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Interview

Luis Aires – Chairman, BP Spain

08.08.2017 / Energyboardroom

Luis Aires, Chairman of BP Spain discusses the merits of operating in a bi-national environment, the importance of having the strongest offer and how the petroleum industry is reacting to the economic downturn.

BP has been operating in this market since the 1950s. You are today the only foreign petroleum heavyweight to have a presence in the Iberian Peninsula and notably enjoy a large market share in natural gas. Could you please start by detailing your assets and BP’s footprint in Spain?

“Particularly in Europe, there is an excess in refining capacity so the target is to achieve a higher value from every barrel. You can always utilise your refinery better and achieve slightly better results.”

When trying to understand our presence, it is very important to delve into our history. BP entered the Spanish market in 1954 via a purchase of a company called Arco, which already had 22 years of experience in the Spanish market. From 1929 to 1991, Spain was a monopoly in the distribution of petroleum products. However, governments repeatedly lacked the knowledge to invest in refineries so they invited international companies to operate and invest both on their behalf and in numerous joint-investment projects. Refineries also received investment in an organised way. For instance, one refinery would supply Madrid, and so forth. So effectively, if you look at a map of Spain all the refineries are located close to areas of medium to high population (typically Madrid or on the coast).

In those days, to enter the oil and gas industry you had to be a refinery investor or a marketer of products that existed outside the monopoly. BP started by selling products in areas that were not involved with the monopoly, hence we targeted the big ports with international opportunities and the Canary Islands. We supplied fuel for airplanes in addition to lubricants. In 1991, Spain sought to enter the European Community and upon doing so couldn’t continue to operate with this monopoly. This was a crucial period as BP decided to invest a lot of money into Spanish projects. BP subsequently bought Petromed – a firm with good quality refinery to exploit. We initially started working with the company on a joint project two years before, and this helped give BP a huge insight into the local market not just a general view of Spain. In buying the shares of Petromed, BP also received a percentage on retail stations and the logistical services. The government sold the monopoly to various refineries based on market share. So in one acquisition, BP entered the market, inherited a great refinery, gained 9% of the shares in CLH (the major logistics player in Spain at the time) and a huge number of retail stations. In 1996, we had a joint venture with Mobil where we joined fuel assets and lubricant assets. It was the initiation of all the mergers and joint ventures in the 1990s. After unsuccessful merger talks, BP and Mobil went separate ways and BP bought Arco, Amoco, Viva, and Aral. With Mobil themselves being acquired, BP bought the entire infrastructure used for the joint venture as well as other prosperous sites in Southern Spain previously belonging to Mobil as part of the JV dissolution. Therefore, the major investment in 1991 and joint venture with Mobil and its effects were the two biggest moments in BP’s association with the Spanish market.

When discussing our footprint today, I need to talk about our Castellon refinery; currently viewed as BP’s best facility. I believe the reason for this honour lies in the culture added to the facility after the joint venture period with Mobil. There is a huge determination to excel in three areas; operational excellence, safety, and ownership of the asset. BP has consistently invested resources in the Castellon facility for 25 years and we are currently investing in a new vacuum destillation unit (VDU) which we are looking to commission next year. We are also investing in new coke barn in the port of Castellon; an area that has already seen huge recent investment. We invested a lot of resources in the movement of products in and out of the refinery as well as a general EUR 400 million (USD 448 million) investment to upgrade the refinery to its current standards. Before that, we invested in hydrotreaters in order to produce 50 ppm gasoline.

Our strategic investments usually are upgrades so we are consistently operating in the best possible conditions. Particularly in Europe, there is an excess in refining capacity so the target is to achieve a higher value from every barrel. You can always utilise your refinery better and achieve slightly better results.

Many have cited recent EU environmental legislation as a contributory factor in the European refining industry becoming uncompetitive. Are these efficiencies proving successful enough to continuously invest heavily and buck the trend?

As a group, our refining strategy is very clear. We have already compiled our portfolio and sold refineries we believe to be uncompetitive in the areas we are looking to achieve specific results. For example, we no longer have refineries in the UK or France, and we have sold further refineries in Australia and the US. We have decided to focus on those facilities that we believe we can develop into state of the art refineries. In certain cases, you need investment due to the refinery’s complexity or the idea of commercial flexibility and reducing costs. This obviously places you in a strong position because when good margins exist you can exploit those opportunities but equally when conditions are not so favourable your costs are low. This also enables you to survive when other companies are forced to redistribute assets. This is BP’s target.

In marketing, we sold our shares in CLH in 2016 during a period in which many petroleum companies were also selling shares in other companies. Because interest rates are so low, money has become increasingly available to spend on strategic investments. Those funds ideally are spent on logistical infrastructure that will deliver a positive return in the future. One thing that BP has been doing logistically is to look at our portfolio of assets very carefully and determine if each one is providing the company with differentiated value. Then, we decide if ownership provides access to the asset and the ability to move products through the asset in an efficient way where an organisation may pay more than its current value. If this is the case, the asset will be brought to the market’s attention.

Could you please detail your retail footprint?

Retail is our main growth engine and our strategy is to grow our marketing presence through differentiation. We achieve this by having good quality products. For example, all the products that we are selling in our retail stations have our own technology.

The Spanish market is a great market for BP. Given our level of integration here, Spain serves as the perfect platform to try new products and new ideas. The Spanish market has experienced quite a unique scenario with the recent economic crisis: demand shrunk considerably but yet several new players joined the market. We had to differentiate effectively to deal with this new situation. We always believed the market was big enough to survive with different offers. Some consumers want the lowest possible price and obviously we were not competing in that arena. The alternative is to provide better products. For example, with our diesel you can drive up to 56km more than the standard product. It is the same story with gasoline as our product runs 44km further than the standard product. In a period where the market has gone through a deep recession in which we only started to see improvements in 2013, we also noticed that market demands had changed. The consumer was more focused on quality so we launched a lot of new products. BP Ultimate, our main product, had a year on year growth rate 20% higher than before. When consumers have more confidence in the future, they tend to buy better quality. We want to continue to differentiate in other elements of our business. For instance, the differentiation in customer service. Here, we are looking to add employees to various sites to aid our customers. Equally, we were the first petroleum company to launch a loyalty programme. Special offers and discounts are now available to our customers; something that is very new to the industry.

What is BP’s attitudes towards partnerships?

Part of our differentiation strategy is to form partnerships. We have successful partnerships elsewhere in Europe. For example, one of our most successful one is with Marks and Spencer in the UK. However, we do not have the right partners lined up in Spain yet. We started piloting with Carrefour but because the venture was so successful the supermarket chain decided to go ahead with a bigger competitor. We do have a successful partnership with a local firm in the Canary Islands (Hiperdino), and this is something we want to add to our mainland Spain portfolio in the coming years. We currently have 646 retail stores and our target over the next five years is to have 1000. We are currently growing so this should be achievable.

Looking forward, what are your immediate goals?

To achieve that level of growth, we need to have a strong offer. We have to make sure our offer has enough elements of differentiation because a competitor will offer more conditions, if we are not able to. If we have a good offer, that will be a competitive advantage when approaching and acquiring new sites. Until you have that competitive advantage, it is difficult to grow. In between the remainder of 2017 and next year, we will have a fully differentiated offer for the Spanish market. This should allow for the growth in the number of sites over the next three years.

When we return in five years’ time what will BP have achieved in Spain?

We will still be the third biggest player in the Spanish market as the top two are much bigger. However, we will have a very strong offer, our footprint will have grown and we will have around 10% market share. We will continue to invest in the Castellon refinery because you always need to make your refineries more and more competitive. We also have a strong jet business in terms of supplying various airports, a stable lubricants business through Castrol as well as our gas and power interests. I think in five years’ time, the gas and power aspect of the business will also have grown. In the next five years, I do not believe many more changes will occur. In 20 years’ time, I can foresee major differences.

On a personal level, how have your extensive experiences of working abroad helped you to manage in Spain, and how would you qualify the reputation of Spaniards in the oil and gas sector?

I think the personal development that you get from working outside your home country is very significant. Five years working abroad probably elates to ten years of work related experience in your home country. You tend to have a better understanding of the sector and you are probably less defensive. It is natural to compare the working conditions in your home country and that of another when you have the experience of both. In other markets, I have seen these experiences lead to new strategies that ultimately deliver a higher value. When you work abroad, you often see opportunities to liaise with other markets to further develop your offer. You are often exposed to technology and processes that you do not have back home.

I do not think the reputation of Spaniards is that different to that of other nationalities. In terms of employment, companies are looking for professionals who could be potential leaders. Nationalities are becoming increasingly less important. Whilst I believe Spaniards in this sector to be hard workers, I have met lots of hard working people from many different countries. Spaniards tend to have a strong sense of ownership and belonging to a company. Perhaps other nationalities move from one company to another more but if I look across my team, I am working with Turkish nationals, French, Belgians and Germans. BP is a global company and we are happy to work with all different nationalities.

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