As more than ten companies are in talks with Repsol to buy its LNG assets around the world, the balance of power at Atlantic, the LNG company of which Repsol is a co-owner, may shift if the assets are bought by China through one of its state-owned companies. While Repsol Chief Financial Officer Miguel Martinez would not say who are the interested buyers or where they are from, in an August 1, 2012 press release, Repsol announced that it intends to sell its "wholly owned subsidiary Amodaimi Oil Company (in Ecuador) to Tiptop Energy Ltd, a wholly owned subsidiary of Sinopec of China." Also, on August 10, 2011, China Investment Corporation acquired French energy giant GDF Suez's ten per cent stake in Train 1 of Atlantic LNG.
GDF Suez and the China Investment Corporation signed a Memorandum of Understanding on August 10, 2011 in which they agreed that the Chinese company would purchase a 30 per cent stake in the exploration and production division of GDF Suez for US$3.26 billion. As part of the transaction, China Investment Corporation also acquired from GDF SUEZ its ten per cent stake in the Train I of the Atlantic LNG liquefaction plant located at Point Fortin, as well as production payments associated with Trains II, III and IV for an amount of US$852 million, according to the joint statement issued by the companies.
At the time, Lou Jiwei, Chairman and Chief Executive Officer of China Investment Corporation, had said: “We are pleased to cooperate with GDF SUEZ, a leading utility company worldwide. Our investment of 30 per cent in GDF SUEZ E&P would be our first sizeable transaction in Europe to date and, together with Atlantic LNG, one of our most important investments worldwide. We are committed to working with GDF SUEZ E&P to achieve its growth prospects.” Gérard Mestrallet, Chairman and Chief Executive Officer of GDF Suez, had said: “I am very pleased to enter into this MoU with China Investment Corporation, a major investment force worldwide, which can help GDF SUEZ access substantial incremental financing resources and strong networks in China and throughout Asia." During a July 26 conference call, Repsol's Martinez said, "In relation with the LNG, our idea is to sell it as a block, and not in parts." That block includes assets in Canada, Peru and Trinidad and Tobago. "With respect to the asset disposal program, we have sold our LPG operations in Chile for $540 million in July. This transaction, along with the sale of the 5 per cent treasury stock in January 2012, amounts to EUR1.8 billion, delivered out of the EUR4.5 billion we have announced as an objective for the five-year duration of the strategic plan," Martinez said. The imminent sale of its company in Ecuador to China's Sinopec subsidiary is linked to the same strategic plan and part of the same asset disposal programme, Repsol said in its release.
Added to what Repsol owns, a 20 per cent share in Train 1, a 25 per cent share in Trains 2 and 3, and a 22.22 per cent share in Train 4, a Chinese buyer would shake-up the ownership structure of the LNG producer, T&T’s single largest revenue earner. If Chinese interests buy out Repsol’s LNG facilities in Canada, Peru and T&T, China will own 30 per cent of Train 1 making it the second largest shareholder behind BP, which owns 34 per cent, and the third largest shareholder of Trains 2 and 3 with 25 per cent. BP owns 42.5 per cent of Trains 2 and 3, while British Gas owns 32.5 per cent. Asked about the prospective buyers of the block of its LNG assets, Martinez said, "I can tell you that we have a strong team in our side, with the Government, plus some consulting group. We have also, I think it's Deloitte's, or KPMG. So we have all the groups working, and we have already received interest from more than 10 companies. So we will see how it develops, but our idea is, as mentioned, to move it fast in order to have more possibilities (before) the (ratings) agencies." Asked if the sale of its LNG assets as a block could fetch the remaining EUR2.7 billion, or at least EUR2.4 billion that Santander Analyst Jason Kenney said was "particularly low," Martinez responded, "Those are your estimates; EUR2.7 billion, EUR2.4 billion. We will see. I mean, we will see. There at least ten different companies which are in the process and normally I don't like to advance the result of what third parties are going to put on the table." On July 21, in response to a text message from the Guardian, Energy Minister Kevin Ramnarine said: “In the event that Repsol does in fact decide to sell its LNG assets in T&T, the purchase of these assets by the NGC or some other entity would be considered. This would, however, be subject to the approval of Cabinet. I have asked the LNG division of the Ministry of Energy to prepare a brief for me on the options available to the Government.”
The impetus to sell comes from its strategic plan, one of the aims of which is "to reduce debt and improve the financial ratios and cash position," but Repsol is also strongly motivated by the opinion of the ratings agency. Citing the Argentine government's expropriation of YPF, Moody's downgraded Repsol's rating on June 12, four days after Fitch Ratings did the same. Responding to Business Guardian questions by e-mail from Madrid, Martinez said: "In relation with the LNG, the priority is to keep the investment grade. We are going to move faster with the LNG, and in parallel with the preference shares.
“If the LNG gives us enough room to work with the agencies, find a status in which the investment grade thus is not in danger, then we will look for a solution for the preference shares totally different from capital. There are other formulas that can solve the situation of liquidity of the preference shares not being capital. But, having said so, I need first to know how the LNG process is going ahead. So I will solve both the issues, but once -- I need a variable to be solved, which is how the LNG and how the agencies will analyze the Company once the LNG is sold. Also I think it's important to mention, when we talk about LNG we are not talking about the Upstream assets linked to the LNG. So, basically, first step, let's see how the LNG works; then let's solve the problem of the preference shares. If the rating agencies give us comfort, and we know that we can keep the investment grade, then there are formulas to provide liquidity to the tenants of the preference shares not affecting the capital; let's say hybrids, or many other options. But I cannot give you more flavour today, because first I need to know how the agency will react once we move into the LNG process."
Speaking specifically on T&T, Martinez said: "Production in the Upstream division within the quarter was 320,000 barrels of oil equivalent per day; 8 per cent higher than during the second quarter of 2011. The main variations come from Libya, Bolivia and Trinidad and Tobago. In Libya, the production reached 47,000 barrels of oil per day, which we have reached pre-conflict (inaudible) levels. “In Bolivia, production was 26,000 barrels per day; 24 per cent higher than during the same period last year, due to the startup of Margarita phase one. “In Trinidad and Tobago, we were still affected by maintenance on the offshore platforms, and in the Atlantic LNG trains, and production reached 119,000 barrels of oil equivalent per day; 16 per cent less than during the same period in 2011." He then immediately followed with, "Since early July, production is at record levels of 350,000 barrels of oil equivalent per day, due to the recovery of Trinidad and Tobago. We expected to materialize added production from Kinteroni in Peru, Russia and mid-continent in the US in the second half of the year." Martinez also said Repsol is "waiting for notification from authorities on our entry into the [Peninsular] Block in the Portuguese Atlantic deep water offshore, and, also, the award of offshore in Block 23B in Trinidad and Tobago."
Nothing cast in stone
Still, nothing is cast in stone for Repsol. Martinez said: "We have to check first how the LNG business is going to evolve and which will be the impact, because I think that the LNG, under the (ratings) agencies concept, implies a debt of EUR4 billion. So it will have a massive impact on the considerations of the (ratings) agencies. So I cannot go any further because first we have to check the evolution of the LNG process, and then we will analyze the prefs. It's important to keep both projects in parallel because one thing is important; what we consider totally necessary is to keep the investment grade. So we will see. We will see. But I cannot be more clear. Okay?" He later reiterated the importance of the ratings agencies: "One thing is clear; we have to keep the investment grade, and we will look at the, first, at the results of the LNG, and, if necessary, we will go to the preference shares. So we keep with both process in parallel. And we will see. In today's financial markets, and in today's -- I mean, volatility's the name of the game; so it's quite difficult to assess what is going to happen in two weeks. So we will keep working on the LNG, and then we will take our decisions. This is all I can tell you."