Compañia Española de Petróleos S.A. (Cepsa)

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Compañia Española de Petróleos S.A. (Cepsa)

Campo de las Naciones, Avenida del Partenón 12
28042 Madrid
Spain
Telephone: (91) 337-60-00
Fax: (91) 337-41-46
Web site: http://www.cepsa.es

Public Company
Incorporated: 1929
Employees: 9,708
Sales: EUR 11.6 billion ($10.4 billion) (2001)
Stock Exchanges: Mercado Continuo
Ticker Symbol: CEP
NAIC: 211111 Crude Petroleum and Natural Gas Extraction; 324110 Petroleum Refineries

Compañia Española de Petróleos S.A. (CEPSA) stands as Spain’s second largest integrated oil and gas concern just behind Repsol YPF S.A. The group’s core activity is refining—its three main refineries include Gibraltar, La Rabida, and Tenerife—and it is also involved in exploration and oil production, petrochemicals, as well as having its own service station network. CEPSA operates on a global scale and maintains a strong presence throughout Spain, Portugal, Panama, Morocco, Algeria, Columbia, Canada, Brazil, Italy, and the United Kingdom. TOTAL FINA ELF S.A. owns nearly 44 percent of the company.

Early History: Late 1920s

In 1927 the Spanish dictator Primo de Rivera issued a decree expropriating all foreign and domestic oil companies and placing them under the control of a state agency. Administration was entrusted to Compañia Arrendataria del Monopolio de Petróleos Sociedad Anónima (CAMPSA), which until the 1980s had sole rights to purchase oil from producers at state-controlled prices.

The Canary Islands and the Spanish Moroccan territories of Ceuta and Melilla were exempted from the decree, in part because they were already exempted from a number of customs regulations and had long served as important trade intermediaries between Spain and the rest of the world. The exemption also would provide a golden opportunity for CEPSA.

Spain’s lack of refineries posed a severe barrier to industrialization, but there was no domestic crude to refine. The few attempts at exploration had failed to find a commercial Spanish field. Spain was heavily dependent on imported foreign oil, supplied by Shell and other foreign multinationals at international prices. Political and economic problems made it difficult for the government to build a refinery.

These problems ensured that when the financier Francisco Recasens and a group of investors incorporated CEPSA in Madrid on September 26, 1929, the Spanish government did not oppose them. Recasens, whose brother was an adviser to CAMPSA, the newly organized state monopoly, convinced government officials that a private concern would have more freedom to acquire crude for Spain abroad.

Recasens had already acquired important concessions in Venezuela and Texas, previously owned by the American Falcon Oil Company. These were transferred to CEPSA. From these early days, the company maintained an international identity and special role. By this means, the company helped preserve its independence from CAMPSA.

By building a refinery in Tenerife, Canary Islands, CEPSA was officially outside the state monopoly, but in practice, it was dependent on a close relationship with the Spanish government. CEPSA could not sell oil in Spain to anyone other than the government. In effect, the government had a de facto veto over CEPSA’s sales to non-Spanish customers because it could simply extend its mainland monopoly to the Canaries. The company had more freedom, however, to trade abroad and to supply ships and international trade in Tenerife.

The Tenerife refinery opened as Spain’s first refinery in November 1930. It remained so until 1949 and supplied 50 percent of the country’s needs with an initial capacity of 5,000 barrels a day or 250 billion tons annually.

Surviving Political Unrest: Late 1930s–40s

The Canary Islands location may have helped secure the company’s future in another way. It was from this island base that General Francisco Franco, then their military commander, began his campaign against the Spanish Republic. In 1936 he flew from Tenerife to Spanish Morocco and raised an invasion force that attacked the mainland and started a bloody civil war that lasted until he finally triumphed over Republican forces in 1939.

During the civil war, the Canary Islands remained firmly in the Nationalist camp, and CEPSA’s refinery became an asset of significance to Franco’s Nationalist cause. Refinery production, denied to Madrid and out of bombing range of the Republic’s mostly Loyalist air force, helped earn foreign exchange and fuel Franco’s success.

The monopoly law prohibited CEPSA from exploration on the Spanish mainland and from 1936 the civil war made exploration practically impossible. CEPSA began to produce oil in Venezuela in 1930, however, and the country remained an important source for decades to come.

In 1939, Franco’s newly established dictatorship announced a policy of industrial self-sufficiency and independence from foreign control. During the civil war, support for the republic from the Soviet Union and international communist movement helped ensure that Spain’s small group of capitalists and industrialists lined up, sometimes reluctantly, behind Franco.

The Nationalists were not interested in free market solutions for a devastated economy with little industry and scarce domestic capital. By the time the civil war ended in September 1939, World War II had begun. There was little prospect of foreign investment.

The Franco dictatorship’s main pillars of support were not the capitalists, but the Catholic church, the traditional landowning classes, and the Falange, a political movement resembling the Italian Fascist Party. The chosen means of implementing self-sufficiency was nationalization of the main industrial sectors. State companies were placed under the direction of a state agency, the Instituto Nacional de Industria (INI).

CEPSA remained under ultimate state control as a privately owned Spanish company engaged in supplying petroleum to the state company CAMPSA, its price-setting major customer. During World War II, Franco maintained a state of nonbelligerency. Effectively, the Spanish government sympathized with its former German and Italian patrons while maintaining a diplomatic stance to stay out of the war. Spain was isolated. CEPSA, though privately owned, took its orders from the government but it retained its independence in order to acquire crude abroad.

Spain’s need for self-sufficiency inspired intensified exploration for oil by CAMPSA, which finally discovered a strike of limited value during the Tudanca survey of 1941. From 1942, CEPSA was allowed to explore on the mainland. A subsidiary, Compañia de Investigacion y Exploitaciones Petrolifera (CIEPSA), was formed as a separate exploration and production concern, but CEPSA was to be much more successful as a refinery and petrochemical concern than as an exploration and production company.

No important Spanish fields were discovered until state-controlled companies made important finds off the Mediterranean coast in the mid-1960s. In the 1990s, most of CEPSA’s Spanish production was concentrated in one of these areas, the Casablanca field.

With the end of World War II in 1945, Spain was in a difficult international position. Nazi Germany and Fascist Italy were defeated. A need to become friendlier with the United States and Britain—who were increasingly the opponents, rather than the allies, of the Soviet Union—and the desire for foreign investment capital led Franco to abandon strict self-sufficiency in favor of controlled foreign investment and private sector participation.

Liberalization Leading to Diversification: 1947–60s

In a 1947 decree, the Spanish government relaxed its oil monopoly. CAMPSA was left in control of marketing and distribution, but this new law enabled the government to authorize private and public companies to develop a wide range of activities: trade; industrial handling, especially refining; storage; research; and the exploration for and production of oil and gas fields. In practice, the government usually required foreign companies, such as Caltex and Esso, to work under joint participation schemes with CAMPSA.

The requirement that both private and public refineries sell to CAMPSA continued, and in 1957 it was extended to gasified petroleum products. After 1950 two new mainland refineries were built by small Spanish companies heavily reliant on foreign participation, and three new state refineries were built. CEPSA’s Spanish refining activities faced new competition.

One of CEPSA’s solutions was diversification, and the company used the 1947 law to look for foreign partners. CEPSA began to diversify into lubricants in 1950 and launched its own CEPSA brand name for industrial and motor oils, but these are sold, in large part, within the Iberian world. By 1989, 87 percent of its lubricants market was still within Spain and Portugal.

Company Perspectives:

CEPSA and its group of companies focus on a strategy aimed at developing and consolidating their businesses, with product and service quality being a top priority. CEPSA is firmly committed to ensuring the highest safety standards in all of its facilities and operations. Because the company strongly believes that prevention is a key component in protecting the environment, CEPSA has been channeling considerable resources towards the ongoing improvement of its environmental performance, complying at all times with Spanish and European Union standards and specifications. CEPSA always looks for the client’s satisfaction and for the welfare of society in general. At CEPSA, innovation and service are our reason for being.

Petrochemical production started in 1955 when the Tenerife refinery built an aromatics extraction plant utilizing the Udex process. The first of its kind in Europe, it involved the separation of high purity aromatics from mixtures with other hydrocarbons using an efficient multistage extraction column. During the 1950s and 1960s, CEPSA cooperated with multinationals in joint ventures to set up a number of derivative production plants. By 1989, CEPSA had signed agreements with the Japanese company Dainippon Ink and Chemicals (DIC) to expand its presence in European markets.

After a series of unsuccessful attempts, CEPSA finally secured government authorization to build a second refinery on the Spanish mainland at Cadiz in 1964. The plant opened in 1969 as the Gibraltar refinery and became the stimulus for one of the largest new industrial complexes in Spain.

In 1964, CEPSA Compania Portugesa, a new subsidiary, began to sell petroleum and petrochemical products in Portugal. It also operated an extensive service station network. In 1975, CEPSA established its own research center at San Fernando de Henares. Even so, CEPSA’s share of the Spanish market for most petroleum products remained small in relation to the state-owned companies, including CAMPSA, controlled by the state through the Instituto Nacional de Hidrocarburos (INH).

Changes in the 1980s

In 1987, most state monopoly interests were reorganized into the Spanish multinational Repsol which, in 1989, was partially privatized. Throughout the 1980s, government policy increasingly favored the growth of Repsol as a major Spanish institution, capable of keeping the Spanish oil industry in Spanish hands, rather than opening up the market to smaller private companies.

This policy brought increased criticism from the European Community, which required Spain, as a condition of membership, to restrict the monopoly role of CAMPSA and Repsol. In June 1983 CEPSA, the government, CAMPSA, and other private refineries reached an agreement known as the Protocol, which attempted to protect the domestic oil industry without a formal monopoly.

CAMPSA shares were split among the refineries, with the Spanish government holding the majority of the shares, but the refineries agreed to sell products destined for the domestic market to CAMPSA. Refineries soon began to ignore the Protocol, however.

Under pressure from the European Community (EC) commission, Spain agreed to change a restrictive law by halving the distance required between service stations and making it easier for independents to use CAMPSA’s distribution network. In 1989, Repsol, by then holding the Spanish government’s majority shares, CEPSA, and other minority shareholders in CAMPSA decided that CAMPSA’s service stations and some other retail assets would be divided among them by mid-1991. CAMPSA would continue as a distribution and transportation company, under Repsol’s control. This process was completed in 1992—Repsol gained slightly more than a 66 percent interest while CEPSA acquired nearly 25 percent of CAMPSA’s assets.

CEPSA, as a relatively small company, was unable to fully exploit its excellent position within a liberalized market in which most analysts expected to see rapid growth during the 1990s. CEPSA’s investment potential, however, attracted the attention of several large foreign investors. In May 1988, the Abu Dhabi Investment Corporation acquired 10 percent of CEPSA.

In November of that year, the company announced a one-for-five rights issue. In a complex series of transactions, the French multinational Elf Aquitaine—now known as TOTAL FINA ELF—acquired 20 percent of the company’s equity and later acquired additional stock through a deal with another major shareholder, the Banco Central. CEPSA went public on the Spanish Continuous Market on September 18, 1989. The company’s stock could be purchased or sold by any authorized trader anywhere in Spain by means of a computerized communications network with a single quote given at the end of each session.

By 1989, CEPSA was less active in exploration but held domestic mining rights over 5,000 square kilometers in exploration permits in Spanish territory and 1,385 kilometers outside Spain. Production came mainly from the Casablanca field, in which it had a 7.4 percent interest in exploitation rights. CEPSA entered into a natural gas exploration agreement with the Algerian government.

During the late 1980s, the two modernized CEPSA refineries processed about 20 percent of the petroleum refined in Spain, but the Tenerife refinery produced mainly for the local market and ships passing through its ports. CEPSA restructured its commercial division and reinforced its distribution network. It also expanded its network of service stations in Spain and bought a distribution network in the north of France.

The influence of Elf, which owned 25 percent of CEPSA’s equity in the late 1980s, was growing and it was rumored that the company would eventually fall under Elf’s direct control. Regardless of this possibility, the unique environment in which CEPSA operated as the most important and diversified private Spanish oil company was changed forever by Spain’s entry into the EC, the dismantling of the state monopoly, the emergence of Repsol, and competition.

Key Dates:

1929:: Financier Francisco Recasens and a group of investors establish CEPSA.
1930:: The Tenerife refinery opens as Spain’s first refinery.
1950:: CEPSA diversifies into lubricants.
1955:: The company begins petrochemical production.
1969:: The Gibraltar refinery is established.
1990:: Elf Aquitaine acquires an interest in CEPSA.
1992:: The firm acquires 25 percent of CAMPSA’s commercial assets.
1998:: CEPSA enters the butane cylinder market.
2002:: The company begins exploration at the Ourhoud field in Algeria.

Creating a Diversified Company: 1990s and Beyond

As certain facets of the Spanish oil and gas sectors were liberalized during the 1990s, CEPSA’s operating environment became increasingly challenging. As such, the company made several key moves during the 1990s to position itself as a diversified oil and gas concern. During 1994, it made an important discovery of crude oil at the Ourhoud field in Algeria, the country’s second largest field. By the late 1990s, the company was heavily focused on its exploration and production business, mainly due to Ourhoud’s promising reserves and those of the RKF field, which had been discovered in 1992. By 2003, Ourhoud was at full capacity, producing 230,000 barrels per day.

During this time, CEPSA also was focused on strengthening its presence in the petrochemicals industry. The company acquired petrochemicals firm ERTISA in 1994. The following year, the firm opened its first North American plant in Canada, where it began petrochemical-related operations. In 1999, CEPSA acquired a 72 percent interest in Brazil-based Deten, a manufacturer of raw materials used to make detergents.

In September 1998, Spain passed a new hydrocarbons law that enabled CEPSA to enter the liquefied petroleum gas (LPG) market over which Repsol had monopolistic control. In December of that year, the firm introduced new butane cylinders made of stainless steel and, in just one week, landed more than 200 contracts in southern Spain. By 2000, the company was distributing butane cylinders through its network of service stations. The company also made additional diversification efforts that year when it began importing liquefied natural gas from Algeria.

CEPSA entered the new millennium on solid ground despite a challenging economy and falling refining margins. During 2001, seven million barrels of oil were extracted from the firm’s RKF field, the firm processed 20 million tons of crude oil, and it sold more than 25 million tons of oil and chemical products. In 2002, crude oil prices continued to rise while refining margins fell by 43 percent over the previous year to one of the lowest levels in nearly 12 years. Nevertheless, CEPSA posted a net income of EUR 460.9 million, a 6 percent rise over 2001 results.

Company management remained optimistic about CEPSA’s future and focused on expanding its retail operations into Portugal, increasing butane sales to residential customers, and developing new products and services. The firm also eyed strengthening its petrochemical operations and gaining a significant foothold in the natural gas market as key to future success. Although CEPSA’s operating environment had indeed changed dramatically over the past 20 years, the diversified company appeared to be well positioned to take on any new challenges that would cross its path in the years to come.

Principal Subsidiaries

Deten Química S.A. (Brazil); CEPSA International B.V. (Holland); CEPSA Italia SpA; CEPSA UK Ltd.; ETERSA Great Britain Ltd.; ETERSA Netherland B.V.; ETERSA S.A.; IN-TERQUISA Canada; Intercontinental Química, S.A.; Petresa Canada Inc.; Petresa Internacional N.V. (Belgium); PetroQuímica Española, S.A.; Plastificantes de Lutxana, S.A.; Asfaltos Españoles, S.A.; CEPSA Card, S.A.; CEPSA Elf Gas, S.A.; CEPSA Estaciones de Servicio, S.A.; CEPSA Lubricantes, S.A.; CEPSA Maghreb (Morocco); CEPSA Panama S.A.; CEPSA Portuguesa Petróleos, S.A.; Compañía Logística de Hidrocarburos C.L.H., S.A.; Compañía de Investigación y Explotaciones Petrolíferas, S.A.; Lubricantes del sur, S.A.; Productos Asfálticos, S.A.; Refinería Gibraltar; Refinería La Rábida; Refinería de Santa Cruz de Tenerife; Societat Catalana de Petrólis, S.A.