The Rising Influence of Rising Affluence

[DewDiligence]

Repsol’s Star Is Rising

[The Spanish-based multinational was once the laughing stock of the industry; it has improved, but it still has a long way to go, IMO. A description of Repsol’s Kaleidoscope technology can be found in #msg-39385996. Disclosure: no position.]

http://online.wsj.com/article/SB10001424052748704317704574503500707233912.html

›October 30, 2009
By THOMAS CATAN and BERND RADOWITZ

MADRID—For years, Repsol YPF SA was derided as the oil company with no oil, but its gamble on boosting exploration has paid off handsomely, with the Spanish company hitting the jackpot in Brazil, West Africa—and now the U.S.

Repsol is expected to announce Friday a new oil discovery in the Gulf of Mexico that it says will boost production from its Shenzi field and help reduce U.S. dependence on foreign oil.

The company said the discovery contains a "fairly sizeable" amount of new crude oil in two wells in the field, which is operated by BHP Billiton Ltd. Shenzi, in which Repsol owns a 28% stake, currently produces about 120,000 barrels of oil a day, or around 2.5% of daily U.S. oil output. [The equity interests in Shenzi are BHP 44%, HES 28%, and Repsol 28%.]

Its string of discoveries leaves Repsol with the unexpected challenge of developing a sudden surge in oil and gas resources. "We've had some success in exploration," Chairman and Chief Executive Antonio Brufau said in an interview. "Now we have to shift to a phase that also carries risks: developing these projects."

Developing the discoveries—building the platforms, pipelines and other infrastructure needed to get the oil and gas to market—would require Repsol to ramp up capital investment at a time when margins in its core business of oil refining have collapsed.

Moreover, Repsol has relatively little development expertise, and buying it could prove difficult at a time when oil companies are competing for skilled workers able to build projects in challenging terrain.

Offshore oil platforms for deep water are also hard to come by, and the uncertain future of oil prices further complicates the equation.

But Mr. Brufau is accustomed to skepticism. Many in the industry were doubtful in 2004 when he launched a major drive to discover new sources of oil and gas to help offset Repsol's waning production in Argentina.

"I don't think anyone would have guessed what they've been able to achieve from this strategy," said David Thomas, an analyst at Citigroup Inc.

Mr. Brufau more than doubled Repsol's exploration and production staff to around 1,800. The company also developed a well-regarded proprietary technology called Kaleidoscope to crunch through massive amounts of seismic data in search of signs of oil and gas [#msg-39385996].

Partly as a result, Repsol was involved in three of the world's five biggest oil and gas discoveries last year. Among them was Guará, a giant reservoir in Brazil's prolific Santos offshore basin. In September, production tests indicated that Guará, in which Repsol holds a 25% stake, contains the equivalent of up to two billion barrels of recoverable oil and gas.

According to analysts at ING Groep NV, the Brazilian discoveries alone could double Repsol's oil and gas reserves, which stood at 2.2 billion barrels of oil equivalent at the end of 2008, including its Argentine unit, YPF.

Last month, the company announced its biggest-ever natural-gas discovery in shallow waters of the Gulf of Venezuela. Repsol, which will have close to a one-third stake in any development of the field, says the reservoir, called Perla, contains up to 1.4 billion BOE [#msg-41417132].

The same month, a consortium including Repsol announced the first oil discovery in deep waters off Sierra Leone, a major find that could open up a new frontier off West Africa [APC is the operator of this consortium with a 40% stake; Repsol and Woodside have 25% each, and Tullow has 10%: #msg-41574657, #msg-41568002, #msg-40397285, #msg-41549489, #msg-41564242].

Repsol said its latest discovery off the Gulf Coast is attractive because of its proximity to the world's biggest oil market, favorable tax rules and the fact that pumping infrastructure is already in place.

As recently as 2007, Repsol was replacing only around 35% of the reserves it was pumping, a red flag for investors who watch the ratio as a key measure of an oil company's sustainability. Excluding its YPF unit, that ratio improved to 65% in 2008. [In other words, they went from horrible to merely bad.]

Mr. Brufau thinks the company will "easily" beat its target of replacing 125% of its output with fresh reserves by 2012. In Argentina, however, production is continuing to slide.

When he arrived at the company five years ago, Mr. Brufau was faced with a host of interlocking problems that made investors wary. The company, which has its origins in Spain's state petroleum monopoly and was gradually privatized throughout the 1990s, had long been a refining and distribution company with little production of its own.

In 1999, however, it acquired a ready-made oil-producing machine by buying the Argentine state oil company, YPF, for $13 billion. Hailed by some, the purchase quickly soured when Argentina fell into an economic and political crisis in 2001.

The Argentine government forced the company to charge below-market rates for its products, keeping energy cheap for its citizens but making it uneconomic for Repsol to invest in extending the lives of the country's ageing oil fields. That, in turn, has hastened Argentina's production decline.

In an effort to isolate its Argentine problem, Mr. Brufau split YPF off into a separate unit. Repsol sold 15% to Enrique Eskenazi, an Argentine businessman with close ties to the government, and gave him an option to buy another 10%. It also plans to float a further 20% of the unit on the Argentine stock market when market conditions improve. [The deal mentioned in #msg-40397285 is evidently off the table.]

Mr. Brufau has also tried to shift Repsol's assets to more politically stable countries. In 2004, only 40% of its assets were in countries belonging to the Organization of Economic and Cooperation and Development, a rough proxy for political stability. By 2012, Mr. Brufau aims to have at least 55% of those assets in OECD nations.

That isn't a risk-free strategy. Competition in OECD countries is fierce, as oil companies are well-established there.

In addition, though the deep-water Gulf of Mexico, home of the Shenzi field, is one of the world's most politically stable oil-producing areas, it is among the most technically challenging.

The company's huge gas find in Venezuela may also be hard to commercialize for political and technical reasons, while Sierra Leone remains, at this stage, no more than a promising find.

The Brazilian finds will require up to $15 billion in investment over the next five years to develop, according to Mr. Brufau. That may be too much.

"In Brazil, we'll have to reflect at some point," Mr. Brufau said. Such a big investment in a single country "is too intensive, without a doubt."‹