"Vuelve a casa"
Bridas Corporation, the Argentine energy giant founded by the Bulgheroni family, this week announced the creation of the Pan American Energy Group, a new joint venture with BP that brings together PAE and Axion, two of the largest upstream and downstream players in the local oil and gas market. The result is Argentina’s largest private integrated hydrocarbon company, with billing totalling US$7.3 billion. Here is the story behind the deal.
More or less at this time of year, around six years ago in 2011, Carlos Bulgheroni, the biggest magnate in the Argentine oil industry, took a call in Milan, one of his three headquarters along with Washington and Buenos Aires. On the other end of the line he was greeted by the concerned voice of a top Libyan government minister. Libya was familiar to Carlos Bulgheroni.
It was a place where the co-owner of Bridas Corporation (the Argentine oil and gas company his father Alejandro set up in the mid-20th century, which Carlos expanded fiercely with his elder brother, also named Alejandro) had done business in the past. The urgency of the call quickly ruled out small talk. The Libyan official got straight to the point, using the direct code which characterised Carlos, a man as evasive in personality as he was astute in business.
On the brink of losing power in Libya, the paranoid dictator Muammar Gaddafi had ordered the persecution of his former aides, including Bulgheroni’s old pal. In his despair, the Libyan minister was turning to the Argentine businessman, seeking the logistical help he needed to pull his family out of the country. There was little time for thought. In a matter of hours Bulgheroni had responded in the affirmative and – taking advantage of his status as a plenipotentiary ambassador (one of his lesser known attributes) – he joined a diplomatic mission led by the former Spanish premier Felipe González, which was heading to Libya with the intention of mediating a negotiated solution with Gaddafi.
Before embarking on this audatious venture, the Argentine businessman had contacted his son Marcos to warn him about the delicacy of the trip. Reportedly, few words were exchanged. As had happened so often before, the message startled its recipient. “I have a contract with Bombardier to buy an aircraft. Should anything happen to me, take care of it,” were Carlos Bulgheroni’s parting words. Some of the provocative, irreverent and altruistic spirit permeating this story bordering on fantasy can be found in Alejandro and Marcos Bulgheroni who – just after the first anniversary of Carlos’ death – have managed to clinch a strategic deal to relaunch the Bridas Corporation’s strategy at a regional level.
Creation and practice. The creation of the Pan American Energy Group (PAEG), announced this week, translates into the total merger of PAE, Argentina’s second-largest oil and gas producer, with Axion Energy, one of the three biggest players in the local fuel market. These assets will now be owned equally by BP and Bridas, which in turn is controlled by China’s CNOOC and the Bulgheroni family.
In practice, BP will be relinquishing 10 percent of PAE (its current share is 60 percent) to pick up half of Axion Energy, the company which inherited Esso’s network of service stations in Argentina after Bridas acquired the brand name in late 2012 from the US giant ExxonMobil.
The new holding will have an estimated annual invoicing of US$7.3 billion, thus making it one of the three biggest companies in the country, running only behind YPF (with earnings last year of 21.1 billion pesos) and the Techint group, whose worldwide sales are estimated at US$15.2 billion (the company does not specify what figures correspond to Argentina).
The operation is a huge boost for the Argentine oil and gas group. But it also establishes something new and different, something related to the changing leadership of Bridas. When – subject to the required regulatory approvals – this move comes together in early 2018, the Pan American Energy Group will have Marcos as its CEO and Alejandro Bulgheroni as its chairman, thus setting the seal on its two new top dogs.
In some ways, with this new holding, the partners will tie up various commercial loose ends and disparities in the distribution of shares to project themselves toward the future from a more stable platform. PAEG will be betting on more expansion in Latin America. Objectives on the horizon include: increasing PAE’s activities in Mexico to take advantage of the opportunities offered by President Enrique Peña Nieto’s energy reforms, starting offshore exploration off the coast of Cerro Dragón, Argentina’s biggest oil-field, and drilling onshore or in the shallow waters of Brazil, sources close to the operation informed the BA Times.
Despite the scale of the transaction, no cash exchange was involved. Under the umbrella of a cash-free understanding, BP and Bridas agreed on an internal share swap between their partners. By entering the refinery market, the British oil giant will be integrating its Argentine business. Bridas already enjoyed that advantage.
Stages and integration. “For 58 years we have been investing in the energy sector in Argentina and in the region. By signing this agreement, we open up a new stage by integrating with our partners,” declared Alejandro Bulgheroni, the chairman and president of Bridas Corporation, via a communiqué. An engineer by profession, the elder of the Bulgheroni brothers pushed the technological upgrading of Cerro Dragón (in the province of Chubut), the most efficient oil-field in Argentina in terms of operational costs and the automation of processes.
The merger – signed last Saturday, September 9, in Madrid – could be explained as both a defensive and offensive tactic from both partners. For BP, the refinery earnings will permit a better defence of the profitability of the crude oil extracted from the Golfo San Jorge basin, given that PAE is its biggest supplier of raw materials for the Axion refinery in Campana, to the north of Buenos Aires. As from now it will have a 50-percent cut in both oil companies.
At the same time, in contrast to the posture adopted during the Kirchnerite presidencies, when it decided to leave Argentina and announced an agreement to sell Bridas its 60-percent stake in 2010 – the transaction collapsed one year later, due to the lack of regulatory approvals – BP now has an expectant outlook as it waits to see how the business climate in the country will evolve. There is no longer any urge to abandon this market. Previously the firm wanted to await developments with Vaca Muerta, the rock formation rich in unconventional oil and gas resources in the Neuquén basin which could turn into a vast and world-class producing area.
The next three years will be crucial. It will confirm if the companies can extract oil and gas there efficiently and at competitive prices with a barrel of crude which (according to most analysts) will remain stuck on the US$50 plateau for the next two or three years. Toward the end of this decade news is also expected as to the offshore potential of the Argentine continental platform. Much of its vast territory remains unexplored. The Energy and Mining Ministry, under the leadership of former Shell executive Juan José Aranguren, plans to launch the first tender for deep offshore areas in the Austral basin, to the south of the Malvinas (Falkland) Islands during the first quarter of 2018. The participation of PAE, which together with the French firm Total and the German company Wintershall is exploiting the two biggest offshore gas deposits in the same basin (Carina-Aries and Vega Pléyade), is highly probable. “On the basis of the expert knowledge [available] and the combined skills of BP and Bridas, this newly integrated company will be able to capitalise on the opportunities for growth and development in Argentina, Uruguay, Paraguay and Mexico,” pointed out Bob Dudley, BP Group’s chief executive.
Commitment and power. For the Bulgheroni family, integration crystallises its power within the business. Despite being one of the minority partners, who in consolidated terms will own 25 percent of PAEG, the Argentine businessmen will control the top management spots at PAE and Axion, as they have until now. The merger will permit them to soften the “noise” with their British counterpart - derived from past commercial conflicts of interest - and project the future from a more robust and reliable position.
“This merger agreement ratifies our commitment to investment, employment and the efficient development of the resources which our region needs,” affirmed Marcos Bulgheroni, the executive director of PAE, who is seeking to write his own story at the PAEG helm. The new oil and gas company will seek to expand its portfolio of assets in local upstream markets. A barrel priced at a stable range of around US$50 does not seem to be an obstacle to that strategy. The company has just been awarded a new potential gas exploration area in the north of Santa Cruz, which in the last 12 months has suffered abruptly curtailed activities due to the decision of some companies – such as YPF and China’s Sinopec – to sharply scale down their level of activity, due to the fall in domestic crude prices.
Indeed, China’s third-biggest oil company is in the process of disinvesting its holdings in the Golfo San Jorge basin. PAE appears to be one of the potentially interested parties in those mature oil-fields. PAE is Argentina’s leading private hydrocarbon producer with a daily output of over 15,300 cubic metres of crude and 15 million cubic metres of natural gas, according to June 2017 data from the IAPG (Argentine Oil and Gas Institute). Between 2001 and 2016, the company invested over US$14 billion in exploration and exploitation in Argentina, through which it increased gas production by 76 percent and oil by 27 percent. Its supply now represents 18 percent of the consolidated oil and gas market in Argentina, and it is the energy company with the highest rate of restocking reserves: 150 percent between 2001 and 2015. On that basis it has among the biggest proven oil deposits: 983 MMBOE (Million Barrels of Oil Equivalent), as of 2015.
As for downstream, Bridas is also expanding. After the merger, the new energy company will move forward aggressively to claim a greater share of the Argentine fuel market, by attempting to cut a slice off leYPF, the biggest player in the sector with a service station market share close to 50 percent, as well as consolidating itself in second place, ahead of Shell, which currently occupies that spot. Axion already has an ambitious commercial policy in progress, boosted by the arrival of BP, one of the big international players when it comes to the refinery business and the sale of oil derivatives.
The expansion of its downstream business is not, a priori, a core objective of BP. The scant relative weight of the Argentine fuel market does not move the ammeter of a giant like BP. Its entry into that business makes more sense in terms of defending the profit margins of its crude production in Cerro Dragón (mostly sold to Axion). Nevertheless, with flat current prices which transfer the value of the energy business to the other end of the energy value chain, it should not be ruled out that in future, the industry’s big global players (like BP) might rethink their decision to concentrate on upstream and return partially to the segment of refining and marketing crude oil.
In any case, Axion – which accounts for 15 percent of the fuel market in Argentina, 20 percent in Uruguay and six percent in Paraguay – is a brand on the rise. In the last five years, the company headed downstream investment with an inflow of over US$1 billion into the country. Much of this outlay went toward an ambitious plan to expand and modernise its Campana refinery, requiring a total investment of US$1.5 billion – the most important project in the refinery sector in the last 30 years. The refinery has expanded fuel production by 20 percent since 2012. In the next two years the rate of increase is to expected to hit 60 percent. Carlos Bulgheroni would be proud.
"Vuelve a casa"