Pedro Miro – Vice Chairman and CEO, Cepsa, Spain
The president of perhaps the world’s most innovative chemical petroleum outfit gives great insight into his firm’s diversification, current difficulties in the European market and where he believes future opportunities will quickly arise in forthcoming years. Pedro Miro concludes the interview with the five words that will best characterize the future of Cepsa: Safety, Oil, Chemicals, Integration and Efficiency.
You have set a goal of doubling the value of Cepsa within a five-year period leading up to 2020, through intensive investment in both E&P and petrochemicals. As you approach the midway stage, how are you progressing with this objective?
“Our integrated model therefore provides us with a diverse spread of risk, but we would nevertheless like to re-balance our model, putting more emphasis on upstream as well as the chemical aspects of our business.”
We are progressing very well. We are not yet at the end of this strategic plan and have had to react to dramatic changes in a variety of sectors only a couple of years ago, but generally we are advancing very well. We are currently revising our planning and asking ourselves the question if we are going to double our value. That being said, the most important is that we are growing and this growth is being achieved whilst maintaining a sensible and healthy financial position.
One of our key strengths is our integrated model, which we have no current desire to abandon. It is extremely difficult to have all the business units meeting and surpassing expectations in a cyclical business. However, it is equally very difficult for all business units to perform badly at the same time. Our integrated model therefore provides us with a diverse spread of risk, but we would nevertheless like to re-balance our model, putting more emphasis on upstream as well as the chemical aspects of our business.
We have several core values that run through the company. One of the core ones is that we want to have a globally profitable company. Therefore, if one part of the business is not performing so well, it will receive assistance using other Cepsa resources. However, it must be outlined that a business unit cannot be kept running for years in a row if the situation is not practical. It is no secret that, during this latest two-year period, certain aspects of the company have suffered considerably. The dramatic fall in commodity prices has led to aspects of the business operating on a survival mode. As a result, we have had to rationalise our organisation with painful outcomes. At the same time, the situation over the last two years has forced us to transfer resources and business experiences from one area to another.
Throughout Europe, we have witnessed a general retreat from refining in the wake of a stiffening of EU environmental regulation which is said to add as much as USD 2/barrel to the cost, which is not in alignment with the rest of the world. Yet you seem to still see refining as a priority with your Gibraltar San Roque and Tenerife facilities. Why?
First I would like to say that the refining business had been suffering for a while and the decisions we made in previous years have also been applied to other areas of our business. We always evaluate the impact of market changes and have a clear direction in which we are looking to move forward.
Now looking at the refining aspect of our business, the majority of the associated factors are external and the one and only internal factor we can control is cost. At the end of the day, our profit margin is determined by both price and cost. Cost is a factor we can manage effectively by having a better tendering process, a superior procurement structure, a more reliable and efficient operation and global optimization, etc. Through our own rationalisation, we have thus created an increasingly leaner structure. In essence, we have managed to stretch our resources further.
I am convinced that the refining industry will be very important in the forthcoming decades. It is possible that the final products and their relative supply chains may change but I cannot see how a huge variety of industries will survive without the refinery sector. Given the need, those with efficient refineries will be best placed to meet that demand. Therefore, our target is to consistently develop and improve the efficiency of our assets. If you look at integration with the chemical sector, on average the European refining industry is responsible for 50-55% of all integrations (in our case, that figure is closer to 70%). The significance of this is we are always trying to obtain the highest added value for each of the molecules that we refine.
In November last year, Sonatrach and Cepsa signed an agreement to extend partnership contracts for two large oil plays – the Rhourde El Krouf (RKF) and Ourhoud oil fields – which will now be extended by 25 years and 10 years respectively. How strategically important is this deal and how does it align with your growth objectives?
This is an extremely important achievement for us. Algeria was where we started our upstream activities and we consider it a vital country for us moving forward. Geographically, the country is also very close. The time spent in the air from Madrid to Algiers is less than that of flying to Barcelona from the Spanish capital! This year we are celebrating 30 years of Cepsa’s Algerian operations, and our aspiration is to operate there for another 30 years. I was as you know personally involved in the Medgaz pipeline and I often consider Algeria to be my second home.
You have also signed a memorandum of understanding with Sonatrach “to explore opportunities in other areas where both companies have common interests both within Algeria and internationally.” What specific opportunities are you looking at, especially since most Algerian concessions are coming up for renewable around 2019?
In addition to the specific upstream commitments previously mentioned, we also have additional upstream contracts in Algeria. We are currently developing solutions alongside Sonatrach as part of a large gas contract and we are always on the lookout for additional opportunities in that country. At the same time, we are also working closely with Sonatrach in Spain with regards to gas commercialization and co-generation projects. The wholesale success of these collaborations, has led to a desire within both firms to take on more projects both inside Algeria and in other parts of the world.
Aside from Algeria, where else do you identify the best growth spots for your E&P business?
Our strategic plan highlights two areas that we feel represent huge opportunities. We want to expand our reach in the Middle East and North Africa whilst also exploring opportunities in Latin America. Both areas are quite large so naturally we are looking to first develop additional opportunities in Algeria and the United Arab Emirates. I am not discarding other areas, but it is strategically important to be successful and scale up in regions where we already maintain a presence.
With regards to Latin America, we have a production presence in both Colombia and Peru and we have exploration activities in Brazil. We want to increase our production levels in these countries before developing and seizing other ones in the continent.
A further project that binds Cepsa to Algeria is the iconic Medgaz initiative, which you yourself successfully fought for against all the odds. Just what is the significance of this project to your company?
For us, Medgaz was a great project and I had the honour of being involved in that project from its inception to the point in which we first transported gas. Not only was Medgaz a great project but it has also left behind a strong operation, and together with Sonatrach we remain committed partners today. The whole shareholding structure was reshuffled several times from the beginning and we feel very comfortable operating with Medgaz employees. The project’s infrastructure functions 24 hours a day throughout the entire year.
There are two factors one needs to consider when discussing performance in these types of projects. Firstly, the European gas market has not developed in line with expectations in recent years. Therefore, you need a very efficient operation and realistically, to grow in line with previous expectations, you need a growing market with strong inter-connections. Secondly, for the project to work properly, you need to obtain gas from Algeria at a reasonable price. When looking at the current state of the European gas market, you also need to understand that a large percentage of the gas contracts inside the European Union are due to expire within the next two or three years. Those contracts can of course be renewed but the European market is not currently in the best shape… I am very comfortable with our continued involvement in Medgaz, but ultimately everything hinges upon these sorts of external factors, essentially demand! Our joint long-term future depends on the direction of the market and of course everything has its price.
In the past, you have referred to your petrochemicals business as being the “hidden star” within Cepsa’s portfolio. Just how useful has this part of the business been as a stabilizer of revenues during this period of prolonged instability in the upstream segment?
As a chemist by background, it is a fascinating part of the company for me. Not only because I have a better understanding of this aspect of our business, but also because this part of the company is performing very well. Cepsa is selling approximately four million tons worth of chemical products a year, an impressive figure. If we can sell a product as a chemical molecule with a higher added value, why should we stop once that interest has been declared? This market behavior could also be due to the fact we are a low-profile company and perhaps we do not communicate in the way others expect. We are not consistently promoting the fact we are the world’s leading producer of LAB and second highest global producer of Phenol. Without doubt, we want to grow in these fields and their related products. The developed world has limited growth opportunities, so if we want to grow, we have to do so somewhere else in the world and Asia is a magnificent opportunity to do so.
Today, Cepsa ranks as the second biggest global producer of phenol and acetone – courtesy of your flagship chemical plant in Shanghai. As you seek to raise the contribution of your petrochemicals business to your overall turnover, how important was it to start investing big in China? (After all this particular injection of EUR 300 million renders Cepsa the #1 Spanish investor in China)
We want to place more attention in this region. Hopefully by the end of this year, we can announce additional projects and further investments in the Eastern world. The demographics of South East Asia are extremely significant to the development of industries like ours in the region. In less than decade, China will have a middle-class population of approximately 300 to 400 million – which is higher than the total European population – and ultimately these people are the final consumers of the products. If we want to grow in the petrochemical sector, we simply have to be operating in Asia. As a matter of fact, we are now opening a new plant in Indonesia which will add to our detergent portfolio.
How instrumental have your Emirati shareholders (through the International Petroleum Investment Company Ipic and since most recently Mubadala Development too, following the merger of both entities) been in enabling the company to make big-league investments in petrochemicals complexes in places like Shanghai?
We really have to thank our shareholders who have been crucial in facilitating our developments in China. The faith they showed in our team was fantastic because it would have been very easy to say these operations are “too far away”. When you compare our owners to European owners, one clear difference is that ours are prone to looking East rather than West and they are very supportive of our efforts in Asia. I believe this is a good vision because ultimately products are all about demographics and people.
Cepsa nevertheless still retains its Spanish identity and has not relocated its headquarters to the Middle East as some perhaps feared. How important is it for the company to maintain these strong Iberian roots?
I think it is important to remember that our original focus was to manage energy assets outside of the UAE. The fact that we are headquartered in Spain is not so important but it is clear that a presence outside the United Arab Emirates was crucial. For sure, we are looking to exploit the synergies between the UAE and ourselves. There are many situations where that specific cooperation would be fruitful for our shareholders and Cepsa as a company. Obviously, our owners still see us as a Western platform, a platform in which they can develop additional opportunities all around the world.
What would be the five words for the Cepsa of tomorrow?
Safety, oil, chemicals, integration and efficiency.