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© D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 22nd World LP Gas Forum-Rio Overview of LAM 2009 By Luis de la Torre
© D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Market demand Market Statistics, Market Barriers
3 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 LAM 9 months after the shock After fourth quarter 2008 shock, the region shows signs of rebound and some small signs of recovery after an outstanding period of growth 2004-8.
4 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 The LPG demand and LAM Despite the crisis, after many global and local recovery and stimulus packages, the LPG market does not look bad at all. LPG makes a strong covariance with the prices and demand in a market energy mix. Central America shows room for growth. The growing young population and growing dynamics of the region fuels the demand. Peru, Chile, Ecuador and Brazil are the best players in 2009.
5 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 The per capita demand 2009 4 countries maintain a exporting position. LAM and South America average are 49.8 and 42 Kg per capita. Mexico and Colombia markets are switching to natural gas at fast pace. Brazil, 34.6 Kg per capita Argentina 38 Kg perCapita Exporter Trinidad & Tobago, 43 Kg per capita Exporter Venezuela, 126 Kg per capita Exporter Mexico 90 Kg per capita Central America AVG 22.7 Kg per capita Ecuador 70 Kg per capita Peru 38 Kg per capita Exporter Chile 65 Kg per capita
6 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Main barriers for market development – the LAM case Doing Business 2009 scores LAM as an area with medium degree of difficulty to conduct business. In LAM is unusual to have all the players following the rule of law or having a good government supervision of the energy market to facilitate a fair competition and safe conditions for our final customers. The volatility of energy prices creates more conditions to increase the complexity of the market, and LAM has a huge challenge in the years to come.
7 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Market barriers (I) Dealing with construction permits: timing for engineering, construction, permits and start-up, most countries are over 1 year. Respecting Brands and Assets: many small competitors, asymetric scale of operation against large operators and unrestricted use of assets without respect for brands and ownership of these assets, creating unsafe conditions for customers, poor quality of products, robbery and low technical standards (valves, cylinders testing, mix, weight) reducing the trust in LPG. Multinationals operate with risk for their investments in bottles and tanks in the day-to-day work to make decent business in this environment.
8 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Market barriers (II) Lack of compliance of the rule of law, for all the business portfolio, creating unsafe conditions or non compliance of contracts with customers even in industrial facilities. Enforcing contracts is a critical issue in the LPG industry and there is no sign of improvement in our region, as many small operators enters due to lobbies or political favors. Employing workers is another critical issue and multinationals have a challenge to provide decent work and the best safe and social conditions for their employees.
9 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Market barriers (III): the real picture Subsidies is another issue in our industry, where the distortion of prices makes it impossible to maintain them in the long term, affecting the quality and benefits to consumers. The informal sector and black markets represent around 40% of the LPG market in LAM, where the lack of regulation and enforcement creates the conditions for them Investments in new cylinders.Investments in new cylinders. guarantee for exact weight and fair price. guarantee for exact weight and fair price. Post service system Post service system Decent work for company employees Decent work for company employees Good maintenance of the system. Good maintenance of the system. Delivery in difficult places with high costs Delivery in difficult places with high costs Pay our taxes Pay our taxes Technical compliance Technical compliance
© D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Opportunities LPG LAM Market drivers, Successful cases, Climate Change financing.
11 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Main Market drivers (I) A reform of the energy administration is giving good results in countries like Chile and Colombia. More electronic transaction reduce the costs and possibility of cheating between the market players. The correct sizing and training of the energy supervisory companies is critical to assure a good timing and rationale in the assessments of new facilities, these issues are being tackled at this moment in Peru and Brazil. The market is moving to certify equipment and professionals in the industry to assure the quality from the very beginning.
12 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Main market drivers (II) Technology and innovation are important driving issues, most multinational and large local operators are investing intensively in new equipment to increase safety, reduce delivery time and improve the overall quality of their operations. Added to this trend, most operators are working in quality, safety and environmental standards ISO type or OSHAS. Small operations, labor intensive should be history.
13 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Main market drivers (III) Innovation is part of the spirit of the LPG industry. The last decade has seen new ideas around the development of autogas for land vehicles, agriculture applications, fast drying of asphalt, back-up systems for CNG, new applications in chemistry, power applications, autogas for hydro vehicles on sea and rivers, low weight cylinders, air conditioning, and radiant ceramic among others.
14 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Main market drivers (IV) Last but not least, the energy policy making is critical in times of high uncertainty like the ones we are now living, where governments and federal agencies have an important responsibility to ensure a correct price setting and margins to allow investments, maintenance and good customer service, safeguarding the trust in LPG and the reputation of the companies that have global class operational standards.
15 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 A market story: bottling - Argentina Repsol acquired YPF LPG operations as part of YPF Gas & Oil in 2000. Since then, our main efforts have been focused to transform the informal market into a safer one to ensure the brand promise to our final customers in industry and household. This huge initiative has been a coordinated action with authorities and other large operators. Argentina is one of the most important markets of Repsols portfolio in LAM.
16 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 A market story in industrial gas – Bulk Brazil Brazil has a liberal model since 2002 and many good conditions for foreign investors. In 2004 Repsol Butano started operations for LPG Bulk through Repsol Gas Brasil S.A., owned 99.9% by Repsol Butano. We started from scratch and today we have more than 2,500 customers in Sao Paulo, Minas Gerais and Rio de Janeiro with a growth rate of over 20% per year. Brazil means an outstanding opportunity for our company and contribution to the development of this society. View of Repsol Cosmopolis Plant and our Brazil Team
17 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 A market story in AutoGas - Peru AutoGas Peru started in 2003 with 4 small operations. Five years later more than 500 stations and 20% of the LPG Peruvian demand dedicated to autogas certifies the successful story of this market. Today Repsol Peru operates and owns 108 stations nationwide. Key issues behind this story are the price gap versus gasoline and the selection of the technological package to offers customers with a low investment (USD 380/kit) and autonomy over 400 KM using a clean and safe product like LPG.
18 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Climate Change financing The carbon market represents today USD 70 billion running since 2003, more than 2,000 projects and USD 90 billion are in the pipeline at UNFCCC. The Clean Development Mechanism (CDM) is the opportunity North-South to transfer financing and technology, in a market over USD 7 billion. LPG participation in the carbon market using CDM financing due has been low due to a restriction in volume, very small quantities with high transaction cost in comparison to natural gas fuel switch projects or LFG in flare. In 2008 the UNFCCC executive board launched the Programme of Activities (PoA) modality to bundle small reductions, very suitable to LPG business model. Repsol Peru is developing the first fuel-switch project and estimates the registration late in 2009. The PoA means CDM income in strong currency for 10 or 28 years, it has a complex registration process, the results can be an opportunity for markets with high gaps against dirty fuels. UNFCCC: United Nations Climate Change Convention, based in Bonn-Germany
19 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Repsol PoA – LPG first global project Repsol Peru Project will reduce ~ 30,000 tCO2/year, resulting from switching from heavy residual fuel 500 to LPG 60/40, for 10 years. The income will help to cover the higher price of LPG and the technology transfer against a less clean practice like Bunker. Project Activity: burning LPG Baseline: burning Residual Fuel Difference: CERs or Certified Emission Reductions Gj or tCO2
© D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Strategic Overview 2010 The competition in short and medium term, Final comments, the future of LPG LAM
21 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 New competitors in short and medium term: CNG Compressed Natural Gas is doing business for short distances, using a radius of 250 KM in a competitive way, this is its major handicap. One module can transport cheap CNG over 230 Bar, but can only recover 95% of the total load. Some developments in Argentina, Peru, Colombia and Mexico. Low-cost equipment, easy to get on leasing mode. Typical applications in Autogas and industry
22 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 New competitors in short and medium term: LNG Liquified Natural Gas in small Scale Gas is doing business for long distances, using a radius of 1,000 KM in a competitive way. No reboiling if highways are good enough. Density is like LPG around 0.44 Ton/m3, cryogenic application using the oxygen or nitrogen business model with vaporizers and stainless steel tanks, very high transaction costs High investment, but profitable structure. Technological applications based on two concepts: LNG small scale using a liquefaction box or Let-Down Technology for small scale in pressure drops Some developments in progress in Argentina, Peru, and Brazil Typical applications in Auto gas and industry.
23 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Market opportunities: niches, new markets LAM, specially countries with low entry barriers, reformed market structures and fiscal advantages for investors like Chile, Mexico, Brazil and Peru offer outstanding financial return over 20% for formal enterprises. LPG market behavior is like a niche due to low prices, reduced transaction costs but key conditions such as secured property rights and law enforcement is needed to sustain this competitive advantages. Climate Change is an additional key motivation in the years to come to promote fuel switch. Special attention should be paid to the penetration rates of electricity, biofuels and new distribution channels for NG like small scale LNG or CNG. LAM offers alternatives for all these options, creating rich conditions for competition.
24 © D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 The road ahead LPG in LAM definitely has a long life, with opportunities, even with Natural Gas, kerosene or electrical competition. At the end of the day, all depends on the classic paradigm: do you see a glass half empty or half full? The answer and the future is yours…….
© D.C. Gestión Patrimonial Repsol YPF S.A. Octubre 2009 Contact: Ladelatorrev@repsol.com Thank you for your attention and see you in Madrid 2010! Contact: Ladelatorrev@repsol.comLadelatorrev@repsol.com
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