The Spanish distribution system of oil products: an economic analysis Ignacio Contín*, Aad Correljé**, and Emilio Huerta*** This paper is concerned with the structure and regulation of the Spanish distribution system of oil products. Spanish-based refiners have a dominant position on the commercialisation of oil products. The Compañía Logística de Hidrocarburos (CLH), a joint venture between the three Spanish-based refiners and Shell, is the only firm that distributes oil products by pipelines in Spain. It also owns most of the storage capacity ex-refineries. CLH constitutes a “bottleneck” in the recently liberalised Spanish oil market, in particular, for transport inland. As a result, the government decided to regulate CLH in June 1996. However, more transparency should be achieved in this regulation. 1. Introduction The Spanish oil industry was dominated by a state monopoly between 1927 and 1993. The oil sector was vertically disintegrated while the government strictly regulated the commercial relationships between companies involved. Ex-refinery and retail prices were imposed administratively. The government established the size of the deliveries from the refiners to the monopoly. The monopoly was operated by CAMPSA (Compañía Arrendataria del Monopolio de Petróleos Sociedad Anónima) which took care of distribution and marketing, either by its own service stations or by concessionaires. Following a rigorous reorganisation from the early 1980s onwards, Spain began to gradually liberalise its oil industry in order to adapt it to European competition rules and to address the instabilities inherent in the prevailing system of regulation. Access to various segments of the oil chain (distribution, transport, storage, and retail trade) was gradually opened up to new domestic and foreign operators. This produced a radical transformation of the industry structure and the relationships between companies involved1. Large investments were made in production, distribution and retail facilities in order to improve their efficiency and to adjust refinery output to the composition of demand. The number of refining companies was reduced from 8 in the early 1970s to only 3 by the early 1990s. The several public oil companies were reorganised into a “national champion”, Repsol, structured similarly to international oil companies. The foreign companies Elf and BP took part in the two private Spanish refiners Cepsa and Petromed, respectively. In this way, the private Spanish refineries were integrated into the production systems of large foreign oil companies In 1984, CAMPSA was transferred to the refiners on the basis of their respective refining capacity. At the same time, CAMPSA acquired the distribution and storage facilities as *Nijmegen International Political Economy Centre (NIPEC) -University of Nijmegen- and Universidad Pública de Navarra. Dpto.: Gestión de Empresas. Campus de Arrosadía s/n. 31006 Pamplona. Navarra. Spain. E-mail: [email protected] **University of Nijmegen. School for Policy Studies. Thomas van Aquinostraat 1. P.O. Box 9108. 6500 HK Nijmegen. The Netherlands. E-mail: [email protected] ***Universidad Pública de Navarra. Dpto.: Gestión de Empresas. Campus de Arrosadía s/n. 31006 Pamplona. Navarra. Spain. E-mail: [email protected] 1For an analysis of this process see Correljé (1990, 1994). well as the service stations from the state2, achieving the refiners in this way a certain degree of downstream vertical integration. Over the 1980s, CAMPSA’s Plan estratégico de CAMPSA brought about a radical restructuring and modernisation of the Spanish distribution system. The plan envisaged large investment in the distribution network as well as a rationalisation of its labour force. Its objectives were to improve its efficiency3 as well as to adapt it to the change in the composition of demand (toward lighter products). Between 1986 and 1991, 20 depots were closed while the storage capacity for fuel oil was somewhat reduced. Large investments were made in order to modernise the remaining depots, through the construction of automatic loading facilities for the trucks and the introduction of a monitoring system in order to employ the capacity of the system more efficiently. The number of ships and barges was reduced and 1.025 kilometres of new pipelines were built. As a consequence all remaining depots (38) were either located in a seaport or connected to the pipeline grid. Hence, the transport of products from the refineries could take place largely by means of the cheapest types of transport, namely pipelines or ships. A satellite system controls automatically the pipeline grid [Correljé (1994) and CAMPSA annual report, 1991]. Forward integration of the refiners was achieved by separating the retail network from the distribution activities, and dividing it up among the refining companies by mid 1992. CAMPSA primarily became a transport company. In January 1993, when the monopoly was abolished, CAMPSA was renamed CLH (La Compañía Logística de Hidrocarburos). At the end of 1993, Shell took over a 5% stake from Repsol. CLH is currently a joint venture among the oil companies that have refineries in Spain plus Shell. Its current shareholding is structured as follows: Repsol, 61,46%; Cepsa, 25,1%; BP, 7.61%; Shell, 5% and others, 0,83% [Contín (1996)]. Together the refiners controlled, through different kinds of contracts, approximately 85,2% of the service stations by mid 19974. Repsol currently has 5 refineries with an approximate nominal capacity of 37 MT/year (which is 61,5% of the Spanish refining capacity). Cepsa has 3 refineries (28,7%) and BP España has one refinery (9,9%) [Contín (1996)]5. All Spanish refineries are connected with depots located in the main consumption areas through pipelines (see Figure 1). Most of the oil companies established in Spain transport their automotive fuels from their refineries or from depots located in seaports to the mainland country through CLH. This company transports 2Until that moment, CAMPSA only operated the Monopoly’s marketing system. The Monopoly’s assets were owned by the state 3In order to secure the distribution of products at minimal costs, it is necessary to locate the depots in such a way that a maximum volume of products can be transported over large distance at the lowest cost, while at the same time minimising the distances over which smaller quantities have to be transported to the retail outlets [Correljé (1994)]. 4The market shares of the “Spanish majors” in terms of service stations were: Repsol, 51,3%: Cepsa, 25,6%; and BP, 8,3%. Shell, Petrogal, Agip and Total together controlled around 7,5% of the outlets (only Total does not use CLH’s distribution system). The aggregate share of all others is 7,3% (Avanti, Continental Oil, Esso, Fina, Saroil, Meroil...-until a total of 12 companies). The hypermarkets managed directly 32 service stations (Oilgas, July-August, 1997). The three refiners sold 86% of the gasoline consumed (Repsol, 54%; Cepsa, 25%; and BP, 7%) and 77% of the gasoil [Contín et alt (1997) and Ministry of Industry (1995)]. In July 1990, when the market concentration was even higher, the government introduced maximum price regulation for automotive fuels to protect the consumers against monopoly pricing. Likewise, in June 1996 the government abolished maximum price regulation for gasoil because it considered that a sufficient competition had been reached. 5There is a ninth refinery, Asesa (capacity of 1 MT/year), a joint venture between Repsol and Cepsa, which only produces asphalt. One of the Cepsa’s refineries is located in the Canaries Islands. Our study refers to the mainland distribution system, to the exclusion of the Canary Islands. Seven of the Spanish refineries are located on the coast near main consumption areas. The other Refinery, Puertallono, is close to Madrid, connected with the coast by a crude pipeline. 2 about 90% of the transportation of automotive fuels (Oilgas, June, 1997)6. Post 1990, new distributors have constructed “independent” storage capacity near terminals in the seaports of high-consumption areas. These “independent terminals” are close to the Spanish refineries or to CLH’ depots. In June 1996, the government decided to regulate CLH because “the high concentration on the primary distribution market”. The final purpose of this regulation was to stimulate competition on gasoline and fueloil markets (Royal Decree 7 June 1996). The objective of this paper is to analyse the developed of the structure of the Spanish primary distribution system of oil products and its regulation7. The next section presents the main economic features of the distribution of oil products. Section 3 describes the Spanish distribution system and section 4 discusses why it should be regulate it. Finally, section 5 presents main findings. Figure 1: CLH’s distribution system Source: CLH Annual Report, 1996. 615 operators use CLH’s distribution system for moving their oil products (Repsol Annual Report, 1996). 7This paper does not deal with the Spanish LPG market. This market, monopolised by Repsol Butano, is regulated by a maximum price system. In contrast with other European countries, LPG is not an important automotive fuel in Spain. 3 2. Main characteristics of the distribution of oil products. Pipelines are the cheapest means of transport for large quantities of light products (gasoil and gasoline) over large distances, such as in the primary distribution system8. Only transportation by water (barges in rivers and ships between seaports) is cost price-competitive with pipeline transportation9. Transport by train and trucks for this order are much more expensive10. For small quantities over short distances and when flexibility is required, like in the secondary distribution, railways and particularly trucks are the most appropriate means of transport. Average pipeline costs in Europe, by 1989, were about 30% of the costs of railroad transport, and between 50% and 90% of the costs of coastal shipping [Masseron (1990)]. In Spain there are not navigable waterways. So, pipelines are the only efficient alternative for inland transport gasoil and gasoline over long distances11. The main characteristics of the transport by pipelines are: 1) Economies of scale.