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Repsol CEO Calls Strategic Plan a 'Transformation Story'

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Repsol recently accelerated its energy transition push by upping its goals for renewable power production and unveiling lower emissions targets. CEO Josu Jon Imaz explained what is driving the company’s transformation, how investors are receiving the strategic shifts and where it leaves the traditional oil and gas business at the recent Energy Intelligence Forum. 

Q: You unveiled a very ambitious new set of targets for renewable energy production. What gives you the confidence that the company can turn its very large project pipeline into actual power on the ground?

A: We started a completely new business three years ago. We already operate 1.6 gigawatts of pure renewable assets in our portfolio. In parallel, we have built a client base of 1.2 million-1.3 million people in the power retail business in Spain. And, on top of that, we are growing fast. In renewable generation, we have increased by 15% our renewable ambition to 6 GW in 2025. And we have an ambition to achieve 20 GW of operated assets producing renewable power by 2030.

This new commitment is based on facts and it's also based on capital expenditure. I mean 35% of our planned capex in the 2021-25 period is going to be devoted to low-carbon businesses. Our forecast is that by 2030 45% of the company’s capital employed is going to be focused on this new business.

So, we have a clear ambition. We have a reality [of renewable projects] that we are already operating today. And, on top of that, we have the projects to fulfill this pipeline.

Q: Repsol was already very ambitious in its emissions reduction targets. What factors pushed you to accelerate those reductions recently?

A: Ambition, delivery and technology are behind this acceleration. It’s the demonstration of how we are building our commitment and how our progress is making possible this acceleration. And when I say “progress,” I'm not only talking about Repsol but also the progress … of the society in which we are living.

We are measuring this decarbonization through the carbon intensity index that takes into account the baseline we had in 2016, taking all of the scopes — Scopes 1, 2 and 3 [operation and end-use emissions] — into account. … We are increasing this reduction, taking off 15% by 2025, a 28% reduction of the carbon intensity index by 2030 and 55% by 2040. Previously, we had figures of 12% 25% and 50% for these three milestones. In parallel, taking the absolute operated emissions — that means Scopes 1 and 2 — we are going to reduce this figure by 55% by 2030.

We believe in technological neutrality. Repsol’s vision is a combination of electrification on one side but, on the other hand, low-carbon products and liquid products could also be a solution to decarbonize the economy in a fast way. So, we are taking that whole broad panoply of technologies. So, technology ambition and delivery are behind this evolution.

Q: How are you reassuring investors that now is the right time to pivot from oil and gas toward renewables? What are those conversations like?

A: I'm not going to tell you that it's an easy task at all. I would say my main job as CEO is the need to combine this short-term view with a long-term ambition. The short term means delivery quarter after quarter. That means cash generation, financial performance and so on. But [it also means] clear metrics about the evolution of our low-carbon businesses.

And for the long term … I say to the investors, Repsol’s strategic plan is a transformation story. Repsol is not the best option today if you want to invest in [just] oil and gas. We have a transformation story. We are an energy company and we have delivered positive results throughout our story, we know how to do it and we are going to go on doing that, but with a clear focus on decarbonization. Of course, we have to combine all that with an attractive distribution of results for our shareholders. In some way, our duty is to take this good momentum coming from the commodity prices [in order to] use this cash to accelerate the decarbonization process we are involved in.

I think that we have the support of our shareholders to do that. And the proof of that is that today we have one of the largest presences of [environmental, social and governance] ESG-focused investors among our shareholders, around 36%-37% — double the average among our peers.

Q: High prices for natural gas, for oil, they're great for cash flows, but they're becoming a growing problem globally. Is this an inevitable impact of the energy transition, a reflection of what some are calling the “energy transition premium?”

A: To be able to decarbonize the planet in the right way — and to have the social acceptance we need in our society to push forward this process — we need a “just transition” and “just” means that consumers are not going to pay fully this extra cost, and that the industrial sector has to maintain competitiveness and has to maintain jobs in our countries.

And it’s true that to achieve that goal, we have to take into account that carbon dioxide emissions are a global problem and we can't just have only national or regional … solutions. I mean, CO2 rates at €60, €70, €80 per ton in Europe has consequences on consumers, electricity bills and also the competitiveness of our industry.

And when I talk about industry, I’m talking about the steel-making sector, paper mills and so on. In the absence of a global carbon price, we need a border adjustment mechanism to avoid this kind of speculative movements around the CO2 price. Because otherwise we are going to lose competitiveness in our industrial sectors, and we are going to export industrial assets, we are going to export jobs to other geographies and … we are going to export CO2 emissions to other geographies. So doing that we are not going to solve the world’s greenhouse gas emissions problem.

Q: As the momentum builds up to the COP26 talks, what do you see having more of an impact — the pledges that companies and the private sector like yourself are making to decarbonize, or those coming from countries?

A: I think that everything is needed. As companies we have to have clear commitments to go ahead in this decarbonization effort because we are part of the problem, so we have to develop the effort to be part of the solution.

The way Repsol is coping with this problem is aligned with this view. We are trying to reduce the carbon intensity of the company by having an alignment between our own pathway to decarbonize the company and what the world needs. But at the same time, countries and regulators have to take these commitments and to define clear rules for the coming years.

Let me say, I think that this is very important to underline the concept of technological neutrality in order to achieve that because not everything is going to be electrified in the coming years. All the technologies have to work together to decarbonize our economy in a cost-effective way. And that is the best alternative to reduce also the cost of the transition for consumers and for industries.

Q: You were an early mover in converting your refineries and industrial facilities to produce and process biofuels. How are you thinking about securing the feedstocks you need to meet your goals? Do you need to get involved higher up the value chain, say in agricultural commodities to protect the margins of your products?

A: Repsol is today producing, more or less, 700,000 tons per year. We launched the HVO [advanced biofuel] product 10 years ago. And we have an ambitious target of reaching 2 million tons by 2030 of sustainable biofuel. That means that 65% is going to be produced from waste.

It's very important to focus on a flexible design regarding the feedstock and waste is what we are going to use as raw material. We are going to use almost everything. We have a solid waste, waste is coming from forests and agricultural refuse coming from farms. And our strategy is to secure that with different kinds of contracts and approaches.

Some of them are long term. If we are establishing close to our refinery an agreement with a municipal community that means that we are establishing and defining long-term contract agreements. For instance, the biogas from waste can be used to produce either hydrogen or to feed a refinery or a chemical plant. In some other cases we have medium-term contracts, and we are also going to have a small part of that which is going to be linked to spot purchases.

So, we are working with a combination of these three things because we know that we have to preserve some kind of flexibility.

Q: Your strategy is to lead the hydrogen market in Spain and be a top three clean hydrogen producer in Europe. It's a more regionally focused plan compared to some of your competitors. Why did you choose to approach hydrogen this way?

A: I think we are in the right place to do that. Spain is probably the best location in Europe to produce renewable hydrogen with electrolyzers due to the renewable generation capacity that we have.

Already we are the largest consumer and producer of hydrogen in Spain. Today we are operating the largest European hydrogen production plant in Cartagena — hydrogen coming from natural gas. We are involved in all this … in the right place, in the right country.

And renewable hydrogen for Repsol is one of the key levers on the road to net zero. It will be an important feedstock for … hard-to-abate emissions sectors. It will also transform probably mobility, the maritime sector or some other sectors.

And in the future, another important point is it could be the feedstock for synthetic fuels and a way to store energy, acting as a buffer for the intermittency of renewable energy. In 10 years, I'm convinced that we are going to have plenty of energy in Spain coming from the sun at 2 p.m. or 3 p.m. in summer but storing this energy is a challenge, so I think that hydrogen could be the way to do that.

Q: You're actively looking at options for either an initial public offering or a strategic sale of a stake in your low-carbon division. Why do you feel that's the right choice for Repsol?

A: We target to analyze the best alternative to, first of all, crystallize the value of this activity, to have the financial instruments to accelerate the growth in renewable power generation, and a point for me is that it is very important to decrease the cost of capital of this activity. So, cost of capital is important because it's the way to be competitive in financial terms. And we are exploring these corporate alternatives to reduce the cost of capital of this business. To have a clear crystallization of value and at the same time to have the right financial tool to grow in this business.

Q: You are shifting the role of your upstream business to focus on cash generation that will fund your transition investments. Has that had an impact on your criteria for investing in new projects?

A: The world is going to have plenty of resources in coming years. So, we are reducing in a dramatic way the frontier exploration activity. And we are focusing our operational activity in areas where we [already] have either production or facilities to monetize a quick way this activity. The consequence of that, that is that we have reduced from $1.1 billion-$1.2 billion the investment in the business, six or seven years ago to the current $200 million-$250 million per year. … In the same way in the production activity, we are going to take [final investment decisions] FIDs mainly either of light crude oil or more compatible gas production … also from the investing point of view, shorter cycle [production] that we could monetize. Because the world in 10, 15, 20 years is going to need oil for mobility, to produce materials, polymers, and some other things. So, we have to do that in an environmentally better way, but at the same time, being very focused on the short cycle [assets], we need to avoid the existence of stranded assets in the future.

Q: You have a potential large project up in Alaska. How does that project fit within a strategy to be low cost, low carbon and shorter cycle?

A: The North Slope is an area where infrastructure, facilities, pipelines are [already] there. So, we are not entering in frontier areas. It’s light oil so there are fewer emissions in terms of carbon footprint than some other oils in the world. And the emissions footprint of our Alaska asset is going to be around 75% less than the current coverage for North Slope operations, combining the facilities, infrastructure and the quality of the oil.

The project is low cost and low greenhouse emission intensity, consistent with our commitment to align the company’s portfolio with the objectives of the Paris Agreement. And, as I said before, a part of the energy demand in 20 years is going to be covered by oil. And this oil has to be an oil of low break-even, light oil, with the lowest possible footprint in carbon emission terms and avoiding, in some way, the new frontier areas in. … Alaska is fitting with this view.

Q: You're the only CEO of a major Western oil company who has spent a significant part of his career outside of the oil business. How has that influenced your outlook on the future of the industry itself and what it needs to do to navigate this transition?

A: I spent a lot of years in the research and technology sectors. Every day we have to challenge the knowledge we have, and to me innovation and technology are two of the most important pieces for a company like Repsol to reach our target of zero net emissions by 2050.

But my public experience and my political background for 12 years in Brussels, in the European Union, plus in local politics, in some way trained my ears to distinguish the many different voices in our society.

And I think that listening to these voices is very important. It's very important to understand what moves them, what is happening in our society and what our society expects from a company like Repsol.

Having this ambition, I think is important to create some kind of coalition combining our investors, our board, which is fully supporting us in this task, the high management of the company, our workers who are proud because they are seeing that Repsol is able to transform the company … taking us forward to what planet needs.

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