A leaked intelligence document issued by Spain’s CNI spy agency in October warns that Russia is aggressively pursuing a plan to “monopolize access to energy supplies to Europe.” The report validates what many analysts have been saying for a long time, namely that Moscow is using Russian energy companies to gain geo-strategic control over northern, central and southern Europe.
Now Russia’s largest independent oil company, Lukoil, is negotiating the purchase of a 30 percent stake in Repsol YPF SA, Spain’s largest oil company. The deal, which is valued at 5 billion euros ($6.5 billion), calls for Lukoil to buy a 20 percent stake in Repsol from Sacyr Vallehermoso SA, a debt-laden Spanish construction company, and another 10 percent stake from La Caixa, a Catalan savings bank. Lukoil is now seeking financing in order to close the deal.
News of the politically sensitive acquisition has come as a shock to many Spaniards, who now are fiercely debating the wisdom of giving effective control of their “national energy champion” to a Russian company. Analysts say the deal could lead to a full-scale takeover or break-up of Repsol, which has lagged rivals in profitability and in reserves growth in recent years. Under Spanish takeover law, a shareholder must launch an offer for the entire company once it passes the 30 percent threshold.
Spanish Prime Minister José Luis Rodríguez Zapatero had vetoed a similar deal with Lukoil in 2006. At the time, Repsol was talking with Lukoil about cross shareholdings and joint ownership of oil reserves. But those plans were abandoned after Sacyr built up its holdings in Repsol in late 2006, presumably in order to keep Repsol in Spanish hands.
Just days before news of the latest Lukoil deal surfaced, Spanish Economy Minister Pedro Solbes had expressed reservations about plans by another Russian energy company, the state-owned gas monopoly Gazprom, to buy the Repsol stake held by Sacyr. “We’ve privatized companies in Spain, and it grates with me when state-owned foreign companies come and buy them,” Solbes said.
But Zapatero now says he will not interfere in the proposed deal, which he says is an issue between two private companies. He says the government “must be respectful of the interests of the company and possible negotiations on the integration of other partners.”
The Lukoil-Repsol deal casts into stark relief several urgent problems facing Zapatero. High on the list is the precarious financial situation of Sacyr, which is trying to sell assets to cover its massive debts. The construction conglomerate borrowed heavily in recent years to diversify away from real estate after the collapse Spain’s decade-long housing boom. The company spent 6.5 billion euros, for example, to buy its 20 percent stake in Repsol. Sacyr, one of the builders most exposed to a rapidly deteriorating property market, has debts of 16.5 billion euros, which dwarf its market value of 2.6 billion euros. The company has lost 70 percent of its share price since the beginning of 2008 on worries that it cannot generate enough cash to meet its rising financing costs.
The collapse of Sacyr would generate ripple effects across the entire Spanish economy, which partly explains Zapatero’s eagerness to find a buyer for the company’s assets. Spain is currently facing the worst economic crisis since its transition to democracy after the death of General Francisco Franco in 1975. The rate of unemployment, for example, is forecast to reach 14 percent in 2009 and a staggering 18 percent in 2010.
An even greater problem is Spain’s extraordinarily large external deficit, which has been running at around 8 billion euros ($10 billion) per month, or 10 percent of GDP. This deficit was previously financed by an inflow of mortgage funding which has now all but dried up. Zapatero is therefore looking for new ways to fund the deficit, which is where the sale of Repsol to Lukoil comes into play. Zapatero is desperately seeking a foreign buyer to raise liquidity for the Spanish banking system, and Lukoil is the only company that has come forward to make the sale viable.
Spanish newspapers across the political spectrum have come out against the deal, as has Spain’s conservative opposition, which says it will do “everything possible” to prevent it from happening. “Nobody in Europe has sold its energy supply and put it in the hands of a Russian company,” opposition leader Mariano Rajoy said. His views have been echoed by former Socialist Prime Minister Felipe González, who says “The operation seems to me wrong, it is a mistake and it should be avoided if at all possible.”
Critics of the Repsol deal say Lukoil’s entry into Spain could eventually give Russia control over energy access to southern Europe, the only major area of the continent that is still out of Moscow’s reach. The deal would also give Lukoil influence in the Maghreb, where Repsol has major interests. And because Repsol relies on South America for some 95 percent of its oil reserves, the deal would also catapult Lukoil into Latin America and the Caribbean. Others say those fears are overblown.
But the Repsol-Lukoil talks come just one week after the European Union announced steps to reduce the risk of Russian blackmail over energy supplies by opening up a new southern gas corridor that bypasses Russia. “The EU wants different sources of supply,” says European Commission President José Manuel Barroso. “We must not sleepwalk into Europe’s energy dependence crisis.”