Refining niche in ArgentinaApril 25, 2018
César Castillo, president of RefiPampa, talks to TOGY about establishing a small refinery in La Pampa, the company’s plans to expand into other sectors and how recent policies are affecting its growth opportunities.
The RefiPampa refinery came on line in 2017, producing gas oil, petrol and intermediate fuel oils. The refinery was the first in the province of La Pampa and the first SME refinery with its own pipeline and 100% Argentina capital.
• On access to financing: “You can read in the news that there is beginning to be financing and credit, but it is very hard to materialise this in our country today. As inflation begins to decrease and credit increases, people will start to invest in production and not in financial tools, which is what is today holding back the boost the country needs.”
• On expansion goals: “Even though we are already integrated in a certain way – our partner Pampetrol has E&P areas in the province and is part of a joint venture with PCR – we would like for RefiPampa to participate in the upstream to continue improving our integration, which is what should provide us an advantage. We have a presence in service stations, distribution, logistics, refining and dispatch, but we lack an upstream presence.”
Most TOGY interviews are published exclusively on our business intelligence platform, TOGYiN, but you can find the full interview with César Castillo below.
Click here to read more
Was Argentina’s Refino Plus programme key in the company’s decision to establish a refinery?
We saw it as an opportunity to enter the sector. The Refino Plus payments never arrived as they were supposed to. However, we designed our project so that it wouldn’t depend on the programme, because we knew that the country’s situation was changing and quite volatile.
For a project of approximately USD 16 million, we only received a payment of USD 700,000 from the state. With our small group of companies, we capitalised all our earnings, taking on debt and always betting on the project and the challenge it meant. In 2016, we finished construction and in 2017, we managed to begin operation.
How do you benefit from the company’s multiple shareholder structure?
Regarding the shareholder structure, as we began developing and growing, we created new businesses with new partnerships. For instance, our group’s transport company, All Road, is its own legal entity, despite the fact that I am the president of all the group companies. All Road is in charge of the logistics for the group companies and has a participation in this corporation.
We also have other partnerships with companies that commercialise our products in service stations and at a wholesale level, and which are also shareholders. Individuals working for the group companies are also shareholders.
What is RefiPampa’s relationship with the province and what incentives has the company received for the refinery?
In 2012-2013, a provincial law in La Pampa was signed that forced us to give 20% of our shares to the province. We are the only company that was affected by the new provincial law.
Prior to this, the province had granted us a 25-year industrial promotion subsidy for this project, which was and continues to be very important to us, because in an industry with such a high tax component, industrial promotion provides us an interesting differentiation, as we are exempt from essentially all provincial taxes, such as the gross income tax, stamp tax, patents and so on.
What type of financing did the company obtain for this project?
The access to financing we achieved was very low. We took on very short-term debt as a consequence of the needs that appeared along the way. We are currently working mainly with Banco Nación, where we are trying to find credit lines aimed at the development of work capital and the evolution of the business. We require this because we are not yet able to obtain credit from our crude oil suppliers. Thus, we purchase with a previous payment and sell within 20-30 days. We are looking for a way to access financing with different tools, such as SGRs [Reciprocal Guarantee Societies], to solve this.
It is very difficult with a structure in which you are an SME, but not truly an SME. According to CEPYME [Spanish Confederation of Small and Medium Enterprises], we are an SME, but not according to the central bank, because we have a certain revenue. We are a group of companies. We are in a gray area.
You can read in the news that there is beginning to be financing and credit, but it is very hard to materialise this in our country today. As inflation begins to decrease and credit increases, people will start to invest in production and not in financial tools, which is what is today holding back the boost the country needs.
How has the tax burden in the fuel sector evolved under President Mauricio Macri’s administration?
I think that the tax burden is being redefined. The fiscal revision project that has been submitted seeks to readjust the cost associated with internal taxes. I think this is interesting in terms of moderating the swings of the international market, given that now, since the liberalisation of the Argentinian market, we are going to have a price at the pump that is tied to the international market. The authorities are looking to moderate the price differences in the market through the internal tax, so that the price at the pump is not too volatile.
A model like the one in Chile is quite positive, wherein they create a buffer with taxes, and when the international price rises, they lower the tax component so that it does not impact the final price. When the international price lowers, they can increase tax income by raising internal taxes. It is my understanding that this is the path the current administration is taking.
How will the decision to open imports of oil derivatives and crude impact your operations?
In late November 2017, the administration nullified the resolution that regulated the import of oil derivatives and crude oil. This provides greater transparency to the market; however, for us, this is a challenge. Being in a domestic industry with local costs and a highly competitive market such as the oil sector, it affects us in a different way.
I always say that we must look for the windows of opportunity that open for us. We are small and, as a small company, we have our own opportunities as well. We have to move quickly and look for alternatives and opportunities that are harder to reach for a big company, be it in terms of time or decisions.
We are studying how we can integrate with the international market, with regards to imports, because big players such as Trafigura, Vitol, Glencore and others are going to play strongly in the country, as they have a position and a regional market to attend to. It is very useful for them to have their logistics base in Argentina, with the plants in Campana, Ramallo, Dock Sud, La Plata and so on.
Our location is quite different; we are very central. We are located 1,200 kilometres away from the federal capital. Therefore, the cost of transporting the imported product from wherever to the region where we need to take it leaves us in a very similar position in terms of cost structure.
The trader brings the product to Campana, but from there, it needs to take it to Neuquén, La Pampa, the interior of the Buenos Aires province, or to the region of Cuyo. This implies a terrestrial transport component that is currently one of the main costs commercialisation has to face. We have a very inland market and we target a square area with vertices in Cuyo, in the centre of the Buenos Aires province and the south of Bahía Blanca.
Is RefiPampa prepared to face the sulphur requirements that will be implemented in early 2022?
We currently have a grade-two gas oil with 500 ppm [parts per million] of sulphur. We are already working on a project to lower that sulphur content, but we think that there is going to be a readjustment of the legislation to Argentina’s reality. In the Patagonia region, it doesn’t make a lot of sense to have 10 ppm of sulphur instead of 300-500 ppm.
Nevertheless, we are working with people from the United States to develop a scheme that, without having to engage in hydrotreating, uses some intermediate alternatives, which we are studying and that could allow us to comply with the legislation. Our current volume does not allow for a costly investment in hydrotreating units.
For what we already have, the conceptual engineering is based on the production of asphalts. We are looking to produce modified asphalt, or AM3. We have finished the planning of the project and in a year and a half or two years, we should have our vacuum and modified asphalt production unit in operation. This would give us a competitive advantage because modified asphalt is only manufactured by Shell in Dock Sud or YPF in La Plata and then shipped to the rest of the country.
In fact, modified asphalt is currently being imported. There is a big opportunity, given the very strong outlook ahead in terms of public works. Once again, with our geographic location, we have a competitive advantage so that we can compete with supply from Buenos Aires when dealing with a client in Mendoza, Neuquén or Chubut.
What is your strategy to enter the service station sector?
In the area where we have our competitive advantage, the idea is to develop a service station network. We have been working for a while in brand development and positioning. Voy Con Energía is the brand we have developed and our goal is to establish 50 service stations by December 2020.
We are a small company and our goals are of that same magnitude in the context of this industry. To us, these are huge challenges. The vacuum unit for asphalt and the creation of a network with 50 service stations are both substantial challenges for us, even though they might be rather small for the industry.
What structure are you considering for your service station network?
We currently have dealings with many white-label service stations. We are talking about a market of approximately 5,000 service stations, of which 40% are white label, deal only in CNG with no brand, or are points of sale for brands that don’t provide the support and protection the service station managers are looking for. This is our target market. We are now aiming at 50 service stations out of those 2,000.
In accordance with our potential, we are going to look for service stations that are not too appealing for big oil companies, and that have smaller volumes. Big oil companies need service stations that handle large volumes. Our target market is 150-200 square metres, while an oil company looks for ones with 400 square metres.
Our operator profile is different. We have a more entrepreneurial and family business. We don’t look for businessmen that want to have a service station as just another investment. We look for entrepreneurs that need to manage their business and can obtain a benefit from that personal management. That is our view regarding the development potential of this service station network, which I refer to as low-cost.
What is your strategy to achieve these objectives in the market?
Considering these parameters, we devised the strategy for these entrepreneurs that can manage a business reducing the maximum possible costs, together with our tax exemptions and the agreements we are signing with Banco Nación, with credit cards and credit card terminals. The idea is that when the client pays, he is paying directly to the fuel supplier and to avoid substantial administrative and taxation costs in that chain.
Today, a credit card charges approximately 1.8% to a service station, on top of the 28 days they have for clearing. Our goal is to deliver the product directly to the service station and when the client pays, he directly pays our oil supplier, PCR [Petroquimica Comodoro Rivadavia], for instance.
Along this line, we are trying to reduce several costs and are thinking of this for many segments of the business: the convenience store, service station identification, business data management, connectivity of service station pumps. We are celebrating an agreement with pump suppliers by which we will have the information of the fuel dispatch and stock online. That will provide us efficiency and this, added to the logistics, should provide a benefit for all those forming the chain, transferring it to the client so that they will choose us.
We are going to have a very nice brand, with a product complying with the Ministry of Energy and Mining’s specifications, but we are clearly neither YPF nor Shell. The benefits we need to offer are service and price and the market we are targeting is one that values both those things.
Where would you like the company to be positioned by 2022 or 2023?
We are targeting growth in terms of refining units, a vacuum unit for asphalt, then hydrotreatment. Afterwards, we will grow in that related to cracking. We will continue adding units to add value to our products.
Regarding the service station network, we want to grow and reach our goal of 50 stations, then surpass that number as much as we can.
The great challenge that we have in the medium term is integrating with the upstream, being able, in the area in which we are located, to have access to the possibility of extracting oil as a way of completing vertical integration. Even though we are already integrated in a certain way – our partner Pampetrol has E&P areas in the province and is part of a joint venture with PCR – we would like for RefiPampa to participate in the upstream to continue improving our integration, which is what should provide us an advantage. We have a presence in service stations, distribution, logistics, refining and dispatch, but we lack an upstream presence.
For more information on RefiPampa’s developments, including upstream investment opportunities and the government’s call for downstream partners, see our business intelligence platform,TOGYiN.
TOGYiN features profiles on companies and institutions active in Argentina’s oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.
Business intelligence and networking for executives: TOGYiN
- From the field