The Spanish oil sector From state intervention to free trade

The Spanish oil sector From state intervention to free trade

Aad Correlj This article describes how the entrance of Spain into the EC forced the Spanish oil sector to reorganize its relatively inefficient and backward structure in anticipation of future competition and in harmony with EC rules. To protect the Spanish industry over a transitional period, Spain replaced its former legal oil monopoly by a de facto monopoly. Recent developments show, parallel with the development of a strong, partly privatized, state oil company, the gradual disintegration of this system. This is forcing the smaller private Spanish oil companies to establish partnerships with foreign consortia to secure their positions in their home market. Keywords:Oil industry; EC; Spain Spain's entry into the European Community in 1986 required it to adjust its legislation to the Community Law over a transitional period. By 1992 the trade barriers that currently protect the Spanish market must be removed to ensure free trade within the enlarged Community. This requirement meant that Spain had to dismantle its state oil monopoly, the Compafiia Arrendataria de Monopolio de Petr61eos Sociedad An6nima (CAMPSA), 1 and replace it with arrangements to allow both Spanish and foreign operators to engage in the competitive trading of oil products. 2 This has enormous implications for the Spanish oil industry. For the first time in their existence the Spanish oil companies will be confronted with competition in their home market. This competition promises to be very severe because of the great interest which foreign companies are taking in the Aad Correlj6 is a research assistant at the Tinbergen Institute and attached to the Center for International Energy Studies, Department of Economic Geography, Erasmus University, Rotterdam (EURICES), PO Box 1738, NL-3000 DR Rotterdam, The Netherlands. 0301-4215/90/080747-09 © 1990 Butterworth-Heinemann Ltd

Spanish market with its bright future prospects 3 and also because oil companies elsewhere in the EC are struggling with stagnant or even declining sales, excess productive capacity and a very dense distribution network, while Spain is relatively 'underpumped'. 3 Anticipating this future competition, the Spanish government has actively promoted and guided a major restructuring of the oil sector from the end of the 1970s onwards. It was perfectly clear that without such a deliberate strategy the Spanish oil sector would never be able to withstand the competition. The industry was relatively weak, lacked the necessary efficiency and had no experience with operations in a competitive market. The objective of this article is, first, to explain the problems with which the Spanish oil sector was confronted at the onset of the reorganization. Secondly, to analyse the strategy which was used to prepare the sector for future competition. And, thirdly, to indicate some general trends in the adaptation process. This will provide us with some clues about the future shape of the Spanish oil sector.

Structural problems In the 1960s, the rapid expansion of the Spanish economy induced a strong increase in oil consumption of 15.4% annually. 4 Spain became increasingly dependent on oil and because of the severe limitations on domestic production potential, Spain was forced to import almost all the crude required. By 1973 the share of imported crude in the total energy supply had reached 72.2% (OECD Europe 60.7%). 5 To protect the balance of payments, the government planned to offset the heavy costs of these imports by stimulating the export of refined oil products. 6 The development of export orientated production and internal demand required an expansion of the refining capacity. Spain was however dependent on 747

The Spanish oil sector

foreign technology and capital for such a strategy; without foreign participation, construction and operation of sufficient refining capacity were impossible. At the same time, the government wanted to keep foreign influence under control as far as possible. In order to resolve this dilemma, a somewhat ambiguous solution was chosen. On the one hand, the government allowed and even stimulated, foreign participation. On the other, it adopted over the years, a set of rules which increasingly regulated prices, investments, locations, production, the acquisition of crude and foreign participation. 7 The intensively regulated development of the oil industry in combination with the CAMPSA distribution monopoly, had several consequences for the development of the sector: •

•

•

•

The sector emerged in a very fragmented form because of the foundation of a variety of consortia, dependent on different public entities. This resulted in a lack of coordination and in very weak vertical and horizontal integration. Besides, the companies were too small to be able to take advantage of economies of scale. The intensive state regulation lead to the virtual absence of competition between the refineries. The CAMPSA monopoly meant the absence of competition in the trade and distribution of products. The subordination of the oil policy to other than strictly economic principles, such as regional development policy, resulted in decisions which, in general, did not contribute to economic efficiency.

These characteristics resulted in comparatively high operating costs and a rigid structure, but this did not represent a serious problem (until the oil crisis of 1973) given low international oil prices and an assumed continuing ready availability of crude. Hence, there was no apparent need for a reorganization of the industry. Thereafter, however, this structure was to hamper and delay the necessary adjustments to the radical changes in the international oil market.

The oil crises After the first oil price shock in 1973, the Spanish government did not immediately introduce structural measures to counter the effect of the rapidly rising prices. It counted on its good relations with the Arab countries to secure supplies and believed

748

Table 1. Prices of obtained crude and sold products. Year

Paid p ~ c e f o r crude

Internal price of fuel oil

1973 1974 1976 1978 1980 1981 1982 1983

100 304 412 532 1095 1 549 1 767 2 104

100 140 197 260 456 772 878 1 025

Source: C. Sudria, 'Un factor determinante: la energia', in J. Nadal, A. Carreras and C. Sudria, eds, La Economia Espaflola en el siglo X X : Una Perspectiva Historica, Editorial Ariel SA, Barcelona, Spain, 1987, p 349.

that the high prices would be only temporary. Thus, absorption of the price shock, by lowering taxes on products, was assumed to be the best protection of the economy (see Table 1). Consequently, the rising costs were only partly passed on to consumers and even these measures were taken very reluctantly. In addition, the crisis took place at a delicate moment in Spanish history because the dictatorship had reached its terminal stage. Waiting for the end of the Franco era, the government was more concerned with the political future of the country and not particularly energetic in policy-making in general. 8 Spanish industrial policy, for example, continued to stimulate the development of relatively energy intensive industries, such as aluminium and petrochemicals. 9 Illustrative of the view of the Spanish authorities was the announcement, in June 1974, of an ambitious plan for the expansion of Spanish refining capacity by 72% by 1980: the Plan de Ampliaci6n de Refinerias. This expansion was justified on the basis of assumed increase in internal consumption and in the export of refined products to Europe.I° Shortly thereafter, on 9 August 1974, the government announced, by decree, the merger of the three refineries in which the state had a controlling interest: REPESA, ENCASO and ENTASA. 11 This led to the establishment of the Empresa Nacional del Petr61eo (ENPETROL), the objectives of which were to secure economies of scale in operation and improved borrowing prospects in the capital market. Besides, the Spanish government intended that ENP E T R O L should secure its crude supplies through direct trade with the producing states. A coordinated state company was expected to have a better bargaining position in this respect. The first attempt to introduce a coordinated energy policy, was the first National Energy Plan in 1975. However, this plan appeared to be incorrectly based. It was far too optimistic about internal econo-

ENERGY POLICY October 1990

The Spanish oil sector Table 2. Development of prices and consumption after 1979. Year

Crude p~ce

Fuel oHp~ce

Consumption

1979 1980 1981 1982 1983

lOO 182 258 294 351

lOO 155 262 292 348

100 103 95 88 86

Source: C. Sudria, 'Un factor determinante: la energia', in J. Nadal, A. Carreras and C. Sudria,eds, La Econornia Espahola en el siglo XX: Una Perspectiva Historica, Editorial Ariel SA,

Barcelona, Spain, 1987, pp 349 and 358. mic growth, and overestimated the growth of internal and external energy consumption. 12 When the government came to realize this, the plan was cancelled and from 1976 until July 1979 Spain did without a coordinated energy policy. Moreover, authorities responsible for the use and production of energy were dispersed over different state agencies and departments, thus paralyzing effective decisionmaking. Over the period from 1973 to 1979 the economic situation in Spain worsened. Total primary energy requirements (TPER) rose from 0.57% to 0.64% of GDP whereas in OECD Europe the ratio fell from 0.70% to 0.66%. In 1979, net oil imports still accounted for about 67.2% of TPER, while in Europe they had been reduced to 46%. 13 Thus, while other countries introduced measures to restructure their energy sector, Spain made only limited efforts to stimulate conservation and a more rational use of energy which largely failed. Towards the end of the 1970s, Spanish energy policy gradually became more effective. The experience with the first oil crisis and a better coordination proved their value when the second oil shock took place in 1980. This time, internal prices followed the rising price of crude and induced a decrease in consumption (see Table 2). Moreover, two important developments gave the initial impetus to a more structural reorganization of the energy sector. In October 1977, the Spanish government and the leaders of the principal political parties had signed the 'Pacts of Moncloa'. These agreements established a general consensus on a framework for necessary economic and political change. Included in the agreements were provisions concerning the reorganization of the energy sector. 14 In the same period, a second important stimulus to the oil industry's reorganization was the official start of negotiations between Spain and the EC on Spanish membership of the Community. In July 1979, after frequent amendments and delays, the second National Energy Plan was pre-

ENERGY POLICY October 1990

sented. The new plan stressed the importance of diversification of supply and conservation in use in order to obtain a greater independence and the establishment of a price policy which reflected the actual price level of crude. Apart from the general objectives, the plan contained sectorial details. The plan indicated qualitative and quantitative imbalances in the structure of the oil sector. Exploration had failed to develop, while the refining and transport sector had a structural excess capacity. 15 Furthermore, the structure of the sector was too fragmented and lacked vertical integration. To ameliorate this the following proposals were made: • • •

•

• •

Reorganization of the public bodies. Development of a policy to ensure an efficient supply of crude oil. Establishment of an ex-refinery price based on minimum production costs in order to stimulate modernization and improve refinery efficiency. Adjustment of production to the demand for products and the stimulation of exports to cope with excess production. Reform and concentration of the Spanish tanker fleet. Modernization of the CAMPSA distribution system.16

Another important step towards rationalization was made on 18 December 1981, when all public participations in the oil sector were brought together in one holding company: the Instituto Nacional de Hidrocarburos (INH). 17 The most important tasks given to the INH were: •

•

•

•

Coordination of the activities of the public companies to improve their efficiency. Removal of excess capacity and reduction of production costs. Structural adjustments in anticipation of the f u t u r e d i s m a n t l e m e n t of the C A M P S A monopoly after the Spanish entrance in the EC. Stimulation of internal and external exploration activities in collaboration with foreign entities. Coordination of the investment and financing policy of the group. 18

Meanwhile, the changed circumstances arising from the second oil crisis, the prevailing stagnation of the economy, the changing composition of demand towards the lighter end of the barrel and the establishment of the INH had made adaptations to the

749

The Spanish oil sector

second National Energy Plan (PEN) necessary. Accordingly, shortly after the foundation of the INH, a revised version of the PEN was presented which contained some remarkable proposals. It argued that the liberalization of the production sector should be encouraged by reducing the state quota, 19 thus allowing the refineries more freedom to buy their crude. It was also suggested that the refineries should be allowed to engage in distribution and retail trade. 2° Only shortly thereafter, the preparations for the third National Energy Plan (PEN 83) started when the Partido Socialista Obrero Espafiol (PSOE) came to power in 1982. By this time, the basic problems of the transition to democracy were resolved and Spanish entry into the EC had become the main issue. This was strongly reflected in the PSOE programme which included a drastic strategy for industrial and financial restructuring. 21 The objectives of the PEN 83 were roughly the same as those of its predecessor - reduction of dependence, increased efficiency, and adjustment of supply and demand - although the new plan a d v o c a t e d a m o r e interventionist approach. 22

Dismantlement of the monopoly In early 1983, when the Spanish government and the EC were negotiating the dismantlement of the monopoly in Brussels, the Spanish oil sector was under guidance of the Ministry of Industry and Energy - evaluating ways of achieving a reorganization. At the end of June 1983, the government, CAMPSA and the Spanish refineries (see Table 3) reached an agreement, which became known as the Protocol. This protocol contained the outline of an operation which would transform CAMPSA in such a way as to protect the Spanish industry as much as possible from foreign competition. 23 The most important element of the plan was the transfer of CAMPSA shares to the Spanish refineries. The implication was that CAMPSA, previously a state monopoly owned by Spanish banks (46%) and the State (54%), would become a subsidiary of INH and the Spanish private refineries. In this way, it was hoped, the situation would be avoided whereby CAMPSA had to offer its distribution services to every interested foreign company, as would be the case arising from the required nondiscriminatory character of state monopolies in the E C . 24

Furthermore, the Spanish refineries agreed to sell their products destined for the national market to

750

Table 3. Spanish refineries 1989. Percentage share c

Company

Refinery

Capacity"

REPSOL

Cartagena La Corufia Puertollano Tarragona Bilbao

5 000 6 000 6 000 8 000 11 000

2 510 2 800 2 450 1 965

REPSOL CEPSA

Total Gibraltar Tenerife

36 000 8 000 6 500

9 725 2 209 660

65.94

CEPSA PETROMED ERTOIL ASESA

Total Castellon Huelva Tarragona

14 500 6 000 4 000 1 550~

2 869 750c -

17.86 9.16 7.03 -

PETRONOR a

Total

62 250

Conversionb

15.83

14 089

a Primary distillation capacity × 1000 t/y. b Conversion capacity in FCC equivalent x 1000 t/y. c Market share of the CAMPSA-supplied market. d REPSOL owns 89% of PETRONOR. e To be expanded to 1250 in early 1990. f ASESA produces bitumen only. Sources: J. Segrelles, 'Restructuring of the oil industry in Spain', in REPSOL-Harvard Seminar, Executive Session on Petroleum Policy, Proceedings of the seminar held in Toledo (Spain), 11-12 April, 1988, REPSOL 'Essay' collection, Madrid, Spain, 1988, p 105; Actualidad Economica, 1 January 1990, p 27.

CAMPSA, which would conclude longterm supply contracts with the service stations to ensure that they would sell CAMPSA products only. 25 This construction was intended to ensure that future foreign distributors were forced to set up their own distribution networks. The Spanish government was required, by Article 48 of the Treaty of Adhesion, to introduce legislation which would give independent operators the opportunity to establish service stations in a socalled parallel network. But, given the small volumes which could be imported freely during the transitional period, this would be very expensive. In fact, profitable operation of such stations would be impossible. Spain planned to replace the former legal monopoly by a de facto monopoly which, at least until the end of the transitional period, would protect the market share of the Spanish oil industry. Meanwhile, in order to be able to withstand future foreign competition, the industry had to be modernized and integrated. Following the entry of Spain into the EC in 1986, the strategy became even clearer. Article 48 of the Treaty of Adhesion includes only the general principles of the dismantlement of the monopoly and a global timetable for the required adjustments. The Spanish government applied a restricted interpretation of this article, and tried to delay the introduc-

ENERGY POLICY October 1990

The Spanish oil sector

tion of its new regulations, designed to govern retail and wholesale trade by independent operators. Disputes continually arose between Spain and the EC Commission which considered the Spanish proposals for new regulations as restraints on free trade. On 21 December 1987 the Commission warned the Spanish government that it might bring the matter before the European Court and issued a 'Reasoned Opinion' (ex Article 169) on some aspects of the retail regulations concerning the minimum distances between service stations. 26 Finally, in June 1988, Royal Decree 645/1988 was passed permitting foreign operators to engage in retail trade. A month later the EC Commission expressed its approval with the adjustments made. REPSOL

In 1985, the state holding company INH embarked on a profound reorganization. Its subsidiaries, the exploration company HISPANOIL, the refiner ENPETROL, the chemical firm ALCUDIA and the LPG distributor BUTANO were merged into an integrated divisional structure. In 1987, INH was renamed REPSOL. In December 1989 REPSOL took over PEMEX's 34% share in the Spanish refinery PETRONOR, in exchange for a 3% share in REPSOL by PEMEX which also won a five-year contract for crude supply. This transaction, which expanded the participation of REPSOL in PETRONOR to 89%, and in CAMPSA to 70%, implied an important increase of control by REPSOL over CAMPSA. REPSOL has thus already become Europe's seventh-largest and the world's 19th-largest oil company. The company refines more than half of the crude processed in Spain, distributes all LPG, and produces half of all petrochemical and oil products. The utilization rate of its refining capacity is about 93% and early in 1990 its up-grading capacity will reach 28%. In 1988 REPSOL exported 26% of its refined products, and 35% of its chemical products. Even though REPSOL has a strong position at home, it has to overcome several shortcomings. Until recently, the company had few crude reserves. It has crude reserves in Colombia, Indonesia, Dubai, Gabon, Egypt and small stakes in the North Sea but is now investing heavily in expanding its exploration activities. Its intention is to increase its own crude supply from 30% to 40% of its total crude requirement. 27 Another weakness of REPSOL is that it has, apart from its recent acquisition of the former British distribution company CARLESS (taken over by KELT in 1989) 28 and the distribution agreements

ENERGY POLICY October 1990

with AGIP and ELF, no downstream activities outside Spain. REPSOL seems to have the intention to expand its sales abroad as a response to its expected loss of market share at home from competition from foreign oil companies. In order to finance these investments, and in line with the government's strategy of partial privatization of public companies, the government offered 30% of REPSOL's shares to private investors - both Spanish and foreign - in May 1989. Further tranches may be offered later. CAMPSA

Since the conclusion of the Protocol in 1983 the hitherto dominant position of CAMPSA has changed significantly. Its initial role, as the sole operator of the Spanish distribution and retail network, has been eroded gradually since the Spanish refineries were allowed to engage in marketing activities themselves. This process of disintegration had already started in 1985, when the private refineries disagreed with the Department of Industry and Energy about their exclusion from retail operations. They distrusted the capability of the former state monopoly to operate in a competitive market and wanted to establish their own brands and images for commercial reasons. This conflict was resolved when, in 1985, the total number of service stations was split up and divided among the refineries (according to their market share) and CAMPSA. The position of CAMPSA was affected considerably by this loss of market power as consumers, instead of having access to products only through CAMPSA, were now ensured of a choice of several Spanish brands. 29 In 1986 CAMPSA announced its Plan Estrat6gico, which consisted of a massive expansion of its retail network in modern European style, with shops, restaurants and other secondary services, and an intensive programme to raise the efficiency of the distribution system. 3° This new corporate image was certainly a change compared to the simple, uniform and unattractive service stations of the former monopoly. A second attack on the position of CAMPSA was launched in June 1988, when the newly introduced retail-trade regulations meant that both foreign and Spanish companies were to be allowed to set up service stations in the parallel network. These stations are required to be supplied with products imported from the EC but, contrary to the intentions of the EC Commission, the Spanish oil companies as well as CAMPSA were given priority in the licensing of these new stations and obtained 50% of the

751

The Spanish oil sector

import quota. 3l Spanish refiners were thus given the opportunity to market products directly without having to work through CAMPSA. Until recently, the exclusive use of the CAMPSA system by Spanish companies was considered one of the most important strongholds against the foreigners. Nevertheless, in 1988, the company decided to provide access to its cross-country pipelines and distribution network to foreign companies, in exchange for the right of Spanish companies to use their networks abroad. Although this demand for reciprocity was the target of strong criticism from foreign entrants, CAMPSA has already signed contracts with MOBIL and BPMED and with AGIP which cooperates with REPSOL, and is negotiating with TEXACO and TOTAL. REPSOL is also negotiating with SHELL for the latter to service REPSOL's (ex-CARLESS) network in Great Britain, in return for SHELL's use of the CAMPSA system. 32 Presently, CAMPSA receives 3.3 ptas for every litre transported, 33 but in the future this price will have to be renegotiated. CAMPSA said that it considered the profitable exploitation of its transport system as compensation for the inevitable loss of its market share to the other companies. 34 Recently, the defined role of CAMPSA in the Spanish oil sector has once again been changed. With the support of the Department of Industry and Energy, REPSOL (owner of 70% of CAMPSA) and CEPSA (15%) have now decided that CAMPSA will continue merely as a transportation and distribution company, while its retail activities will be taken over by the refineries themselves, according to their shares in CAMPSA. This decision led to serious tensions with the other shareholders because ERTOIL (5.9%) and PETR O M E D (7.7%) preferred CAMPSA to maintain the operation of a retail network, primarily because of the cost of the compensation which they have to pay CAMPSA to offset the loss of its investment in retail outlets, but also because of the proposed redistribution of the service stations between the various companies. 35 In December 1989 yet another disagreement arose between REPSOL and the private refineries concerning the proposals for the future expansion of CAMPSA's cross-country pipelines. The expansion as proposed for product pipelines is seen as likely strongly to benefit REPSOL by providing it with the opportunity to supply its retain outlets all over Spain at much lower costs than the other refineries 36 (See Figure 1). These recent developments indicate that, with the

752

approach of the end of the transitional period, CAMPSA's function as protector of the Spanish market from foreign oil companies is coming to an end. From now on, foreign companies can enter the market if they are prepared to pay CAMPSA for its services and to fight REPSOL. REPSOL, however, is rapidly taking advantage of its controlling share in CAMPSA to strengthen its position on the Spanish market even more. The reciprocity concept, the expansion plans for the distribution network, and the separation of the retail and distribution operations are primarily benefiting REPSOL. The private refineries For the private refineries, of which only CEPSA has an integrated structure, the disintegration of the CAMPSA network has important implications. The proposed split-up of the monopoly network in 1985, the recent expansion in the parallel network and the eventual division of CAMPSA will force these refineries to develop their own retail outlets, or to look for other customers for their products. What is more, the 'take-over' of CAMPSA by REPSOL implies that they will have to compete not only with foreign, but with Spanish companies too. These developments have powerfully motivated the Spanish companies to cooperate with each other and with foreign companies. For example, for the exploitation of its outlets in the parallel network P E T R O M E D established a joint venture with BP (BPMED) and is negotiating a possible BP participation of between 8% and 15% in PETROMED. To date, despite its modern refinery, the position of P E T R O M E D has been weak. In 1988, for example, the utilization rate of its refining capacity was 55%. However, this year, new conversion capacity and new production capacity for unleaded gasoline will come onstream. 37 CEPSA, which operated at 74% of its refining capacity in 1988, sold 20% of its shares to the International Petroleum Investment Company of Abu Dhabi (IPIC) to finance the expansion of its chain of service stations in Spain and Europe, and obtained a crude supply contract. Currently, CEPSA is negotiating with TOTAL and the Portuguese P E T R O G A L , over the shared use of their respective distribution systems. In 1988 CEPSA exported over 30% of its production. 38 In July 1990 the French company ELF took an interest of 20.5% in CEPSA with an option of adding another 4.5% within a year. The position of the ERTOIL refinery in Huelva is unclear. In the past years speculation has frequently

ENERGY POLICY October 1990

The Spanish oil sector

Petronor

F R AN

C E

RepsolA .a Corufia

P

(3.

.o

"'c~

Leon

°oo0 IPalencia Valladolid

rragona

o•

SalamO~anca

\

Petromed•

d)

t'-

~"

Aim

O

O °••°°0••

o.

kPuertollano

Merida

Alicante

oil pipeline

Repsol

. . . . . .

Cartagena AC~

El Arahal

future oil pipeline

•

refineries

O

oil terminals and depots

CANARY ISLANDS Tenerife

S

Cepsa

Rota~A~--,-,. 0 I

200 I

krns

I

Igectra '

Cepsa


Figure 1. Oil refineries, terminals and pipelines in Spain. been made about the closure of this small and outdated refinery. Nonetheless, in early 1989 the owner ERCROS (which is financially controlled by the Kuwait Investment Office) announced that it intended to modernize the refinery, which in 1988 operated at only 67.5% of its capacity. Currently, ERTOIL is engaged in negotiations with the Nigerian NNPC, which already has a crude-supply contract with ERTOIL, the Venezuelan PdVS,A and S O M e from Iraq, over the transfer of 25% of its shares to one of these companies in exchange for crude and capital. Moreover, ERTOIL has planned to sell another part of its shares to a European oil company to finance its modernization and expansion activities. 39

Future developments Over the past ten years the Spanish oil sector has changed drastically. On the one hand, the Spanish government has introduced legislation which provides suppliers of oil products with direct access to the market, albeit with some continuing difficulties by early 1990, foreign companies had opened only ENERGY POLICY October 1990

seven service stations. On the other hand, the Spanish oil industry has been reorganizing its structure in anticipation of the pressure of foreign competition. By now, the adjustment of legislation to EC rules is nearly completed. In July 1990 the government price-fixing system for oil products has been deregulated, and finally in 1992, all restrictions on the import and trade of oil products have to be removed. However, this does not imply that the Commission will then consider the matter closed. In the first place, a close watch will be kept over Spanish interpretations of the recently introduced regulations. Secondly, the new structure still has to be considered in the light of `Articles 85 and 86 of the EC Treaty, which are concerned with concerted practices which may restrict competition and the abuse of a dominant market position. Thirdly, in May 1988 the Commission published a working document in which it identified obstacles to the completion of the internal energy market in Spain. 4° In this context, which is certainly more critical than `Article 48, it remains to be seen whether the Commission will accept the dominant position of REPSOL in CAMPS.A, C.AMPS,A's exclusive distribu753

The Spanish oil sector Table 4. Ownership structure of Spanish oil sector. Company

Owner(s) (%)

PETRONOR

PETROMED

REPSOL (89) savings banks (11) private (30) PEMEXb (2.7) State (67.3) IPIC (10) Banco Central (30.6) ELF (20.5) BANESTO

ERTOIL

ERCROS~

REPSOL CEPSA

Others

CAMPSA (%)a

Cooperation agreements

69.66

ELF-Aquitaine, AGIP (SHELL)c

14.64

(TOTAL) (PETROGAL)

7.51

BPa MOBIL

5.76 2.43

a Refinery participation in CAMPSA. b With an option on 5%, to be paid for in crude. ¢ Brackets indicate that negotiationswere still continuingby early 1990. d PETROMED and BP established a joint venture (BPMED) to market products in the parallel network and BP has an option on a participation in PETROMED (10-15%). e ERCROS is controlled by Torres-Hostench, of which 95% was recently acquired by the Kuwait Investment Office. tion rights for Spanish products and, in the shorter term, the slow development of foreign independents' outlets in the parallel network. A point which has to be stressed in considering the future of the Spanish oil industry is that it will not only face foreign competition after 1991, but also that the structure of its production capacity has to be adjusted to continuing evolution of oil demand. Despite a continuing absolute increase of consumption, the dependence on oil is slowly decreasing and energy efficiency is improving. Between 1980 and 1987 the share of oil fell from 69% to 53% of TPER, 41 with oil being replaced by coal, nuclear energy and natural gas. This is a process which is likely to continue, especially as a result of the ambitious plans for the use of gas. 42 In addition, the composition of oil demand is dramatically changing towards lighter products. In 1980, 14% of total demand was gasoline, 25% middle distillates and 50% was fuel oil. In 1987 the corresponding figures were 22%, 38% and 22%. 43 This trend is forcing the refineries to invest heavily in upgrading capacity. Overcapacity in the refining sector is still a problem. Spanish refineries, on average, operate at around 78-79% of their capacity, which, although higher than in previous years, is still below the minimum level consistent with the low-cost operation of refining plants according to the EC (80%). 44 The private refineries are operating well below this minimum. Nevertheless, in the light of investments already made and committed, none of the companies seems to be planning the closure of refining capacity. 754

After 1991, these developments, in combination with the necessary expansion of exploration and marketing activities, and a declining market share, will put heavy pressure on the Spanish oil industry and its financial strength. Moreover, the continuing disintegration of C A M P S A will force the private refiners to develop their own marketing activities. All the private refineries have established close ties with powerful foreign agglomerates: CEPSA with IPIC from Abu Dhabi and ELF, P E T R O M E D with BP, while E R T O I L is partly owned by KIO and is still looking for other partners. The Spanish refiners' needs for financial resources and crude provide an excellent means whereby foreign companies can increase their participation in the Spanish oil industry, and thus acquire access to the Spanish market more quickly and easily than would otherwise be the case. Other foreign companies will be moving in too. Very powerful companies, like SHELL, which has planned to establish around 400 outlets. T E X A C O and T O T A L are determined to increase their share of the Spanish market, either with the CAMPSA distribution network, as a result of the cooperation agreements, or if necessary without it. This will probably lead to intensive competition. It is highly likely, therefore, that the reorganization - especially in the private sector - has only just begun. On the other hand, the Spanish government seems to have achieved its initial objective of ensuring that competition from outside was faced with a strong Spanish industry. Over the current transitional period, the Spanish national oil company R E P S O L has, in particular, taken the opportunity to reinforce ENERGY POLICY October 1990

The Spanish oil sector

its structure so that foreign oil companies entering Spain will face stronger competition than they would have encountered only a few years ago and certainly much more than they anticipated. The author gratefully acknowledges the assistance of Professor P.R. Odell at EURICES and Drs O. Holman at the University of Amsterdam.

qn 1927 the Spanish dictator Primo de Rivera had established the state monopoly after the expropriation of the assests of foreign and Spanish oil companies. ZArticle 37 of the Treaty of Rome declares that 'Member states should adjust their commercial monopolies to the extent that all discrimination in trade between citizens of the Member states disappears'. This provision is reflected in Article 48 of the Treaty of Adhesion which states that, during a transitional period of six years, Spain has to open up its frontiers gradually to the import of oil products originating from the EC. In 1986, the first year, 4.25% of Spanish production should be allowed to be imported and traded freely. Every following year this contingent should be increased by 20%, and in 1991 trade should be liberalized completely. 3While the number of retail outlets has increased by 18% between 1970 and 1986, sales volume rose by 135% and the number of vehicles by 189%. Per million tons sold there are currently 380 points of sale in Spain, compared to an average of 926 in Europe. Source: J. Segrelles, 'Restructuring of the oil industry in Spain', in REPSOL-Harvard Seminar, Executive Session on Petroleum Policy, Proceedings of the seminar held in Toledo (Spain), 11-12 April 1988, REPSOL 'Essay' collection, Madrid, Spain, p 8. 4IEA, Energy Policies and Programmes of lEA Countries 19601973:1980 Review, OECD, ParAs, France, 1980. 50ECD Economic Surveys, Spain, OECD, Paris, France, April 1986, p 38. 6petroleum Press Service, October 1972, p 370. 7In 1963 the government took virtually total control over the oil sector by announcing the yearly publication of the national Combustibles Plan. This plan contained a planning of the sales, imports and production of oil products, and determined the contribution of each refinery to the total supply of oil products in Spain. The refineries had to offer their part to CAMPSA, which sold it to the consumers. CAMPSA paid an ex-refinery price which was fixed by the government. In addition, to protect the balance of payments, the refineries were obliged to purchase from the Spanish government a certain part of the crude they needed; the so-called 'government quota'. This crude originated from trade with other state oil companies, from barter and from the Spanish public exploration companies ENIEPSA and HISPANOIL. Until 1973 the quota had a value of about 40%; in the first part of the 1980s it increased to around 50%; from then on it fell. Source: N. Fernandez Questa, 'La liberalization del Sector Petrolero', Economia Industria, March/ April 1986, p 41. 8C. Sudria, 'Un factor determinante: la energia', in J. Nadal, A. Carreras and C. Sudria, eds, La Economia Espa~qola en el siglo XX: Una Perspectiva Historica, Editorial Ariel SA, Barcelona, Spain, 1987, p 349. 91bid. l°J.M. Matin Quemada, Polftica Petrolffera Espahola, Confederaci6n Espafiola de Cajas de Ahorros, Madrid, Spain, 1978, pp 104, 131. ~lThe main owner was the state-owned holding company INI

ENERGY POLICY October 1990

(71.7%). ERT, CHEVRON, TEXACO and several Spanish banks owned the remaining shares. Source: Quemada, op cit, Ref 10, p 106. 12J.M. Marin Quemada, 'Politica de Energia', in L. Gamir ed, Polltica Econrmica de Espaha, Alianza Editorial, Madrid, Spain, 1980, p 701. 130ECD Economic Surveys, Spain, OECD, Paris, France, April 1986, p 37. 14Los Pactos de Moncloa, 27 October 1977, ch IX a. 15The excess refining capacity was a result of strong expansion in the 1960s, aimed at the export of refined products. However, the anticipated growth in demand did not materialize because of the improvement of energy efficiency in Europe. This lead to a decline in the refinery utilization rate from 86.52% in 1973 to 63.15% in 1984. Source: J. Santamaria, 'El petrrleo en Espafia: del Monopolio a la libertad'. 16j.M M a i n Quemada, 'El Petr61eo en la Encrucijada de la Economia Espafiola', Papeles de Economia Espatiola, No 21, 1984, pp 246, 247. 171n fact, the integration of public participation in the oil sector had already been proposed in the middle of the 1970s. However, up to 1981, important interest groups involved with CAMPSA, such as Spanish banks and the Department of Finance, had strongly resisted the plan. In the period between 1975 and 1985, all foreign shareholders in the public oil companies had sold their shares to the Spanish government. tsC. Boada, 'El INH en la politica energ~tica Espafiola', Papeles de Economfa Espahola, No 15, 1985, p 153. t9See Ref 7. 2°Marin Quemada, op cit, Ref 16, p 247. 21A. Lopez-Claros, The Search for Efficiency in the Adjustment Process: Spain in the 1980s, IMF, Washington DC, USA, 1988, pp 6ft. 22Marin Quemada, op cit, Ref 16, p 268. 23El Pais, 9 July 1983, p 41. 24See Ref 2. 25Jornadas sobre el Sector de Hidrocarburos y su Distribucion, Uni6n General de Trabajadores (UGT), Madrid, Spain, 27 July 1983, unpublished conference paper. 26EC Commission, Seventeenth Report on Competition Policy, Brussels, Belgium, 1988, p 210. 27REPSOL, Informe Annual, Madrid, Spain, 1988. 2SEl lndependiente, 26 May 1989, p 19. 29Expansirn, 27 January 1988. 3°CAMPSA, Boletln Informativo, May 1987, p 6. 3~Only 15 of the 150 new stations awarded so far had gone to the independents. The EC Commission took action against these developments in November 1989 when Commissioner Sir Leon Brittan warned the Spanish government that, if this state of affairs continued, he would advise the Commission to reexamine the terms that permit CAMPSA the sole use of the monopoly network. Source: Financial Times, 28 November 1989. 32Actualidad Economica, 5 February 1990, p 22. 33E1 Pais, 18 December 1989. 34El Independiente, 26 May 1989, p 19. 35E1 Pa{s, 19 February 1990, p 57. 36Actualidad Economica, 1 January 1990, p 27. 37pETROMED, Informe Annual, 1988, p 22. 3SEI Pais, 27 March 1989; El Independiente, 26 May 1989; CEPSA, Informe Annual, 1988. 39El Pals, 22 January 1990, p 12. 4°European Community, Com (88) 238 final 2 May 1988. 41Segrelles, op cit, Ref 3, p 91. 42petroleum Economist, February 1988, p 48. 43Segrelles, op cit, Ref 3, p 93. 44European Community, Com(88) 491 final, p 5.

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