José Luis López de Silanes – Chairman, CLH, Spain
The chairman of CLH, Spain’s number one oil transport and storage company, explains how increasing efficiency, internationalization and expanding the firm’s range of services are at the very core of his vision for the future. He outlines how the energy giant posted a net profit increase of 25 percent in 2016 and how territories such as Ireland, Oman and the UK will feature heavily in the company’s short term global project plan.
These are exciting times for CLH, with 25 percent growth last year; what were the main drivers of this growth?
“By taking advantage of the efficiencies we gained during the crisis, along with the general recovery of the Spanish economy in 2016, we obtained this profit increase.”
CLH has been growing significantly over the last 10-12 years. In 2016, the figures were remarkable, but this stemmed from a growth that occurred even through the economic crisis. We have worked hard on cutting costs, which allowed us to grow in spite of the depreciation in our turnover that dropped by 25 percent as a result of the crisis. As I said, during the crisis we did what we had to do: take advantage of the situation to increase our efficiency, to induce growth more steadily, and by taking advantage of the efficiencies we gained during the crisis, along with the general recovery of the Spanish economy in 2016, we obtained this profit increase.
CLH dominates the local market – owning and operating 90 percent of Spain’s refined product pipeline and handling some eight million cubic meters of storage capacity. With the Spanish economy now registering a growth rate of nearly three percent – roughly double the average of Europe – what do you see as the evolving opportunities in the local market?
CLH is the only pipeline operator in Spain. We have 4,000 km of pipeline and 40 terminals along the coast and inland which can be used by any operator, making it freely available in this sense. Ours is the only European model giving integrated storage and transport services which is open. Any operator that wants to sell its products in Spain does not need to invest in logistics. Instead, they only need to buy a vessel located in the North Sea or the Mediterranean, and get to Bilbao or Barcelona, and they can then take the product to Seville, Madrid or wherever they like. Ours is the only method that lets you do that.
Could you explain how Spain chose this unique model?
Well, the explanation is very clear, because we came from a monopoly that was capable of supplying the whole territory. After this, the decision was made to open up the market to a network of operators. This was a well-designed network because it was optimized and since then we have bulked it up based on the growth of demand. This is the reason why we have this model.
However, in other countries, the oil industry was developed by companies – by geographic areas – where each company built its own refinery and its pipelines to distribute its own product: it was only for them. Thus, today, in Europe, there is no model like this one. Only France has a significant open oil pipeline network, which does not feature terminals, which can be accessed by others, although not operated with the same transparency as in the Spanish market. We publish our storage and transport tariffs on our website, as well as that of the National Competition Commission (Comisión Nacional de los Mercados y la Competencia). This does not exist elsewhere in Europe; not even in the UK, a territory we are now operating in, is there such transparency.
Spain, though, has its growth limitations. Could you elaborate on these figures a little more? How does it compare with Singapore and other places?
In 2007, we had a decent figure for national domestic consumption. It has however fallen by 25 percent since then. Last year it grew by three percent, this year to date another 3 percent, but we still have a long way to go to reach the 2007 figures. I believe that several years of growth await us, despite the fact that we are in an ever-changing environment, where efficiency will effectively substitute part of growth. It is like buying a car today and its consumption per 100km is two liters less than what is was five or six years ago. Engine manufacturers are highly incentivized to go to great lengths to reduce consumption, because it is the only way of reducing CO2 emissions.
The growth of oil products remains in line with GDP growth, but it could drift away from this on account of efficiency. That being said, we will continue growing. Until when? I don’t know. Will we reach levels of consumption from 2007? I personally believe so, although others disagree with me. We are still far from achieving these levels of consumption, but we will continue growing in the consumption of oil industry products.
You provide consultancy services in oil and logistics around the world to companies in places like Colombia and Brazil. Tell us a little bit about that side of the business.
Five or six years ago, in the wake of the economic crisis, we thought that the growth of consumption would eventually slow down and conceivably even grind to a halt completely. For this reason, the company wanted to grow, and we had to expand globally. When one takes this decision, the first thing is to study the international markets and engage in economically low-risk ventures, in this case consultancy work, before plunging into the world of investments. And this is the process we followed. We gave consultancy services for two to three years and then we got involved in investments.
Our first investment was in Oman. Oman Oil was already a partner of ours. Consumption was growing rapidly in Oman and its product distribution was very expensive. It did everything via bunkering and by cabotage in Sohar and there was no pipeline network at all. They operated like CAMPSA (Compañía Arrendataria del Monopolio de Petróleos) under the monopoly; their logistics were not at all optimized. As they liked the CLH model a lot, they asked us to undertake a project which was to be a small CLH in Oman. We then entered into a Joint Venture – 60 percent Omani, 40 percent CLH –, the value of the project being USD 350 million, and this will get underway soon. All is going very well and both parties are satisfied.
CLH also maintains a heavy footprint in the UK. We are talking about 2,000 km of pipeline and storage capacity of 1 million cubic meters. What was the rationale behind going to an Anglo-Saxon economy like the UK?
We knew that the British Government wanted to sell a network of pipelines it had for the purpose of supplying military bases and airports in the UK. They also had 16 terminals and storage of 1 million cubic meters, so the government opened up a competitive selection process in order to select an operator. We assessed the viability, put ourselves in the running and were subsequently awarded the tender. We won the tender against 30 other companies because we are, without a doubt, the best operator of pipelines and storage plants in the whole of Europe. We are the most efficient, and it is not just me that says this, it has been ratified by the International Energy Agency. In its most recent report, it says that CLH is one of the most efficient integrated transport and storage systems in the world.
The fact that the Spanish Government recognizes our work and that we have this recommendation gives a lot of flexibility and safety. We are extremely satisfied, and proud, that such an important institution [as the IEA] speaks of us in such good terms. Due to this, it doesn’t surprise me that the British Government, at the time of making their selection for the operation of such a strategic pipeline network for the UK, chose to go with a reliable operator with vast industry knowledge.
When were you awarded this contract in the UK?
Two years ago, and we feel very honored as it is such a strategic network. We have signed a contract with the Ministry of Defense for the period of ten years – which we hope will be subsequently renewed – for the military bases. Furthermore, we have signed contracts with private companies to transport kerosene, our objective being to turn this network into a multi-product pipeline. At the moment, it is primarily dedicated to the transport of kerosene, although we want this pipeline to reflect the Spanish model of a multi-product pipeline: the same tube for petrol, diesel, kerosene… and we have the technology to be able to transport all of these and to separate each product, without compromising their quality in any way, upon reaching a terminal.
Britain is going through a lot of instability at the moment with Brexit; is that a concern for you?
No, not at all. The company is mainly operated by English employees. We have no more than half a dozen of Spanish people working on this, so there is a close connection between the CLH Pipeline System (CLL-PS) Management Team and the team in Madrid, since ultimately, we want CLH-PS to operate in the same way that CLH does here in Spain. But all the staff are English, the company will operate under British legislation and I don’t think we are going to have more problems above and beyond the exchange rate. With a focus on hard work and achieving greater efficiency, we expect the currency exchange to be the most serious issue: repatriating profits [from GBP into Euros.
We understand you also have a footprint in Ireland in aviation?
The Dublin Airport Authority held a competitive tender procedure to select a company to operate its fuel facilities. We entered our bid and were chosen; I suppose because of the experience that we have. We had just done what they required at Alicante Airport – it was an identical brief –, for instance building tanks and creating a hydrant system. This means that every tender process we have submitted a bid for has been successful.
In your strategic plan 2017-2021, you set aside EUR 400 million for international expansion. What are the new geographies that you are targeting and what are the characteristics of markets that you would like to be a part of?
Highest on our list of priorities are our neighbors: France, Portugal and Morocco. The second phase, logically, would be the rest of Europe. In this I include logistics activity and also work at airports. After this we will need to take the leap of faith: to move into North America and Latin America. This is more or less the order of events. Opportunities are arising in Latin America. Mexico will be fundamental, with the [oil] opening that is underway, or will shortly take effect. Of course, we are still in the analysis stage for all of this.
Could you tell us more about the financing component of leading such projects and expansions?
We do not suffer from this problem. I believe that today CLH has the best debt ratio. We have a very healthy PBIT and this allows us to have, for the moment, direct (1-to-1) financing from banks. We haven’t yet had to issue bonds because we are currently experiencing great direct financing from banks. But we, as I said before, have one of the lowest [debt] ratio in the whole of Spain thanks to excellent financing. In this way, we are not going to run into any problems.
In any case, I would like to mention a very important point: regardless of the project we are running, we should be the operators. We can have more or less equity but we will always be operators because we believe this is where added value lies. CLH adds value to any operation.
Having IEA recognition and receiving the European Excellence Seal 500 (one of three energy companies here in Spain to get that), tell us about your capacity for innovation and the extent to which you are a benchmark or model for others.
CLH is very committed to innovation in its sector. I could say that CLH is an example of how to implement new technologies in a logistics project. We are continually working on increasing our efficiency through innovation: through the utilization of new technologies. This has been a fundamental ally up to now and will continue to be so in the future. CLH still has a long future and, despite everything, still has a lot to achieve. We are going to step up efficiency once more through continued use of innovation. It is very profitable, especially for a logistics company.
“CLH is an example of how to implement new technologies in a logistics project.”
On the other hand, CLH has been concerned about its social responsibility for years now. CLH has drawn up a strategic CSR plan, which has now been updated. We believe it is extremely important to give part of our efficiency back to society and to collaborate on development projects. We are very proud of one such volunteering scheme, which consists of incentivizing our staff to work with NGOs outside of their working hours, and CLH finances initiatives run by the NGOs they support.
We are also very committed at an entrepreneurial level. We have agreements with Autonomous Communities [within Spain] and universities to promote the values of entrepreneurship. We finance awards ceremonies and every year new projects are realized which are backed by CLH and, in part, by the corresponding Autonomous Community. There is a fantastic project which involves students of the Campus of Excellence Iberus, which groups together the universities of Zaragoza, Lerida, Navarra and La Rioja, in which, with the approval of the four deans, we hold an annual awards ceremony that yields a whole host of breakthrough projects and which is funded by CLH. This is an important aspect of our company.
You have been in leadership positions in some of the heavyweight Spanish energy companies: CLH, Repsol and Gas Natural Fenosa. What is your perspective of the influence and performance of Spanish energy firms in Europe and globally?
In the last 30 years, Spain and specifically Spanish businesses have made a huge effort to modernize. The internationalization project in Spain is a successful one; after 30 or 35 years, we have become some of the best builders in the world, we have some of the best engineering companies in the world and we are leaders in energy. In refining, Spain leads Europe with the most efficient and modern refineries.
In logistics, we are making very clear improvements. I think that Spain has gone away and done its homework, and now it has really pulled its socks up and is becoming more successful. As a result of this, we have well-educated and well-trained Spanish executives from Spanish universities and Schools of Engineering. Business Schools are also very good, and Spanish companies nowadays have extremely competent executives.
I hope that CLH continues in the same vein, looking for new efficiencies and services and internationalization that allows us to extend our growth, in a phase where low consumption may stunt growth. The truth is that continued growth is the path we need to follow, since the markets are appreciating our work. The company is vastly increasing its value and the most recent transactions show that the company is worth more than before and that the market is appreciating the efforts we are making in these areas (of finding new efficiencies and internationalization).
What are your five words for the future CLH?
I would say: firstly, ‘efficiencies’, secondly, ‘new services’, thirdly, ‘internationalization’… If I had to say another, it would be ‘safety’. But these are the vectors that will drive us in the years to come. Evidently ‘operational excellence’ too, as well as ‘safety’, but the three main drivers are the ones I mentioned. Efficiencies. New services and Internationalization: we have to reinvent ourselves to serve the demand from our customers. And we’re also trying to change the culture. We need to have two types of people: those who give customers a service and those that support the service.