Petróleos de Portugal S.A.

Rua das Flores, No 7
1200 Lisbon
Portugal
(1) 346 1281
Fax: (1) 321 233

State-Owned Company
Incorporated: 1976
Employees: 6,000 (1989)
Sales: Esc379.38 billion (US$2.78 billion) (1989)

Although involved in exploration for crude oil both at home and abroad and in other oil-related activities, Petröleos de Portugal (Petrogal) is primarily a refining company. Its history and that of its predecessor companies constitute the history of refining in Portugal. Petrogal was formed in April 1976 from four companies—SACOR, CIDLA, SONAP, and PETROSUL— that were nationalized following the revolution of April 1974, and has grown into the largest nonfmancial company in Portugal. Privatization, which is on the agenda for 1991-1992, is the next milestone in the company’s story.

The first official Portuguese interest in oil occurred during the mid-19th century with the granting of concessions for exploration in Sesmana, Monte Real, and Torres Yedras, but nothing came of these grants. Around the turn of the century, several international companies established themselves in Lisbon. The most significant was Vacuum Oil Company, later to become Mobil, which dominated the domestic market until the 1940s. Other important participants included Costa e Ribeiro Ltd., which was established in 1919 and which, in 1929, became associated with the Atlantic Refining Company. In 1920, the Shell Company of Portugal, the successor to the Lisbon Coal and Oil Fuel Company—the latter dating from 1910— appeared on the scene.

In 1930, Queiroz Pereira, the first oil company with a majority of Portuguese capital, was formed. Three years later, it merged with Sociedade Nacional de Petröleos (SONAP), a company with mixed French and Portuguese capital, which was to play the key role in the development of the Sines refinery in the 1970s.

By the mid-1930s, there was a clear understanding of the importance of oil to Portuguese economic development. In 1938, the government published a decree setting out the conditions for the exploration and sale of hydrocarbons and for the installation of an oil refinery. This resulted, also in 1938, in the creation of Sociedade Anönima Concessionária de Refi-nacao em Portugal (SACOR). In order to encourage self-sufficiency in refined products, the government granted SACOR a refining monopoly, the right to supply 50% of the petroleum products consumed in the country, and certain price guarantees. It was only Portuguese entry into the European Economic Community in 1986 that resulted in a wholesale dismantling of these concessions.

The first president of SACOR was Dr. Eduardo Fernandes de Oliveira. Martin Sain was vice president. Sain, a former director of the Romanian oil company, Redentza, was a key figure in the development of SACOR. Along with a number of Romanian technicians, he had left Romania in the face of the Nazi threat. Romania was an important oil producer before World War II, and the Romanian influence in technology and key personnel was significant in SACOR’s early years.

SACOR’s first big project, supervised by Martin Sain and a Romanian engineer, Adolfo Hascal, was the construction of the refinery at Cabo Ruivo, near Lisbon. The location for this refinery, Portugal’s first, was near the storage facilities of the Atlantic Refining Company and Socony-Vacuum, the latter an oil retailing company, and had good access to the River Tagus and to rail links. Despite technical difficulties, construction took only 18 months and the refinery began operations in January 1940—only three months behind schedule—at a total cost of Esc32.8 million. The initial processing capacity was 300,000 metric tons of crude oil per year. The plant also included facilities to produce caustic soda, sodium hypochlorite, and sulfuric acid.

In the first year of Cabo Ruivo’s operation, 116,000 metric tons of crude were processed. Technical modifications quickly increased the refinery’s capacity to 480,000 metric tons per year. However, World War II intervened, and the consequent difficulties of obtaining supplies of crude oil halted the plant’s operations until the end of 1944.

In common with other European countries, Portugal’s consumption of petroleum products increased massively after World War II, with an average annual increase of more than 10% between 1938 and 1952. The biggest increases in demand were for fuel oil, which was used primarily in industry and for power generation.

In 1952, work began at the Cabo Ruivo refinery to increase its capacity to one million metric tons a year. The work was completed by the end of 1953 and allowed other technological improvements to be made.

The refinery expansion was accompanied by a decision to increase SACOR’s capital to Esc 150 billion and to allow foreign participation in the company up to a maximum of 10%. Compagnie Francaise des Pétroles promptly took an 8.75% stake in SACOR. The Portuguese government retained its one-third holding, and the rest of the company was in the hands of local private investors.

At the same time, the refinery concession and price supervision were extended until December 31, 1976. In 1954, SACOR’s privileges were extended to Portugal’s overseas territories; henceforth 80% of the gasoline, kerosene, and ga-soil imported into Angola had to be refined on Portuguese territory. Cabo Ruivo, as Portugal’s only refinery at that time, was the main beneficiary.

Given its refining monopoly and its 50% quota of the domestic market, SACOR was in a privileged position in relation to the other petrol retailers active in Portugal—Mobil, Shell, British Petroleum, and SONAP—who had to buy significant proportions of their product from the Lisbon refinery. SA-COR, whose first petrol pump was installed in January 1940 in Sintra, also had an advantage over these rivals as a result of its exemption from income tax. Forty years later, Petrogal was to dominate the retail sector through its GALP affiliate.

SACOR and refining remained as the core of the petroleum industry in Portugal, but from the early days a number of companies and SACOR affiliates were established to complement the activities of SACOR. The first was Combustiveis Industriáis e Domésticos (CIDLA) which was established in December 1939. CIDLA’s task was to develop the distribution of lubricating oils and liquid petroleum gas (LPG)—such as butane and propane—in Portugal.

In 1947 Sociedade Portuguesa e Navios-lanques (SO-PONATA) was formed as a joint venture of local shipping firms, SACOR, and the main petroleum distributors. It was formed at the direct behest of the government to prevent a repetition of the wartime situation in which tanker shortages had caused problems of crude oil supply. All petroleum products entering or leaving Portuguese ports had to be in SO-PONATA tankers. SACOR MARíTIMA, which played a similar role, was founded in 1960. SACOR’s original holding in the latter company was 99.98%. In 1976, this passed to Petrogal which reduced its holding to 80% in 1988 to raise money for two new product carriers.

Sociedade de Lubrificantes e Combustiveis (ANGOL) was set up in 1953. Initially, it was active in the sale and distribution of fuel, lubricating oils, and LPG in Angola. By the 1960s, however, it was also participating in the exploration for hydrocarbons. In 1957, SACOR participated in the establishment of a parallel company, MOQACOR, in Mozambique.

One of the most important developments was the formation of SACOR affiliates to take advantage of surplus refinery gases. In August 1957, Sociedade Portuguesa de Petroquimica was founded with a 60% SACOR participation. Commercial operations began in 1961. Petroquimica undertook the manufacture of ammonia, town gas, hydrogen, and other inorganic chemicals. Expansion into organic chemicals took place at the end of the 1970s. Nitratos de Portugal, of which SACOR owned 25%, was also set up in 1957 and had close links with Petroquimica. Nitratos was in the business of production, distribution, and sale of nitrogenous fertilizers. In 1960 SACOR founded AGRAN to manufacture pesticides.

Other affiliates were set up to support SACOR’s retailing activities. Petröleo Mecánica Alfa was established in 1962 to manufacture service station equipment and bottles for liquid gases. In 1962 SOCAR was formed and constituted in Spain to carry out market studies and to implement a distribution network for liquid fuels. In 1966, SACOR participated in the formation of Construtora Moderna SARL for the manufacture of pipes, boilers, and industrial structures and machinery.

Meanwhile, the expansion of the Cabo Ruivo refinery during the 1950s had proved inadequate to cope with the growing demand for petroleum products in Portugal. A further expansion to 1.5 million tons, planned for the early 1960s, still was not enough. In 1960 SACOR presented a memorandum to the government setting out the need for a new refining complex to deal with the anticipated demand growth of the 1960s and 1970s.

In 1964, after a period of intense public discussion, SACOR received authorization to build a new refinery at Matosinhos, about two kilometers from the port of Leixoes and ten kilometers from Porto. This document, which was ratified in July 1965, established the basic conditions of the refinery concession. The refinery was to have an annual capacity of 1.5 million metric tons with storage facilities for 500,000 metric tons. Petrochemical facilities and an 800,000 metric ton lubricating oil unit were also to be built. In order to help finance the refinery, which was expected to cost Esc3.5 million, SACOR increased its capital by Esc800 million. The state retained its one-third stake.

The construction of the Porto refinery was closely linked to the expansion of the port of Leixoes, and plans were set in motion in 1964 for the construction of a maritime terminal capable of receiving large tankers. The terminal, which consisted of three quays, was opened in 1969. The refinery itself was fully operational by mid-1970; the first unit yielded the full range of petroleum products from light oils to heavy fuel oil and asphalt, and the second unit produced lubricating oil.

Two decisions taken in 1971 were to have a profound effect on the future of the Portuguese refining industry. The first concerned the expansion of the Porto refinery to a capacity of five million metric tons a year and the revamping of existing facilities. Porto was expanded to 7.5 million tons by 1975. The second involved the installation of a third refinery at Sines at a cost of Esc25 billion and a capacity of ten million metric tons a year.

The Sines refinery differed from the Lisbon and Porto refineries in two ways. First, in line with the wish of the government to introduce greater dynamism and competitiveness into the national refining industry, the refinery concession was awarded not to SACOR but to SONAP, originally founded in 1933 and which had only been active hitherto in sales and distribution, and to Companhia Uniao Fabril (CUF), one of Portugal’s biggest industrial companies. In 1972, the SONAP-CUF association resulted in the formation of Petrosul, in which the government also had a 34% stake, to carry out the Sines project.

Secondly, the Sines decision marked a new phase in official thinking about the petroleum industry. Hitherto, the domestic industry had been intended to satisfy domestic needs. However, international consumption of oil products had expanded rapidly, and Portuguese decision makers saw opportunities to boost foreign exchange earnings from the export of petroleum products. Sines was conceived not only as a potential export refinery but also as a crucial part of a much bigger, integrated industrial export complex. The project was held to have three key crucial commercial advantages: access to low-price labor; abundant supplies of raw material from the Middle East and Portugal’s overseas territories, and markets with an inexhaustible demand.

The plan went awry. Portugal’s overseas territories gained their independence. The 1973-1974 and 1979-1980 oil price hikes reined back the seemingly unstoppable demand growth, and Portugal became the subject of an Arab boycott after allowing the United States to use the Azores as an air base for its airlift of emergency aid to Israel during the 1973 Middle East crisis. Instead of providing a steady stream of foreign exchange, Sines, which came onstream in 1978, contributed to the worldwide refining surplus that prevailed during the late 1970s and during most of the 1980s. For several years, Portugal’s refineries were operating at less than 50% capacity.

Before the Sines project became a reality, politics intervened. In April 1974, the uprising of the armed forces movement brought an end to the authoritarian system of government set up by Antonio Salazar almost 50 years earlier and continued by Marcelo Caetano after Salazar’s death in 1968. The coup had a profound effect on all aspects of Portuguese life, including the refining industry. In April 1975, the main elements of the national oil industry, SACOR, CIDLA, SONAP, and PETROSUL, were nationalized. On April 1, 1976, these companies were brought together to form Petrogal, which inherited the quotas and other privileges of its predecessor companies.

Petrogal’s early years were made difficult by two factors. First, Portugal’s overseas territories became independent states and, although ties remained close with the former colonies, Petrogal lost many of the preferential conditions of access to African oil. Secondly, the coup brought upheaval to the Portuguese economy, and growth stagnated for some time. The oil price shock of 1979-1980 precipitated a slowdown in economic growth worldwide and dealt a severe blow to the export plans for Sines.

The start of commercial operations at Sines facilitated an overhaul of the Cabo Ruivo refinery, which was modernized and converted to crack fuel oil from the Sines refinery to yield higher value-added products such as gasoline, gas oil, and LPG. The refinery was recommissioned in 1984 after an Esc4.5 billion conversion.

In 1979 work for the third phase of the Porto refinery got under way, ready for start-up in 1981. This Esc 12 billion chemical project utilized the refinery’s utilities and part of its output as raw material. The new plant had nameplate capacity of 350,000 metric tons a year of aromatics and solvents and allowed Petrogal to intervene in markets for plastics, dyes, fertilizers, detergents, and fibers, among others. The major part of this unit’s output was exported. Subsequent modifications increased the aromatics production capacity.

The history of the oil industry in Portugal is primarily the history of refining. Exploration for crude oil in Portuguese territory had not been a priority before 1974 because of the existence of colonies which had large reserves of crude. Exploration of offshore and onshore Portugal has been more systematic since the coup and has been carried out by foreign companies and by Petrogal. Results, however, have been discouraging. Petrogal has been active or shown interest in north and west Africa, South America, the Middle East, and the North Sea, and has taken stakes of 10% to 20% in promising concessions.

The accession of Portugal to the European Economic Community (EEC) on January 1, 1986, heralded profound economic changes for Portugal. Industry in general, and the oil industry in particular, had been subject to a high level of protectionism. From the beginning, SACOR had a guaranteed 50% share of the market, changed to 40% in 1971. The protection which had been afforded to Petrogal and its predecessors had resulted in slow responses to changes in the international markets and had been damaging to the economy. At the end of the 1980s, oil still comprised 82% of total Portuguese energy consumption, whereas it had fallen to an average of 47% in the rest of the EEC. Market signals should have contributed to major improvements in energy efficiency—very important to a country like Portugal with limited indigenous energy resources—but protectionism and subsidies prevented them from working.

EEC entry changed all this. The accession treaty for EEC entry allowed for a seven-year transition period with the full removal of Petrogal’s privileges by December 31, 1992. Liberalization began in 1986 but was soon accelerated, allowing full liberalization to take place by January 1, 1991, two years ahead of schedule.

Privatization will combine with liberalization to form a major influence on Petrogal’s competitiveness in the coming years. State ownership of industry is no longer in favor in Portugal. By the mid-1980s, public sector losses in Portugal amounted to Esc3.3 trillion, equivalent to nearly 70% of gross domestic product. Constitutional amendments were passed in 1989 to enable the government to sell off its shareholdings in state-owned companies, including Petrogal. The 1990-1991 Persian Gulf crisis caused a crisis of confidence in Portuguese equity markets and briefly delayed the privatization program. Because of its size, the Petrogal sale, which will be among the largest in the privatization program, is likely to take place in stages. The process should be well underway by the end of 1991. Foreign companies that have shown an early interest in taking a stake in Petrogal include Repsol, Elf Aquitaine, and Exxon. The Espirito Santo family, once major shareholders in SACOR, put together a consortium, in which it was joined by the Gulbenkian Foundation and Portuguese investors, to bid for Petrogal.

Principal Subsidiaries

AGRAN (Angola, 98.67%); CABRO-GAL (97.36%); DICOL (30%); EIVAL (89.28%); GALP International Corporation; HOTELGAL (29.83%); MO^ACOR (Mozambique, 76%); PETROGAL ESPAñOLA; PORTGAS (30%); SAAGA (43.91%); SACOR MARíTIMA (79.78%); SOCAR (50%); VIVA PETRöLEOS (44%).