TotalFina Elf is preparing the sale of its estimated 45 per cent stake in the Spanish oil firm Compania Espanola de Petroleos (Cepsa), industry sources told Reuters yesterday. Total's stake is worth close to 1.4 billion euros ($1.3 billion) at current market valuations. It was inherited from Elf, which the French oil giant acquired last year.

One source said Union Fenosa, a Spanish power and gas utility which owns five per cent of Cepsa, is attracted to a combination with Cepsa. Cepsa has said it wants to expand further into the power business, and in the past has looked at potential gas projects with Endesa, Spain's power sector number one. Cepsa and Fenosa are already linked through a natural gas and power co-generation joint venture. Spanish authorities last year blocked a merger of Fenosa, the third largest Spanish power company, with another domestic utility, Hidrocantabrico.

Spain's utilities sector is in a state of turmoil as potential deals are prepared ahead of market liberalisation. Total earmarked the Cepsa stake for eventual disposal as long ago as 1999 when it first planned the Elf merger. "If you look at the way Total views the world, having an asset that they don't control, that they can't consolidate, and it's worth quite a bit of money, is exactly the sort of asset they would look to sell," said one source familiar with Total's plans.

"Acquiring it outright is the other alternative but that's a non-starter for Spanish (political and regulatory) reasons." A Total spokeswoman declined to comment on the group's plans for the stake. A Cepsa spokesman said, "We are unaware of this and believe it is a rumour without foundation." A Union Fenosa spokesman said the utility was unaware of any plan by Total to sell its stake in Cepsa. "We have not expressed any intention of increasing our stake," he said when asked whether Union Fenosa was interested in a bigger chunk of Cepsa.

The sale plan will heighten speculation that the French oil giant plans an eventual merger with Cepsa's much larger Spanish rival, Repsol. The political and regulatory barriers to such a deal are huge anyway, and analysts are sceptical that the assets are a convincing fit. But if the Spanish number two were to become independent of the French group, now the world's fourth largest oil company, one potential snag would be removed. Cepsa derives over 80 per cent of its sales from within Spain and is predominantly a refining and marketing company. It distributes its petroleum products through a network of more than 1,700 outlets in Spain and Portugal.

It holds 25 per cent of Spain's products distribution company Compania Logistica de Hidrocarburos (CLH), in which Repsol owns a majority stake of 61 per cent. The Spanish bank Banco Santander Central Hispano would be a key player in any combination between Cepsa and Union Fenosa in each of which it holds a substantial stake. Industry experts said ENI, the acquisitive Italian oil major, may also be interested in a deal with Cepsa that could involve a swap of Spanish and Italian refining and marketing assets.

Asked about its future in an interview this month with Reuters, TotalFina Elf Chief Executive Thierry Desmarest said "Cepsa is in a good position... we are very happy with Cepsa."