THE SPANISH OIL INDUSTRY

Spain, which has evolved from a monopolistic oil culture spanning almost two thirds of the 20th Century, is now a totally liberalized oil and gas market as shown by its presence in different phases of the business – from refining to petrochemicals and from distribution and marketing to natural gas – of leading international companies such as: Agip, Atofina, Basf, BP, Cepsa, DuPont, Esso (Exxon Mobil), Galp, Q-8 (Kuwait Petroleum Corporation), Repsol YPF, Saras, Shell, Texaco (Chevron Texaco) and Total.

Upstream

Spain does not have any significant underground or continental shelf oil and gas reserves and, consequently, has been forced to play an active role in international exploration and production activities following the footsteps of the Spanish company Hispanoil, which was a pioneer in the business and made major productive discoveries in several Middle East Countries in the 1960s.

In 2005, Repsol YPF and CEPSA produced nearly 203 million barrels of oil, with Repsol YPF producing 1,246 bcf of natural gas, while the Spanish internal production barely reached 166,000 tons of oil and 1,859 GWh of gas from four small oil fields, mostly offshore in the Mediterranean, and gas fields.

Spanish oil companies are involved in exploration and production activities in more than twenty countries, including those with such deep-rooted oil traditions as Algeria, Argentina, Brazil, Indonesia, Libya, Mexico, Saudi Arabia, Venezuela and the United States, and emergent countries as in the case of Trinidad and Tobago.

Because of its lack of oil and gas reserves, Spain, a solid and reliable consumer country, must import most of the oil consumed domestically. Refining companies in 2005 imported more than 59 million tons of crude and oil operators more than 27 million tons of oil products from all parts of the World. Natural gas purchases reached 390,806 GWh, most of which was imported from the African continent (Algeria, Libya and Nigeria).

Downstream

There are 10 refineries in Spanish territory owned by three operators. Eight are on the coast of the peninsula, one inland, and the other in the Canary Islands, all having a global capacity of 66 million tons per year and a high conversion capacity. The companies involved in this Spanish oil segment are BP (one refinery), CEPSA (three and one in a shared ownership arrangement), and Repsol YPF (five and one shared). Spain also has a significant presence in the refining sector in Latin America where Repsol YPF has refineries in Argentina, Brazil, and Peru, with an annual total capacity of approximately 25 million tons.

In logistics, the basic segment of the supply chain (basic logistics of refined oil products) is carried out by CLH, a company participated by the following national and foreign companies: BP, Cepsa, China Aviation Oil, Disa, Enbridge, Galp, Oman Oil, Repsol YPF and Shell. CLH has a sophisticated transport system and a large network of modern and safe storage facilities: an extensive nearly 3,500 kilometre pipeline network and 40 storage facilities. The advanced technology system, one of the leading ones in Europe, efficient, safe, and totally environmentally conscious, is centrally managed via satellite. In the storage and capillary distribution area, the Spanish logistics system also counts on the presence of several independent operators: Capesa, Euroenergo, Forestal del Atlántico, Galp, Saras Energía, and others.

With regard to marketing, Spain currently consumes over 70 million tons of oil products. Approximately half of this demand is covered by a very modern service station network, with around 8,600 retail outlets, owned by fifteen Spanish and foreign operators: Agip, BP, Cepsa, Disa, ERG, Esergui, Esso (Exxon Mobil), Galp, Meroil, Q-8 (Kuwait Petroleum Corporation), Repsol YPF, Shell, Tamoil, Texaco (Chevron Texaco), and Total. However, as corresponds to a globalised industry, the Spanish presence in the retail segment is not limited to the Spanish territory: Cepsa and Repsol YPF also operate in Portugal, while Repsol YPF also operates in other European countries such as Italy, as well as in Latin American countries such as Argentina, Brazil, Chile, Ecuador, and Peru.

In this context, liquefied petroleum gas (LPG) is particularly worth mentioning. This product is very popular in Spain, particularly in the bottled segment for residential and household consumption. Spain is one of the world’s major references in this product, with the latest generation technologies applied in its manufacturing and bottling, and with a significant presence in North Africa, southern Europe, and the Latin American Southern Cone.

Petrochemicals

The petrochemical business in Spain has a long history. Since its commencement, it has always been apart from the monopoly that dominated the oil business, making it easier for foreign companies to operate in this segment. There are four large petrochemical centres: Tarragona on the Mediterranean coast, Algeciras and Huelva on the western coast of Andalusia, and Puertollano in the interior. Most of the initial impetus of petrochemicals in Spain came from the Tarragona petrochemical centre and was largely due to the presence, still very active, of the most important companies in this specialty worldwide: Atofina, Basf, Bayer, Dow Chemical, and Shell, with other companies joining the ranks more recently and in other geographical contexts such as Du Pont and Ube Industries. Foreign presence was also very important at the beginning in the Puertollano petrochemical centre.

Spain’s significant presence in this sector is mainly through Cepsa (aromatics) and Repsol YPF (olefinic compounds) with the former at the petrochemical centres created in the area surrounding its Algeciras and Huelva refineries, and the latter near its Tarragona and Puertollano facilities.

Globalisation has led both companies to have a formidable presence abroad. Repsol YPF’s production activities are concentrated in Argentina with Europe and the Mercosur countries as its most important markets, while Cepsa’s international operations are located in Brazil and Canada and its production marketed in the five continents.

Natural Gas

No other Spanish industry has experienced such a spectacular growth recently (15% average growth in the last ten years) as the natural gas related business, due mainly to the liberalisation process in which it has been immersed. Spain is at the forefront of Continental European countries with respect to its real, not theoretical, market liberalisation.

Approximately fifty companies are currently operating in Spain in natural gas transport, distribution, and marketing, with many of these being foreign companies: BP Gas España, Carboex, Cepsa Gas Comercializadora, Edison Gas España, Electrabel España, Enagás, Endesa Gas, Eni Comercializadora de Gas, Gas Natural, Gaz de France Comercializadora, Iberdrola, RWE Energy Trading, Shell España, Unión Fenosa Gas, and others.

The trend in the Spanish gas sector in recent years is backed by sales growth, that in 2005 exceed 32 bcm representing an increase of 17.6% over 2004 (the highest rate in Europe in recent years), the start-up of new gas installations (3,173 kilometres of new gas pipelines and the LNG regasification plant in Sagunto, Valencia, at the Mediterranean coast of Spain, as the most important targets reached in 2005) and the consolidation of new projects for the future, (like the start-up of the new regasification terminals in Galicia, in northwestern Spain as well as the construction of new combined cycle power generation plants). This strong sales growth is gradually bringing Spain closer to the countries with a stronger tradition in this source of energy.

Naturally, Spain’s international presence in the gas sector is also noteworthy: Gas Natural operates in the most important markets in Latin American and Mediterranean basin countries; Repsol YPF produces, transports, and markets natural gas in Latin America, with ongoing projects of great economic significance for the entire region, and LNG in the Mediterranean and the Atlantic areas; and, just to mention the case of new operators on the wake of the liberalisation, Unión Fenosa is currently building a natural gas liquefaction terminal in Egypt and is involved in a similar project in Oman.

Moreover, Spain, promotes some of the most technologically advanced projects related to European supplies. In the past, this included the construction of the Maghreb-Europe gas pipeline from Algeria to Spain, stretching over Morocco and through the Strait of Gibraltar, and in the near future, it will be the Medgaz gas pipeline project that will directly link Algeria and Spain crossing the Mediterranean sea to Almería, with the deepest point along this route reaching 2,100 meters below sea level. The Medgaz project is led by Cepsa and Sonatrach.

Innovation and Technology

With the objective of being, and always remaining, at the forefront of the European and world oil industry, the Spanish industry promotes its innovation and development capabilities to support its own corporate growth both in Spain and in international markets.

Spain has two petroleum research centres that rank among the best technology centres in the energy and petrochemical sectors worldwide:

• The Repsol YPF Technology Centre, where 350 professionals work and are involved in research. Its Technology Unit engages in three types of activities: research and development of new products and new production processes; technical support for the ongoing improvement of already existing products and processes; and long-term exploratory products to evaluate the future potential of currently emerging technologies.

• The Cepsa Research Centre, with more than 50 professionals engaged in R+D activities, is equipped with the most modern analytical systems. It develops its own technology in addition to improving and providing support to the production and commercial areas. The Centre is involved in an intense and varied activity in areas as diverse as molecular biology, biochemistry, polymer derivatives, fine chemistry, refining, petrochemicals, etc.