NEWS Portugal's privatization campaign sets sights on further moves

Portugal's 1995 Refined Products Output, Market Share [22256 bytes]

Petrogal's 212,895 b/d refinery at Sines, Portugal, needs major capital investment to boost its cracking capacity. That's a sample of the changes required if the state petroleum company's privatization is to succeed. Photo courtesy of Petrogal.

Privatization of Portugal's energy industry remains solidly on track. The centerpiece of that campaign, continued privatization of state owned Petrogal, received a big boost when a key group of private shareholders approved a 5 year plan for turning the troubled company around.

That bodes well for the third phase of Petrogal privatization, an international share offering scheduled for 1997.

It's all part of a massive effort by Portugal to privatize a number of industries nationalized during the 1970s. Since privatization got under way in 1989, Portugal's sale of state assets has raised more than $8 billion.

The new Socialist government, elected last October, hopes to raise 380 billion escudos ($2.5 billion) this year from privatization.

Petroleum, power

Among state companies marked for privatization in 1996-97 are those in the oil, gas, chemical, and electric power industries.

In addition to Petrogal, plans call for selling the government stake in petrochemical producer Cia. Nacional de Petroquimicas (CNP) and fertilizer company Quimigal Adubos.

An effort to sell Quimigal Adubos collapsed this year after the government failed to decide between two bidders. Whether much interest will be shown in CNP remains to be seen. Its main asset, an olefins complex at Monte Feio, was acquired by Borealis AS, a petrochemical venture of Norway's and Finland's state oil companies.

The privatization of Portugal's two main natural gas companies, Transgas and Gas de Portugal (GDP), is not likely to get under way until development of a gas infrastructure in the country is finished. That program, to cost an estimated $1.3 billion, is expected to be complete in 1997.

Transgas was set up to oversee introduction of gas into Portugal through construction of a high pressure pipeline from the port of Setubal, south of Lisbon, to the northern city of Braga.

This transmission line is to link with systems operated by town gas producer and distributor GDP and regional gas distributors Portgas, Lusitaniagas, and Setgas. Those four gas companies, EDP, and other state interests make up the group that owns Transgas.

The Setubal-Braga pipeline will be linked to two Spain-Portugal pipe- lines, one of which in turn will tie into the Europe-Maghreb gas pipeline being built by Algeria, Morocco, Spain, and Portugal.

An international offering of more than 20% of Electricidade de Portugal (EDP), the state holding company for Portugal's electric power generation and transmission utilities, is expected to proceed late in 1996 or early in 1997. Further EDP offerings are tentatively planned, but the government will retain management control and a stake of at least 51%.

Petrogal status

It is the continuing privatization of Petrogal while it continues to expand and yet seeks to stem a tide of red ink that commands center stage in the government campaign (OGJ, Oct. 16, 1995, p. 25).

The government holds 55% of Petrogal, and a group of Portuguese private investors, Petrocontrol, holds the remaining 45%. The prospect has been raised of Angolan state oil company Sonangol acquiring a stake in Petrogal, with other upstream and downstream ties broadening between the two nations.

Petrocontrol issued a statement approving the so-called Petrogal 2000 strategic outline for the company's operations the next 5 years. While the group generally welcomed the suggestions put forward in Petrogal 2000, it wants dividends issued earlier than the end of the century, as outlined in the paper.

That is "a deadline Petrocontrol views as having a negative impact on the viability of its investments and on the objectives of the state vis a vis the second stage of the company's privatization," the group said. Therefore, it added, "All possible efforts should be made to speed the company's turnaround."

Petrogal management at yearend 1995 approved details of Petrogal 2000, which is aimed at reversing the financial fortunes of the ailing state oil company by 2000.

Improving balance sheet

Immediate concerns of Petrogal's management are to improve the company's woeful economic situation through a program of rationalization and refocusing core activities while taking steps to shed noncore assets.

The Petrogal 2000 document sets out these principles for company strategy:

Maintaining production of hydrocarbons.
Stabilizing refining margins.
Consolidating its retail refined products distribution network.
Developing a network of specialized products.
Selective efforts at internationalization.
Cutting costs and improving productivity.
Motivating personnel and improving the company image.

As market analyst Jorge Jacinto put it, "In short, they want a company that shows profits in all areas of business and will be able to return dividends to existing and future shareholders."

Specific goals

More specific goals for Petrogal are to lift its rate of return on capital to 12-15% and maintain its dominance in the domestic market with a share of about 50%.

Petrogal 2000 lays out these domestic market share targets: 40-50% of gasoline, 45-50% of diesel, 50-55% of jet fuel, at least 60% of fuel oil, 44-49% of LPG, as much as 45% of asphalt, 22-33% of lubricants, and at least 80% of aromatics and solvents.

At the same time, the document sets out a nine point plan for improving its bottom line:

Increasing available capital through cuts in interest payments totaling $45.5 million/year.
Cutting short term operating costs by about $26 million/year.
Rationalizing refining operations, resulting in further savings of $26 million/year.
Selling noncore businesses and other measures aimed at curbing the cost of debt service, for a total gain of another $26 million/year.
Decreasing labor costs along with rationalization of business management overhead, a combined savings of $45.5 million/year.
Improving margins in international investments, adding $19.5 million/year.
Restructuring of refining/marketing operations, saving $90 million/year.
Increasing domestic sales to garner another $19.5 million/year.
Investing in new, related areas of business to raise $45.5 million/year in revenue.

Stemming losses

According to Petrogal 2000, those nine measures are intended to deliver to the company profits of about 30 billion escudos ($195 million)/year by 2000. That compares with a loss of about 20 billion escudos in 1994.

In 1990, Petrogal registered a profit of 3.6 billion escudos. The following year, it incurred a loss of 15.2 billion escudos.

In 1992, the year the company was opened to investment by private shareholders, those losses had jumped to 33.1 billion escudos. Losses declined but were still significant at 24.l billion escudos in 1993 and 19.2 billion escudos in 1994.

Preliminary figures show Petrogal posted a loss of 11 billion escudos ($71.5 million) in 1995 despite an operating profit of 16.9 billion escudos. That was due in part to a significant carryover of losses from 1994.

Petrogal Chairman and Chief Executive Officer Manuel Ferreira de Oliveira this year predicted a net profit for his company in 1996.

However, reports of profits and losses from previous years have varied widely because the company often made adjustments to its financial reporting. This led to claims of losses being hidden from private investors.

Petrocontrol's concerns

Petrogal's private shareholders have all but despaired of the situation facing the company.

As Jacinto explained, "They see before them a company that, by all rational laws of economics, should be highly successful. Instead, the further they dig, the nastier it gets. They've discovered that they have opened a veritable Pandora's box."

It has been this constant fiddling with figures that has so infuriated Petrogal's private shareholders and led them to decide last summer not to increase their stake in the company to 51% from 25% as originally planned. Instead, they forced the government into a complicated debt for equity swap that saw them acquire an additional stake of only 15% in Petrogal.

At the same time, Petrocontrol knows that if the government allows the group leeway needed to revamp the company, it could see healthy rates of return on sizable investments-precisely the point of Petrogal 2000.

With such changes implemented, Petrocontrol predicts Petrogal's financial results in 1997 could be even better than the official forecast of 3.5 billion escudos.

Petrogal operations

In 1994, Petrogal refineries at Sines and Porto ran at a respectable 85.4% of capacity, producing 264,000 b/d of refined products.

Of this total yield, 66% was earmarked for the domestic market-27% sold to competitors-and the remaining 34% exported. In terms of direct sales and sales to competitors, Petrogal supplied 67% of the market's needs.

At the same time, Petrogal has seen a highly successful expansion into neighboring Spain, where it is now the single biggest foreign operator in retail marketing.

Despite that growth, Petrogal has yet to make sizable needed downstream investments, notably at the main refinery at Sines, where its cracking index averages 24.5%, well below the European average of almost 30%.

What's more, Petrogal's second refinery at Porto does not have a cracker. However, the company has earmarked 15 billion escudos ($97.5 million) for a new desulfurizing unit at Sines, bolstering its ability to handle a broader crude slate.

The company also has been forced to build a new tank farm at Aveiras de Cima after decommissioning its old storage site on the outskirts of Lisbon.

At the same time, the company is building a multiproduct pipeline linking the new tank farm to Sines at a cost of $260 million, as well as a similar pipeline linking the Leixoes terminal to the Porto refinery.

Petrogal also has been increasingly aggressive in oil exploration, notably in Angola.

It holds a 10% interest in an Agip SpA led group exploring off Angola, a 20% interest in a British Petroleum Co. plc group exploring onshore in the Angolan enclave of Cabinda, and a 9% stake in a Chevron Corp. group probing a deepwater prospect off Cabinda.

Weak points

Such efforts are meant to deal with Petrogal's weak points.

The company owns no reserves, has little exploration and production technology and experience, and lacks the financial strength to ever become a significant upstream player.

Petrogal also has little experience in trading, particularly in financial derivatives.

In refining, the company faces the problems of matching its products yield to domestic needs, which results in supply gluts, notably in lube base oils; overall low yields by European standards; and an aging refinery at Porto that in turn is supplied by a port at Leixoes with severe limits on the size of vessels it can accept.

In marketing, Petrogal is hampered by too many money losing rural outlets as well as a high number of urban outlets that need remodeling or are marked for closure in the short to medium term on safety grounds.

One of the last decisions made by the former Portuguese Social Democratic government of Anibal Cavaco Silva was to extend by 5 years to Oct. 30, 2002, a deadline for closing about 400 service stations for reason of safety. About 75% of the stations belong to Petrogal's GALP retail unit.

Lobbying by the major oil companies affected by the decision-Petrogal, BP, and Royal Dutch/Shell Group-in conjunction with Anareg, the association of gasoline retailers, led the government to extend the deadline.

Most of the stations slated for closure are in Lisbon and Porto.

The aim of Petrogal 2000 is to take a close look at all of those points and devise a strategy whereby the company can remedy areas that can be remedied and move out of areas considered either nonstrategic or unprofitable.

"The old idea of being in areas where such a company does not really belong, simply for the sake of prestige without any considerations for the laws of economics, are clearly over," Jacinto said.

Angolan connection

Prospects are growing for a deepening connection between Angola's and Portugal's state oil companies, beyond Petrogal's upstream involvement in Angola.

Following a state visit by former Portuguese President Mario Soares to Angola, Portuguese Secretary of State for Energy Jose de Penedos said neither the government nor Petrogal's shareholders "would have any objection to Sonangol acquiring a stake of up to 10%" in Petrogal.

Petrogal's links with Angola's state oil company "are of strategic importance" he added, and form a key part of the Portuguese company's efforts to bolster its oil productive capacity.

"It is important for Petrogal to have crude production of about 20,000 b/d-today it produces less than 20% of that figure-if it is to act as a seller as well as a buyer (of crude oil)."

De Penedos said Petrogal also is eager to develop Angola's potentially lucrative retail marketing network, although he noted this could occur only "once the situation in Angola has stabilized."

In return, Petrogal is prepared to help Sonangol develop its retail marketing network in Portugal and provide technical training for Sonangol staff. Petrogal currently pays for 20 Sonangol staffers to attend university classes in Portugal.

Transgas privatization

Transgas also is awaiting approval by Portugal's new minority Socialist government to open its equity capital to private investors.

Transgas interests break out as GDP 34%, EDP and state owned bank Caixa Geral de Depositos 29% each, the country's three regional gas distributors 1% each, and a direct holding by the state 5%.

The plan is to offer 75% of Transgas stock to private investors. This will be done through a series of stock splits excluding current Transgas shareholders that will continue until current shareholders are left with 25-30% of the company's equity.

As much as 49% of Transgas equity capital has been earmarked for foreign investors. The candidates include BP, Tenneco, Ruhrgas AG, Den norske states oljeselskap AS, Belgium's Distrigaz, and Spain's Enagas.

About 5% of Transgas capital has been reserved for Algeria's Sonatrach, which will supply the gas for the Europe-Maghreb pipeline. However, Sonatrach has expressed interest in increasing this stake.

Gas projects

Construction by Bechtel on the 530 km Algerian section of the Maghreb-Europe gas pipeline is technically complete, Sonatrach Director Gen. Nazim Zouioueche told Portuguese news agency Lusa.

"This means the pipeline sections have been welded from the gas fields at Hassi R'Mel as far as the Algeria-Morocco border," he said. "We are currently conducting tests in preparation for its entry into service. This will take 2-3 months, which means the deadline of June 1996 will be met."

Work on the Moroccan, Spanish, and Portuguese sections of the pipeline are not complete, but Zouioueche said it is evident the Portuguese portion of the 1,370 km, $2.3 billion pipeline need not be so advanced because Portugal's gas purchases won't begin until 1997.

Portugal's secretary of state also confirmed the government is considering plans to build a liquefied natural gas terminal to complement the Europe-Maghreb pipeline. This pipe- line will feed the Setubal-Braga system 87.5 bcf/year of Algerian gas.

"Since Spain is in no condition to supply us with piped gas should gas supplies from Algeria be cut off, it would make sense for there to be a terminal somewhere along the Portuguese coast that could receive shipped LNG," de Penedos said.

However, he added, because construction of such an LNG terminal would involve an investment of more than $345 million, European Union funding for the project would be "an essential precondition."

The Portuguese/Spanish group of Construtora Abrinta, Construtora do Tamega, Dragados y Construcciones, Auximi, and Ramalho Rosa won a $35 million contract to lay a pipeline linking the Europe-Maghreb gas pipeline with the Setubal-Braga line. This pipeline will in turn feed the 990,000 kw, gas fired power plant at Tapada do Outeiro being developed by the Siemens AG led group Turbogas Produtora Energetica SA.

Meanwhile, work on the Setubal-Braga high pressure gas pipeline Transgas is building has halted following a blockade by farmers in the northern village of Vila Nova de Familiacao.

The blockade is in protest of a change in the pipeline route that will now take it through their land. Farmers have asked a local court for an injunction against the route change, claiming that it is illegal and was done without proper public consultation.