepsa, which has come out of the Campsa breakup with about 1,200 stations, plans to spend 35 billion pesetas by middecade to launch its Cepsa-Elf trademark and upgrade its outlets.

BP-Petromed will inherit more than 300 service stations from Campsa, in addition to the 100 or so it currently controls.

FOREIGN COMPANIES COMPLAIN

Several major foreign companies have expressed an interest in making deeper inroads into the Spanish market.

Chief among them is neighboring Portugal's Petrogal. The company contends the breakup of Campsa still will leave about 1,000 stations unaccounted for. The official figure is 400, but the Portuguese point out that about 600 stations have short term contracts with big companies that could easily be rescinded.

Petrogal intends to build and have on line about 80 retail outlets by mid-1993, part of a 30 billion peseta investment plan the next 3 years to boost its Spanish network to 300 stations. Petrogal and other foreign companies have accused Madrid of making their entry into Spain difficult.

The problem facing foreign companies moving into Spain is choosing between dependence on Campsa successor CLH for distribution-and thus buying direct from Spanish refineries-or directly importing products. Both involve setting up costly infrastructure projects.

Repsol official Jorge Segrelles dismisses the possibility of new refineries being built either by Spanish or foreign companies and accuses Portugal of double standards.

"Petrogal has more than 80 stations here, and we have barely 20 in Portugal, a country we are keen to move into," he said. "You can't expect to just walk into another country, where local outfits have been in operation for decades and expect immediate results."

Fanjul similarly rejects criticism, saying, "Many multinationals that had great plans to enter Spain have had to abandon them or have a serious rethink because they thought they could move into Spain without making any serious investment and take advantage of the existing infrastructure."

Segrelles also claimed, "No country has done as much in so short a time to shed state control over the oil industry and open the way for competition."

Downstream analysts say the only way foreign multinationals are going to break into the Spanish market is by acquiring interests in Spanish companies, as Elf and BP have done. The problem of creating a distribution network is aggravated by the fact that most of the best sites are taken.

Repsol has begun talks with Shell, Total, and Texaco Inc. over exchanges of assets and market areas. And Italian refiner Saras SpA and Conoco Inc. are involved in a venture to set up a company to market a variety of petroleum products in the northern and central regions of the country.

A feasibility study is under way involving proposed construction of refined product terminals, with particular emphasis on an LPG facility for the Gijon-Aviles area in the northwestern region of Asturias. Madrid authorities have looked favorably on the project, not least since it will assist in the government's efforts to revive the struggling economy of the fast declining former industrial heartland. Exxon, Total, and Shell also have expressed interest in the project.

MORE COMPETITION

Whether the recent flurry of international interest in Spain's downstream leads to growth in the marketing sector is another question.

One facet that may change is that Spanish service stations are still over-whelmingly full serve, contrary to the trend elsewhere in Europe.

However, with the easing of controlled prices, the big three Spanish refiner/marketers have embarked on major spending programs to improve existing retail stations and build self-serve stations.

Repsol plans to spend about 200 billion pesetas on retail expansion and improvements by middecade, and Cepsa has launched a 40 billion peseta service station investment program. BP is concentrating its efforts on production and marketing of unleaded gasoline.

As of Jan. 1, 1993, all new cars sold in Spain are required to have catalytic converters, enabling them to use unleaded gasoline. The growth in sales of unleaded in Spain was late to start but has been rapid and huge. In 1987, unleaded accounted for 0.7% of gasoline sales, rising to 6.2% by mid-1992 and expected to reach 10% by yearend.

Industry analysts say, however, that it will be at least another 2 years before Spain nears the EC average of about a 45% market share.

EFFECTIVE OLIGOPOLY

How to end what some Spanish industry officials contend is in effect an oligopoly presents a complex problem.

Industry officials rule out a price war even under decontrolled prices.

Some foreign companies have accused Repsol, Campsa, and BP of acting in concert with the government to keep prices artificially high. With liberalization of gasoline distribution markets, companies are, in theory, free to set their own prices-provided they don't exceed the Industry Ministry ceiling.

Some industry officials contend a price war is impossible, claiming there is an unwritten nonaggression pact among the three companies that control 90% of Spain's downstream market that helps sustain prices at current levels. The only outsiders with any real presence are Shell and Petrogal, but they say there is no point in them trying to bring prices down because of their tiny market shares.

Some marketers claim they have been denied permission to set up new service stations in retaliation for trying to sell cheaper gasoline.

Sources in the industry say that even if BP or Cepsa were to break away and spark a price war, unlikely at the moment, the smaller operators would complain they were being driven out of business.

The Spanish monopolies agency says no complaints against the three market leaders have been lodged, although it describes the situation as "a clear case of a cartel." The EC says firmer evidence of this would be needed before action could be taken.

The Industry Ministry defends itself by saying the pricing arrangements prevents the big three from pushing prices up, as they would be able to do in other European nations that lack a government set ceiling.

Even after liberalization, taxes still account for 69% of the price of a liter of high octane premium gasoline. Thus, when refiners' crude acquisition costs are factored in, there is likely to be little change in the gasoline sales price. After Britain, Spain has the cheapest gasoline in Europe.

PETROCHEMICAL SLUMP

Meantime, Spain's slumping petrochemical sector is squeezing the country's big three refiner/marketers, which also account for a majority of the Spanish petrochemical market.

The Spanish petrochemical sector has been unregulated since the 1970s, when concessions and monopolies in the domestic petrochemical industry were eliminated.

Foreign firms-EC and non-EC-are free to import petrochemical products into Spain and establish petrochemical facilities there.

Because of a continuing shakeout in the petrochemical sector, the three big Spanish refiners are broadly following two lines of action on petrochemicals:

• Consolidation of operations and market share growth within the areas most integrated into the refining system.

• Drastic cost reduction policies involving rationalizing complexes and greater integration with refineries' cracking facilities.

Cepsa has disclosed plans to sell Poliesa, its plastics division, to Germany's Continental Can Europe for $110 million. Repsol is looking for a foreign partner to participate in its petrochemical division while cutting back the work force by 20%.

BP is also anxious to find outside capital for its petrochemical division, and there has been speculation among Spanish refiners that the company's current drastic worldwide rationalization program might even lead it to abandon its Spanish plans and sell its Castellon refinery.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.