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Interview

Demetrio Carceller Arce – President, Disa Group, Spain

Demetrio Carceller Arce, president of Disa Group, sees the future growth of Disa stemming from both upstream and downstream operations, as well as renewables. He discusses the importance of location in the downstream business, the advantages of vertical integration in the energy sector, and the complexity of the downstream business in the fragmented Spanish market. Finally, he calls for further connections between the Spanish energy sector and European Markets.

Disa Group stands as the largest company operating in the Canary Islands. The company has a well-diversified portfolio of assets, some of which are outside the energy sector. How relevant is the oil and gas sector to your operations?

“Between 1996 and 2017, Disa Group has managed to multiply tenfold in its operations. This phenomenal revenue increase has given us a chance to look at other countries and different activities throughout the value chain.”

Disa is a Canary-based energy distributor with annual revenues of USD three billion for 2016. It has 540 points of sale on both the Canary Islands and the Spanish peninsula. 70 percent of the company’s assets are oil and gas related, the remaining 30 percent are mostly accounted for by food and beverage. This uncommon combination is the result of the fund reinvestment strategy pursued by Disa over the last 80 years. Indeed, interesting investments within the oil and gas sector were not always available. Over the years, Disa opportunistically diversified into various sectors such as construction, food, beverages and banking industries. Until 2004 and the acquisition of Shell’s distribution assets in Spain, Disa’s operations were mainly focused on the Canary Islands. This operation allowed the group to have a nice platform to build its downstream business in the mainland. Since 2004, our investments have been concentrated in the Spanish peninsula; more specifically in the oil and gas sector. Between 1996 and 2017, Disa Group has managed to multiply tenfold in its operations. This phenomenal revenue increase has given us a chance to look at other countries and different activities throughout the value chain. In our case we could either go upstream, downstream or increase our renewable energy sector.

Competition in the Iberian Peninsula has intensified and some claim that those who will survive will be the ones who own a refinery, such as Repsol, Cepsa and BP. How do you operate on the mainland and what are the main challenges today?

We are living proof that it is possible to be competitive downstream without a refinery! The supply of oil and oil products is such in the world today, that having stations in good locations and the knowledge to acquire the product suffices to be competitive. However, vertical integration can protect a company from global macroeconomic shocks in the industry, ranging from barrel prices to refinery margins. Since Disa Group does not own any refineries, our operations can be affected if margins shift from downstream to upstream. If Disa had refineries, it could absorb this margin shift into its value chain and keep selling oil at a competitive price. When this happens Disa looks at other sourcing options. It must be stressed that high refining margins are something extremely rare in the history of oil business.

We have seen new competition arise in the market recently with several independent operators grasping market share. What role do you see for independents?

Independent players can become a force in the market, especially in Spain where the market is composed of many regions with independent regulation policies. Nonetheless, they still need to improve their presence outside of regional markets. In fact, the regulations specific to each region of Spain could cause harm to the market as a whole, and not just as regional independents. I overall believe that such regional regulatory mechanisms create unnecessary stress and noise, with different prices and different places just because of taxes and regulations. Overall, I believe that the growth of business in downstream very much depends on the locations you own. Since few good locations are still available to build new industry, Disa’s growth strategy is based on selective acquisitions of individual stations in different places.

José Llorca Ortega, President of Puertos del Estado, mentioned during our interview the potential for the Canary Islands to act as a hub to Africa in various fields. What is your standpoint on this matter and from a Disa perspective, how do you see the market evolving within the Canary Islands?

With regards to its location, the Canary Islands can become a hub of choice for any industry with African operations – without a doubt. In terms of oil and gas, there is also a streamline of opportunities provided exploiting companies find agreements with local populations. Indeed, Morocco Oil’s recent discovery has shaken up the islanders concerned about the tourism economy. As for myself, I think that the cohabitation of the two sectors is possible, provided that drilling is done right and that security and the environment are made a priority. Many touristic seaside resorts have oil platforms close to their beaches and it has not affected the tourist economy. In terms of oil supply, Moroccan offshore exploitations are likely to account for a growing portion of the oil available on the island.

Which value chain diversifications do you intend to pursue?

Upstream is too capital intensive for a company like Disa, but downstream could be an opportunity. We have the logistics to carry oil from the Canary Islands over to the Spanish Peninsula, or to Africa. Whatever our decision, our investments will be funded solely with the cash we generate.

What do you see driving growth in the next three to five years?

Regardless of energy sources used, people and industries are going to need an increasing amount of energy. In fact, it is only a matter of time before the existing electricity supply capacities are overdriven by demand. It is important that Disa Group continues building capacities in hydrocarbons despite subsidies for renewables and the expected increase in competition in the sector. Eventually, I am confident that renewable energies will become growth drivers. A few years ago, these technologies needed subsidies to be competitive against existing pipelines. Now, if subsidies were to disappear, renewables such as wind and solar energy could compete with fossil fuels in an open market situation. In the case of the Canary Islands, where electricity is mainly produced from oil, regardless of subsidies, and the fact that renewables are not as competitive as they could be, I think generating electricity from renewables would be a good business. Actually, we have 15Mwatt capability at the moment and we intend to increase this in the years to come.

CLH, at the same time a competitor and one of the firms your family holds shares in, plans to enter retail and downstream segments in multiple European countries. Is this something you are planning to do with Disa?

Disa Group still has a lot of opportunities to explore in the peninsula but eventually we might consider this road of expansion. If such a decision is made, we have many challenges to overcome. Firstly, European markets are unique, in other words, it is next to impossible to replicate retail strategy in the region from one country to another. If we wanted to expand we would need local knowledge. For example, Mercadona, a supermarket chain, has run very successful operations in Spain and has been struggling for the last six years to achieve similar success in other European markets. Secondly, I see only a few downstream industries in Europe as profitable as the one on the peninsula. Such a move would require an opportunity big enough to grow, but not so big as to jeopardise the financial situation of the group. Last, entering these segments requires tremendous financial investments and political influence investments that only large players can afford or wield. With USD 3 billion annual revenues, Disa remains a relatively small player.

Over the years, Disa Group has acquired stakes in multiple corporations of the energy sector at large. Certain people might think this is a risky strategy, could you tell us why this decision was made at first?

Disa Group has been investing this way since 1936. This strategy is safe, provided you know about the industry and want to grow there. In our case, electricity generation and distribution is related to our core business. Strictly speaking, our company understands the risks and rewards associated with investing in the sector. Therefore, and despite our relatively small size, we are in a position to manage the investment strategy in huge companies such as Repsol. Of course, part of the decision is based on the managers in place and our trust in the people, but again, this knowledge is derived from being a player in the energy sector. Moreover, we have been using these stakes as the basis of agreements to establish business ventures outside of our home markets.

What changes in the electricity sector have you noticed in the last five years?

The first term of José Maria Aznar [Spain’s prime minister from 1996 to 2004] marked a change in model. The model specified internal rate of return to companies based on asset valuation to promote competition in the industry. Rather than a competition model it was an execution model. The pool was supposed to set the price of the k/watt. Unfortunately, the model was jeopardized by its complexity. Indeed, on top of setting k/watt prices, the model covered nuclear energy generation, taxes and interests. On the other hand, José Luis Rodríguez Zapatero’s [Spain’s prime minister from 2004 to 2011] initiative to subsidize renewables was smart but went too far. Indeed, the size of the subsidised energy production created unnecessary havoc in pricing. This led to many natural gas producers claiming the system was inefficient. I agree with the fact that this system needs to be reformed. Indeed, it does not reward good investments nor does it paralyze bad ones.

As a shareholder in Repsol, what is your view on their international expansion?

I am positive, Chairman Antonio Brufau’s decision to acquire Talisman was a great move. This vertical integration acquisition rebalanced Repsol’s operations towards upstream activities making it a stronger company. Indeed, this structure helps Repsol guard itself from price variations. While certain people have criticized the amount that was paid for the acquisition, I was convinced that this would have no impact five years down the line, provided that Repsol managed Talisman’s integration.

It turned out, Josu Jon Imaz (CEO of Repsol) did a great job which resulted in Repsol being a much stronger company today. What matters most is the creation of synergies, knowledge transfer and the opportunity building.

Just how important do you consider proprietorship of strategic assets?

The proprietorship of strategic assets is irrelevant. Strategic assets are nowhere near as important as guaranteed supply. European governments should be concerned about strategic supply so that energy is available to all Europeans at the cheapest price possible, regardless of which company it belongs to. Eventually, governments should also be in a position to influence the system if supply is disrupted and regulate its distribution. Nonetheless, I do see a point in the importance that energy companies rather than investment funds, own the strategic assets. Indeed, the financial motives of the investment funds conflicts with the necessary entrepreneurial approach and investment required for energy distribution.

What can you tell our readers about Disa’s position and the role it wants to play in the pan-European energy sector?

Despite our relatively small size, we still play an important role because we are better connected to the public than certain large corporations. I think it is important to maintain the independence of small businesses within the herd.

On the role of Spain in Europe, with regards to its locational advantages, the country could be a gas hub and the “southern port” for everything in the region if it were properly connected to the European energy markets. For this reason, I am expecting our government to dialogue with other European governments to improve the connection between countries in the energy sector. Moreover, this could decrease Europe’s relative dependence on Russia energy.

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