Repsol broadens its horizons
Spain's Repsol is looking more and more like an international oil company. Executive chairman Antonio Brufau talks to Tom Nicholls in Madrid
THERE'S no doubt Repsol is a Spanish company. Thanks to its state-owned heritage – it was formed in 1986 by virtue of the merger of various state-controlled oil companies – it retains a dominant position in Spain's refining, marketing and distribution businesses: a quarter of its operating income came from Spain's downstream last year.
It is still Argentine too, despite its eagerness to sell off more of YPF, the state-owned oil company it bought in 1999: upstream and downstream operations in Argentina accounted for another quarter of operating income in 2008.
Yet Repsol is looking increasingly like an oil major – with a bigger upstream portfolio, a better geographical spread of assets and real hope of boosting its substandard reserves-replacement rate to the sorts of levels expected of international oil companies.
When Brufau took over as executive chairman in 2004, there was too much Argentina on the books: the country accounted for 0.7m barrels a day (b/d) of Repsol's 1m b/d of production. In 1999, the YPF purchase had given Repsol instant scale and access to reserves, but within five years, it had become a drag on growth. "Argentina is a very mature country," says Brufau. "Trying to fight declining production was a waste of money and time."
Last year, it sold 15% of YPF to Argentina's Petersen Group for $2.235bn – plus an option to buy a further 10%. Having an Argentine partner, says Brufau, enhances YPF's credibility locally, which will be important as the company tries to extract maximum value from its remaining assets in the country.
But, more significantly, cash from the sale has helped it diversify outside Argentina and to broaden its upstream activities. Last year, Repsol YPF – as it then was – set out a five-year growth plan designed to boost production outside Argentina by more than 5% a year, to 400,000 barrels of oil equivalent a day (boe/d), by 2012. In first-quarter 2009, non-Argentine production amounted to 317,000 boe/d. But recent exploration results have been impressive: worldwide, the first quarter of 2009 was exceptionally good, with 11 discoveries from 11 wells.
Results have been especially encouraging in the US Gulf of Mexico (GOM) and Brazil. "Last year, we only had one discovery in the GOM. Today we have seven," says Brufau. In March, oil started flowing from the GOM's deep-water Shenzi development – one of the region's biggest discoveries, claims Repsol. The company has a 28% share in the field, which has a production capacity of 100,000 b/d of oil and 50m cubic feet (cf) a day of gas. The previous month, it announced "a significant new oil find" in the deep-water GOM – the Buckskin field – in which it holds a 12.5% share and acts as exploration operator.
There could be even more upside in Brazil. The Carioca field – which last year Haroldo Lima, the head of upstream regulator ANP, controversially suggested might contain as much as 33bn barrels of oil equivalent (Petrobras, the field's operator, quickly distanced itself from that figure) – was among the prospects Repsol said would propel its upstream expansion. But Repsol's focus has since switched to the Guará field, which, says Brufau, is bigger than Carioca and better connected with other structures. How big he will not say, but more information should be available later in the year as a long-term production test begins.
And there should be more to come: Repsol has an enviable acreage position offshore Brazil. It is the largest foreign owner of exploration rights in the Santos, Campos and Espírito Santo basins, with 11 operatorships and shares in 24 blocks – many of them in the Santos basin's coveted pre-salt areas.
North Africa is another important upstream area. In Libya, Repsol has a 12-13% share of gross production from operations that produce 300,000 b/d. Since the start of 2008, it has made six natural gas discoveries in the Reganne area in southwest Algeria: reserves may amount to over 3 trillion cf, says Brufau, and production should start in 2011. He adds that the disagreement with the Algerian authorities over the Gassi Touil liquefied natural gas project – from which Repsol and Gas Natural, another Spanish energy company, were ejected in 2007 – does not endanger its other operations in the country. "The Algerians and us decided that Gassi Touil shouldn't damage our relationship in other areas." An arbitration process should start in the second half of the year, he adds.
In addition, with substantial interests in the Caribbean – Trinidad and Tobago, Venezuela and Colombia – and Peru, Brufau believes the company can substantially boost its reserves-replacement rate. In 2008, it replaced just 44% of its reserves – 66% outside Argentina and 33% in Argentina. But Brufau is "very confident" the figure, excluding Argentina, will rise to 125% by 2012.
Upstream investment on track
So far, despite the global recession, there are no plans to drop any upstream investments from the 2008-12 plan. Nonetheless, capital spending is falling; since the start of the economic crisis, Repsol has managed to reduce the average price it pays for services and supplies by around 10% through renegotiating with suppliers. This has reduced the projected 2008-12 capital budget from €33bn ($45.5bn) to €30bn; freezing some chemicals investments should lop another €1bn off the bill.
Expenses are also falling – and should be down by around €0.5bn over the full year, says Brufau. It is a welcome relief in the context of recent market weakness – characterised by poor refining margins and low oil prices (although at the time of writing, prices were only about $5 a barrel below Saudi Arabia's magic $75/b target). Conditions should improve in refining too; Brufau says margins should get "back to good numbers" within two or three years, although a recovery in the petrochemicals sector might take longer (see p15).
In addition, more funds should become available when Repsol carries out its plan for a $3bn-4bn initial public offering (IPO) of another 25% of YPF to Argentine and US investors; the company delayed the IPO because of the financial crisis and there is no firm date for a resumption. "The sooner the better," says Brufau.
Nonetheless, Repsol will not be relying wholly on oil and gas. Like other energy companies, it must evolve in response to efforts by governments to create a low-carbon economy. "Consumers want clean, efficient energy: and our priority has to be on delivering what consumers want," says Brufau. "In 25 years, all of us will have a different face." Oil and gas will not be enough: Repsol will need to be a "pure energy" company. New areas are unlikely to include nuclear power or pipeline-management, but Brufau lists offshore wind, geothermal and solar power as possibilities. And carbon capture and storage – an important research area for the Spanish company – is a priority.
Another motive for diversifying away from oil and gas is seeking new ways to grow. "Every day it's getting harder to find new activities," he admits. "National oil companies have more power and more money and they know how to buy more services. With the money they have when oil goes above $100/b, they can agree with suppliers to do the job we're supposed to do."
Nonetheless, renewables will remain a peripheral part of the business. The weight they will occupy in Repsol's portfolio should reflect their share of primary energy supply, he says – and renewables will not account for more than 10% of primary energy consumption by 2030, he predicts: "Renewables won't be a significant part of the energy cake in the next 50 years."
Additionally, he takes issue with the EU's 20/20/20 targets (to reduce greenhouse-gas emissions, increase the share of renewables in the energy mix and cut energy waste, all by 20% and all by 2020) – with the exception of energy-efficiency improvements, which make "perfect sense" – suggesting that the numbers were chosen because they sounded good. "If it had been 2018, would it be 18/18/18?"
More profound analysis is needed, he adds: which type of renewables are the most effective? Who's going to pay for them? Does the large amount of water needed for biofuels production create its own sustainability problems? And will the choices governments make strengthen the competitiveness of companies in some countries to the detriment of companies elsewhere? Indeed, the biggest problem that the oil industry faces is "trying to see clearly the energy needs of the future".