Pemex deal with Sacyr upsets Repsol

Responding to Pemex's recent doubling of its stake in Repsol, Spain's leading energy company has said that the move may affect its Cartagena oil refinery, where the company has made a massive three-year, 3.2-billion-euro investment, the country's largest ever, in a bid to increase its ability to meet growing domestic demand for diesel and aviation fuel.

Mexico's state-owned oil monopoly Pemex recently doubled its stake in Repsol to more than 9 percent at a cost of around $1.6 billion. It also agreed to vote in tandem with key Repsol shareholder Sacyr Vallehermoso on strategic matters, jointly securing about 30 percent of Repsol's total voting rights.

The agreement between the construction firm and Pemex brought their combined ownership in Repsol to just below the 30-percent stake threshold that requires a full takeover bid in Spain.

Pemex says that it is seeking to expand its operations globally via a greater presence in Repsol, getting a bigger say in the Spanish oil company's management and gaining access to technology, production expertise, refining and marketing channels, a new report prepared by the state-owned oil monopoly says.

The report, "Contexto del Aumento de Participacion de Pemex en Repsol" (Context of the Increased Stake by Pemex in Repsol), lays out the Mexican company's strategy.

"The bigger stake in Repsol is part of Pemex's strategy in the international market and represents an opportunity to expand a relationship of more than 30 years," the report says.

An alliance with Repsol opens the way for the "possibility of reaching business agreements in the region that benefit both companies; for example, a swap of petroleum products," the report, which is dated September 1, says.

This would be potentially damaging for Repsol, which could find itself obliged to refine Mexican crude. This would affect its Cartagena refinery operations, which are based on acquiring cheaper, heavier crude on the international markets.

An alliance with Repsol will also allow Pemex to gain access to seismic-imaging technology that would be useful in complex projects, the report says.

It adds that a closer working relationship with the Spanish oil company will open the way for exchanges of personnel in similar fields and ensure Repsol's participation in new exploration and production projects, thanks to joint venture agreements.

Pemex will gain access to refining technology from Repsol, which has the capacity to process 800,000 barrels per day (bpd) of crude, as well as exploiting synergies in gas-fired cogeneration projects and other business opportunities.

The Mexican oil company expects to reduce its operating costs by $105 million annually in the areas of exploration, production and marketing, thanks to technology from Repsol.

An alliance with Repsol will allow Pemex to take advantage of synergies in refining Mexican crude instead of Russian petroleum, and in the production and sale of different grades of gasoline, the report says.

Some observers have pointed out that by partnering with Sacyr, a construction group, to exert more control over the Repsol board, Pemex has joined up with a company that has placed itself in opposition to Repsol management over the last two years. They add that the claim that the share purchase, which was not even discussed by Pemex's own board of directors, will lead to some sort of alliance with Repsol is doubtful and raises more questions than it answers.

For Sacyr, the motives are clearer. Since it announced at the end of 2006 that it had lifted its stake in Repsol to 20 percent, the oil company's shares have fallen more than 26 percent, handing Sacyr a more than 1.5-billion-euro paper loss on its investment. This loss looks all the worse given Sacyr's heavy borrowing, just under 5.2 billion euros, to fund the last stage of its share purchases.

According to Sacyr's press release announcing the tie-up with Pemex, the two companies want better corporate governance at Repsol, including splitting up the job of chief executive and chairman of the board, and the adoption of measures to cut costs and enhance synergies among Repsol's subsidiaries in an effort to boost the share price.