Gazprom’s Move on Spain

You’ve got to hand it to the Spanish – while their friends in France, Germany, and even Italy get twisted up in the bickering with other EU members over common energy policy and relations with Russia, the Iberian peninsula often appears to be blissfully unaware and uninvolved. After all, as they are geographically beyond the reach of Moscow’s pipeline arteries, they enjoy a diverse supply of natural gas from Norway, Algeria, and the spot market at LNG terminals. As such Madrid has not really had to worry that much about Gazprom’s encroachment on various companies and assets critical to security of supply (not to mention the trafficking of influence). In a recent interview with the Economist, two-term Socialist Prime Minister José Luís Rodríguez Zapatero did not mention Russia or energy even once, despite the approaching partnership talks. He seemed entirely focused his domestic agenda, which has been the signature trademark of his stewardship of this government. The magazine also commended Mr. Zapatero as “one of Europe’s few successful politicians of the left” but warned that under his watch, the Spanish government has become overly inward-looking when it can and should be playing a larger role in European and global affairs – a fact demonstrated by the lack of invitation to participate in the Nov. 15 summit on the economic crisis in Washington. But Spain’s isolation from the hardball game of EU-Russia energy politics may be coming to a sudden end, as the Kremlin’s deputy prime minister (you know who that is) suddenly announced that Gazprom is currently in talks to buy up a 20% stake in Repsol, the country’s top oil refiner and one of the world’s ten largest remaining private energy corporations. Guess what: Madrid doesn’t like it at all.

Before everyone panics about the Russian siege of the Spanish energy market, we have to take into account how Gazprom has handled these kinds of takeovers in the past. Usually we are treated to a lot of back and forth expressions of interest followed by denials, which has exactly been the case with Gazprom and Repsol. Just last month they were denying any interest in buying a stake in Repsol following rumors leaked to a Spanish business paper. We’ve also seen Gazprom announce empty deals everywhere from Algeria to Nigeria to force the hand of their competitors, part of a process I have called “premature contractualization.” If we were to take the example of the OMV-Mol dispute or investors to the Shtokman Field, one could argue that until the money is on the table, don’t pay any attention to Gazprom’s highly public entreaties to assume a huge chunk of Repsol – at least not yet.On the other hand, the entry into Spain via Repsol could very appealing to Gazprom as well, especially in long-term strategy. One of Repsol’s major shareholders, construction giant Sacyr Vallehermoso, has been absolutely slagged by the pop of the housing bubble, and in dire need of the liquidity that this 20% stake would generate. According to the Financial Times, “Sacyr paid a hefty €6.5bn (£5.6bn) at the end of 2006 for this stake in an oil group, which in recent years has generally lagged behind its peers in profitability and in increasing production and reserves. The acquisition was mainly financed by debt to the tune of about €5.1bn and Sacyr pledged its Repsol shares against the loans.“Spain is also commercially very interesting to a company like Gazprom. It has been one of the fasting growing consumers of natural gas in all of Europe (consumption tripled between 1994 and 2004), and the country has an extremely high number of combine-cycle electricity plants. Its position as a pipeline hub from North Africa and its highly developed network of LNG terminals (an area where Russia has been traditionally weak) could eventually give Gazprom access to a number of new markets. Repsol is also a technologically sophisticated company, with successful offshore extraction operations everywhere from the Canary Islands to Latin America and even Trinidad and Tobago – a monster gas producer (where they have been pressuring BP for access).Politically, there is great interest as well. Gazprom’s efforts to enter other European markets have often been thwarted by anti-monopoly agencies, and there is of course the ever-looming threat of the “Gazprom clause” from Brussels, which seeks reciprocity for participation in production projects. Getting into Spain could arguably represent the final diplomatic piece for Russian interests to be fully represented in Brussels alongside several influenced parties and politicians (the SPD, Berlusconi, the Austrians, the Hungarians and others). Although clearly difficult to quantify, one can understand the level of “mercantilist foreign policy” that a 20% stake in Spain’s largest energy company would bring. Also, it would probably seem to many in the Kremlin that Mr. Zapatero would be an easy sell on their “vision of a multipolar world” – flawed as the vision may be.But just because the Spanish haven’t been especially active in Brussels against Russia’s energy moves on Europe, or because the Bush Administration has treated them like Iran, it is a mistake to think that they aren’t savvy and fierce when it comes to their own market: Madrid can throw down the protectionist gauntlet with the kind of bureaucratic enthusiasm of the Soviets.This was the lesson learned the hard way by Germany’s E.On, who was forced to abandon its highly publicized attempt to take over the Spanish electricity company Endesa after Spanish regulators got creative with laws requiring pre-approval for energy mergers (of course the lawsuits continue). And so far, it looks like Gazprom is even more unwelcome by Spanish government than the 711 invasion by the Moors.In just 24 hours, the critics are coming from all across the political spectrum: The leader of the opposition Partido Popular Mariano Rajoy has told El Pais that he is “radically against a monopolistic state owned Russian company taking over 20% of Repsol YPF.” Pedro Solbes, the socialist minister of economy (PSOE), said “We’ve privatised companies in Spain, and it grates with me when state-owned foreign companies come and buy them. (…) We have to analyse it seriously.” Repsol’s Chairman Antonio Brufau, one of Catalunya’s most seasoned and influential businessmen (an important region for Zapatero’s power base), has stated his case rather simply and plainly: the company should continue to be “private, independent and Spanish.”It is difficult to assess the degree to which this unanimous opposition to Gazprom’s entry into Spain is motivated by the potential political influence of the Kremlin, or simply a traditional distrust of outside owners edging in on a national champion. Neither will we know for a while whether Gazprom’s bid to the desperate Sacyr is serious or just a PR ploy, given that there are serious doubts about the state company’s ability to finance the acquisition in the middle of a crisis. The company recently found itself unable to pay for the heavily discounted stake in BP’s Kovykta field (which they had bargained down thanks to government pressure), and ever since the company has lost two thirds of its share price value, it is looking to the government for bailout help on its margin calls.Nevertheless, with the steep discount on Repsol’s price right now, driven down by temporarily low oil prices, this acquisition might just be irresistible to the Russian government.Photo: Spanish Prime Minister Jose Luis Zapatero gives a press conference after an European Informal Economic Council summit at the headquarters of the European Council on November 7, 2008 in Brussels. (AFP/Getty Images)