And he is Catalan. Those three things make the former auditor one of the most controversial figures in Spain and Latin America. He is also a very powerful one.
Interviewed over breakfast in the company’s current Madrid headquarters – a building where suited executives mingle with Spanish, North African and South American engineers dressed in casual clothes – Mr Brufau and his team are soon to move into a Norman Foster-built tower so high that “when it snows at the top it will rain at the bottom,” say managers.
That is proof of the company’s ambitions, which are dependent on the political canniness of the 58-year-old former head of savings bank La Caixa and of Gas Natural, Spain’s largest gas company. With 56.3% of its assets in Latin America, where many existing and new heads of government are asserting their rights to a larger percentage of foreign oil company profits and, in some cases, nationalising assets, Repsol is in the thick of a new paradigm. Mr Brufau points out that there are no more pending discoveries of vast oil reserves, extracting oil continually demands more effort, companies are consuming more reserves than they book, and demand is estimated to grow at 1%-2% a year, therefore prices will continue to rise.
| “In these circumstances, state-owned companies are in command,” he says. “One of our niches is getting along with state oil companies. We are perceived as friendlier, less aggressive, than the big oil companies.” |
Humble pie Evidence of this is that the Repsol representative was asked to give a speech at a recent event in Venezuela where 17 foreign oil companies swallowed their bile and turned their local subsidiaries into joint ventures in which state oil company PDVSA will have the majority. The decision by oil companies Eni (Italy) and Total (France) to abandon their business in the country leaves Repsol as the largest foreign company by volume.
“It is logical that in something as capital intensive [as oil extraction] the risks need to be shared,” says Mr Brufau, wearing his characteristically amiable look.
“But that is executive logic,” he adds; evidence of his understanding that what makes sense in the boardrooms of international oil companies does not play well in, say, the presidential palace in Bolivia. There, in a widely expected move, President Evo Morales nationalised the country’s oil and gas fields on a symbolic May Day, a couple of weeks after our interview. Bolivia has the second-largest reserves of natural gas in Latin America and Repsol is the largest foreign investor along with Brazil’s Petrobas. The government will renegotiate contracts with foreign companies over the next six months. Repsol reacted in a very low-key way.
“You have to have a lack of arrogance when dealing with the authorities,” says Mr Brufau.
Meanwhile, Ecuador imposed a 50% tax on the ‘extraordinary profits’ of foreign oil companies and took over $1bn of US company Occidental’s assets on the back of the dispute.
In Peru, the two presidential candidates have both made unfriendly noises to international oil companies. But despite all this – and there are more countries one can mention – Repsol’s exposure to Latin America has to be put in context. As Shell and other oil majors well know, west Africa, Russia and the Persian Gulf, where the most reserves lie, are as politically awkward, in their own unique ways, as some of the increasingly populist Latin American governments. (Repsol also has an exposure to north Africa, Algeria and Libya, and to Iran, mainly in liquified natural gas.)
Another problem oil companies face, and Repsol more so than many, is an organic reserve replacement ratio of just 11.2% in 2005, about one-tenth what the business should be adding to maintain the status quo, says Morgan Stanley in a report. Plus, with China and India on the acquisition trail, let alone the usual international oil companies, the prices being paid are too high, says Mr Brufau.
This does raise a question mark over the company’s independence. A ?30bn market capitalisation is not a deterrent in the world of oil. “We are not small, the big are very big,” points out Mr Brufau, as he picks a few strawberries and a piece of ham from the assortment in front of us. “We would like to be independent. We run the risk of being taken over. Our responsibility is to do a good job, that the market perceives this so Repsol’s capitalisation rises and, if our multiples are comparable to the big ones, they won’t find added value [by buying us].”
Fending off predators
Conspiracy theorists tie this into Mr Brufau’s announcement in January of a 25% downward revision in Repsol’s proven reserves. There was a huge brouhaha, with critics pointing out that he had been on the board since 1996, later joining the auditing committee. “In America he would have been on the street yesterday,” says one critic, a top investment banker.
But as Mr Brufau points out, the committee “had no responsibility over reserves, only the board did, while we dealt only with auditing. When I became president [chairman and CEO] I changed that. Now those who tabulate reserves don’t report to me but to the audit control.”
As almost 50% of those reserves were from Argentina and Venezuela, some oil analysts speculate that when Repsol bought YPF of Argentina in 1999, thus becoming an international oil company, the latter may have been excessively generous in stating its reserves to make itself more attractive and that, currently, Repsol is tidying itself up for sale. A more likely explanation is that this is part of Mr Brufau’s efforts to transform the company by improving its margins, increasing shareholder returns and reinforcing its credibility. In 2005 it posted a 29.2% rise in net income to €3.12bn.
The company trades as a single A, a sore point. “The analysts only see upstream. Half of our EBITDA [earnings before interest, tax, depreciation and amortisation] comes from downstream. Refining and marketing are very valuable,” he says, also pointing out that the company has up to €6.5bn in annual cash flow and net debt of €4.5bn.
Repsol is the number one retailer of LPG in Spain with a market share of more than 81% and an average share of between 29% and 39% in the Latin American markets where it is present. It also has a huge network of petrol stations.
It is, however, Mr Brufau’s involvement with Gas Natural’s hostile bid for Endesa (see page 62) that has made him controversial in Spain. He had already hit the headlines in 2003 when, as head of Gas Natural, he launched a hostile bid for utility Iberdrola which was disallowed. Now, with Repsol’s 31% stake in Gas Natural and increased co-operation between the companies through a joint venture, critics say he is acting in the current government’s interests by trying to create a national champion – and at the same time rid the ruling socialist administration of Manuel Pizarro, the chairman of Endesa, who is closely allied with the opposition Popular Party.
“I have been criticised. I don’t know about it, I don’t read those things,” he says, waving his breakfast knife about. “He who criticises the bid is doing so out of political motives. The world is going this way: it is the normal tendency for energy companies to sell everything to the customer.” He points out that the counterbidder for Endesa, Germany’s Eon, sells gas and electricity, as do other European firms, such as the UK’s Centrica.
Pulling the strings
He denies, with his usual affable smile, that he is more of a politician than an executive, and also denies unique responsibility for the Gas Natural bid, despite the words of a former investment banker who has known him for 20 years and says: “Without the slightest doubt he is behind everything to do with Endesa. He is a great strategist.”
Mr Brufau will only admit that he is on the board of the gas company and “the board of Gas Natural made the hostile bid for Endesa. All boards approve bids. I was on it.”
What has made the hostile bid all the more contentious in Spain is that Gas Natural is a Catalan-run company with headquarters in Barcelona. With the recent passage of a bill granting greater autonomy to Catalonia, which the opposition Popular Party argued would lead to the break-up of Spain, any bid that looks like a Catalan takeover of a non-Catalan asset was bound to be controversial. Even more so when La Caixa, the Catalan savings bank, is the main shareholder of Gas Natural, leading Mr Pizarro to repeat three times at a press conference: “I will never be an employee of La Caixa.”
With all this emotion at stake, as a Catalan, Mr Brufau is certainly in the thick of it. But even with the added worries of Latin America, his famed agreeable nature has not deserted him.
