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Cepsa CEO: New Energy System Demands New Strategy

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Spain’s Cepsa has unveiled a new strategy to reposition the company to thrive through the energy transition. Under the plan, the privately held player will dramatically boost investment into activities like electric vehicle charging, biofuels and green hydrogen to slash emissions and garner some 50% of its income from sustainable businesses. Energy Intelligence caught up with Cepsa CEO Maarten Wetselaar for an exclusive interview. An edited transcript of the discussion follows.

Q: Can you explain why you chose to reorient the company in this way?

A: It starts with the realization that just about 50% of the energy system needs a molecule. Today, molecules versus electrons is 80- 20. But if you look at how much can we electrify of the molecule usage, most studies end at about 50%, maybe 55%, if you push the boundaries. So it leaves about half of the energy system that cannot be electrified. That is an important conclusion, because electrification is a very good and useful and important way to drive the energy transition, but there are all these energy uses like steelmaking, cement-making, but also air transport, long-range shipping and trucking that are very, very difficult — heavy industry — very difficult to electrify. And the green molecules have been ignored by science and by investments, etc. The ranges and the cost curves and the government policy have all been about electrons. I think the competitive space is better at the green molecule side. There's been less development, less attention on it and it's also because it's more complex. A second generation biofuel molecule or green hydrogen molecule is just a more difficult thing to produce, a more difficult thing to handle and to scale up. So in a way, for companies that like doing difficult things, this is more promising space. You know, windmills and solar panels are very, very commoditized. It's hard to find a competitive advantage in them.

Q: Where does Cepsa see its competitive advantages relative to your peers? 

A: We've been handling molecules for 100 years, including hydrogen molecules, but molecules in general. So it's our business. There is a lot of crossover between the current molecules of the energy system and the new molecules of the energy systems. We are large users of hydrogen, so the initial green hydrogen we produce we can simply consume ourselves. We can be our own customer. And we are a large seller of aviation fuel and for a long time that will be a blend of sustainable aviation fuel and normal aviation fuel. And so having the two — being in that market, being a significant player, I think will yield important synergies for us. We're not the only ones in this space, but it's a much less contested space than green electrons.

Q: If it's much less contested, will green molecules have a higher, more defensible margin than green power?

A: That is certainly the implication of it. I think there will also be more opportunity for infrastructure to play a key role in keeping returns reasonable. There's not going to be that many hydrogen lines. There's not going to be that many energy parks where you can actually produce this stuff. A second generation biofuels plant or green hydrogen plant is a real industrial installation. If you are already an industrial location with permits with land with utilities, there are very important advantages that are defensible against competition, whereas a solar farm or wind farm more or less anybody can get into this.

Q: How will conversions of your refineries into energy parks that produce hydrogen and biofuels work? Will you have to give up the ability to make traditional fuels — which enjoy high prices now — to move ahead? 

A: That will be very market driven. The way we are configured we can scale up the hydrogen and sustainable aviation fuel and biofuel production whilst keeping the traditional fuels running at the same level. Particularly in markets like Europe where liquid demand is not growing, it's simply substituting one for the other. This development will over time start to drive down the demand for hydrocarbons and then for us it will be relatively easy to say, OK, we have six distillation columns that currently distill crude oil. At some point we might shut down one of these distillation columns and then the second one. You will always look at the economics of this. We have some advantage in being able to export relatively easily to North and West Africa. It is possible that our refineries will be producing into Africa for a while if the European demand starts to fall away. But in principle we would over time be planning to take out crude distillers and continue to build the biofuels and hydrogen.

Q: Your strategy talks about participating in a green energy trade between the Middle East, North Africa and Europe. How do you see those hydrogen markets developing? 

A: There will be three stages to this and all with their different timelines. Initially, you can see local hydrogen consumption being displaced by locally produced green hydrogen. That's a logical first stage because the logistics are simple. As a stage one, production and consumption is relatively local. In stage two, it becomes a pipeline industry where local production serves regional consumption. The EU has already published its plan for pipelines in Europe for how we're going to connect the major centers of supply to the major centers of demand. That has a pipeline in it that goes through the south of Spain to the north of Europe to the German consumption center. Then thirdly, there will be an international trade. So, although you can get going with locally produced hydrogen and then you can make the next step with, let's say European hydrogen produced for Europe, in 15 years, maybe 20, you will need Middle Eastern and North African hydrogen to come into Europe and Middle Eastern and Australian hydrogen to come into Japan in order for the energy system to truly be green. You could build a pipeline between Morocco and Spain and get green hydrogen into the European market. But in the Middle East, where you have some of the cheapest conditions to make green hydrogen, you will end up liquefying, which is not trivial. Today, as you know, liquefied natural gas has become the commodity of the day in the world — that's minus 162° C. Liquefied hydrogen is minus 260° C. That's even more intense process of liquefaction and it needs an even higher grade of steel to contain the hydrogen. But it's going to happen. So the Middle East will be liquefied hydrogen and North Africa will likely be by pipeline. All of that will be needed in order to get Japan, Europe and other places like China to net zero.

Q: With the technical challenges of transporting hydrogen and the immense amount of renewable energy needed to make it, wouldn't it be more efficient to use that green power directly rather than convert it into hydrogen?  

A: If you have a green electron, use it and as much as you can, use it for energy. There's a false discussion going on about, is it green electrons or is it green hydrogen? They don't compete. If you can use green electrons to drive your Tesla or electric vehicle, go ahead. Don't go through the trouble of converting it to hydrogen and back to electricity because you lose more than 50% of the energy content. The green hydrogen molecule addresses energy demand that cannot be electrified. Therefore, it doesn't really compete with green electricity but you're absolutely right, the amount of green electrons that will be needed to first of all electrify the system and then make all this green hydrogen is staggering.

Q: Your retail strategy goes well beyond selling energy and extends to food and pharmacies and a host of other activities. How is an energy company going to develop the ability to operate in these unrelated businesses?

A: That definitely needs development of competence, but also development of partnerships. One of the very interesting developments that took off during Covid was (multi-purpose) kitchens. These are kitchens that will produce for up to 15 brands of food and they are the base from which these brands of food deliver to the home. The companies that are good at this were essentially space-constrained for places that had permits to make food, which had a bit of space, etc. We have retail sites that have very open-ended permits to produce food and very often have space to do this activity. For me to say, OK, I am going to be the world’s best operator of (multi-purpose) kitchens would be relatively risky. But luckily the world’s best operators of (multi-purpose) kitchens dream of having access to the footprint that we can bring and the same goes for the best operators in the world of the last mile delivery of goods. So what we're saying is, these locations, these permitted square meters that we own — very often close to a community or even in a community — have been underutilized dramatically over the last decades. We've been treating them as places to sell our diesel and gasoline from rather than a place to serve a community from. I think that's the whole philosophy change. It's about building partnerships with people who are the best in the world at doing this and then leveraging our infrastructure because it dramatically lowers their costs.

Q: You're giving your upstream business more autonomy within this strategy. What does autonomy mean?

A: Giving it autonomy is simply, I think, the logical consequence of realizing there's very little integration value. We don't use our own oil. We sell it and then we buy oil from others and we process it. So there's very little integration value. We've made clear we're not developing new upstream positions. For now, the role of the business is to produce cash, to sustain itself but then also to allow us to invest in the greener business.

Q: Some competitors have looked at spinning off their upstream business or taking on selling a portion of it. Is that a possibility? 

A: We haven't decided to go down that path at this point in time, but these strategic options are open to us. Having it more autonomous creates an option more clearly.

Q: What is the impact of high energy prices on your strategy? 

A: There are areas where we benefit from high energy prices. There are also areas where there are costs. We are a large consumer of natural gas and natural gas in Europe is unbelievably expensive today. And of course it dampens economic growth and dampens people buying our products. Altogether, I'm not the biggest fan of high energy prices. What is interesting though is that today the cost of gray hydrogen produced from natural gas is higher than the cost of green hydrogen. So in a way, it gets oxygen to all these green alternatives. The cost of the alternatives — they are not so crazy anymore. It proves that the world can live on a green diet without falling apart.

Q: How should governments respond to address the current high prices?

A: I think what governments are clearly doing, and they should be doing, is taking some radical decisions. I think it's wise for people to say let's not shut (nuclear plants). I think they should be more willing to apply the same slightly more radical thinking to going quicker on the green front. They've been increasing targets, but you know we have enough targets. We need action on the ground, and there it's been a bit more I would say traditional. Governments could use this moment to push the transition agenda with more force and with a bit more imagination. The industry and certainly Cepsa is ready for it.

Topics:
Hydrogen, Mobility, Corporate Strategy , Capital Spending, Regional Integrateds, ESG, Biofuels (incl. SAF)
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