why government steps in again...2 landmarks: 1) 1997 -bolivia-brazil gas pipeline (with the...

Volkan EmreStefan Edwards

Gabriel KohlmannBereket Asfaha

Why Government Steps in Again ?

A Comperative Analysis of Dominant Energy Sector SOEs of Russia, Brasil and China

Reseach Questions

• What are the reasons / motivations for re-intervention of governments in energy sector ?

• What is the relationship of interventation and energy prices ?

• Do the activities of the company reflect success in achieving their motivations / objectives ?

• Do the selected SOEs behave as an instrument of state rather than a private enterprise ?

• What are the main expectations and challenges for the future ?

Why government steps in again ?

A General Look at the Energy Prices

ConclusionPetrobras Chinese Petro-Majors

Introduction Gazprom

Historical Motivations for the Establishment of SOE’s

Economic motivations:

• Revenue Generation• Import Substitution

Political motivations:

• To create economic diplomacy and trade with other nations• To create state monopolies for strategic resources

Security motivations:

• To monopolize military enterprise, production and technology• A means to fulfill their interest with power and prestige

SOE’s in History

• During the eras that preceded and that was contemporary to the World Wars, a number of governments started to play a more direct role in the economy,

• The motivation for intervention often originated from a number of concepts, including:

• Natural Monopoly: government intervenes in sectors they deem to be in the public interest such as the electricity, gas and the railway sectors required for the provision of goods or services.

• Market failure: provision of public goods, i.e., the free rider problem. Private enterprise does not have motive to produce such goods and services.

• Merit goods :limited to particular groups, but consumption is desirable even if you don’t pay a market price (for example, merit goods are health care or education).

• Externalities (positive or negative) outcome of an economic activity that affects other members of a community.

Examples of Modern SOE sectors

• Britain – The “Workshop of the World” & the Liberal Approach. Still yielded examples of nationalizations like Suez Company(1875), BBC(1927), British Airways(1939) and British Steel(1967)

• France – A Long Tradition of State Involvement in the Economy, dating back to the ‘regies’ of the 18th Century. Modern examples include France Telecom and La Poste, as well as the gas and electricity industries of France.

• Germany – A Late Starter and Late Developer. Railways nationalized after World War I. Renationalization of Bundesruckerei (2008).

• Russia/Soviet Union - ‘Socialization of Production’, all production nationalized in 1918. Yeltsin government seized Gazprom assets in 1998 in lieu of claims of owed taxes.

7

SOE’s Post-War Era to 1980’s

• Following Keynesian ideology, state organs seen as driver of economy

• Large demand for public spending

• SOE’s seen as critical in closing development gap

However…

• Government failure and SOE underperformance played critical role in debt crisis among developing countries in 1980’s.

• Call for fundamental shift from state driven to market driven development

• Structural Adjustment era!

• Calls to privatize

8

Privatisation

Privatisation is understood as any transfer of state activities into the private sector;

Main Drivers of Privatization of SOE’s

• Low efficiency, profitability and competitiveness of SOE’s

• Low technological progress of SOE’s increased potential for privatisation and commercialisation e.g. utilities

• Lack of adequate funds and the difficult process to “get public finances right” Privatisation emerges as a way to minimize government spending and increase revenue for government

• The downfall of centrally-planned economic systems main drivers for privatization

9

Re-entry of government into enterprise activity

• The truth is, many SOE’s survived the 1980’s reform e.g., Most petroleum companies, Amtrak, Indian Rail, Enel(Italy) & CFE(Mexico)

• In a way, a competitive environment has been good for SOE’s, prompting them to act more like private firms

• Efficiency and competiveness, and corporate governance improved.

• More governments keen to use them as tools again in order to achieve social and public interest goals, as well as industrial and technological flagships.

10


Introduction GazpromA General Look at the Energy Prices

Total energy real end-use price index for industry and households

Oil & Gas Industries in Russia

• Russian state followed different paths in the oil and gas industries since the collapse of USSR

Oil: o Russia holds world’s 6th largest reserveso Russia is world’s second largest oil producero Large privatization of exploration & extraction o Pipeline infrastructure kept under the state control

Gas: o Russia holds worlds largest reserveso Russian state retained the largest stake in Gazprom

• Warning ! Over the last years ,with the political effect of Putin - Kremlin sought to assert greater control over the oil industry by building a large oil company within Gazprom

Gazprom

• It alone produces more than 20% of the world’s gas ( most recently 22%)

• 8% of Russia’s GDP (in 2008)

• Largest and richest company in Russia - 13th largest in the world (Forbes The Global 2000 Report, 2009)

• Provided 25% of its earnings to the federal budget (2008)

• Supplies almost all of the gas of the households in Russia

• Generates 50% of Russia’s electricity

Gazprom

• Russia is the largest market for Gazprom in terms of trade volume

• European and Chinese markets come after domestic market

• World’s top gas exporter / Mainly to Europe

• Gazprom also imports gas from Central Asia: Turkmenistan & Kazakhistan

• Gazprom makes largest portion of its revenues by exporting gas to Europe and charges oil-linked prices which are roughly 5 times more than the prices paid by Russian consumers

• Gazprom aims to become a global , vertically integrated energy company occupying a leading position on the world market

• The company wants to compete with the majors on their own territories by developing upstream and downstream activities overseas

Gazprom’s Activities at Glance

Gazprom – Brief History• 1989, Foundation , First State – Corporate Enterprise (Exercised through shares of

stock 100% state shares)

• 1991, USSR was dissolved. Gazprom remained in Russia but there were newly created national companies like Turkmengazprom

• 1993 – 1997 , Inluence of Boris Yeltsin and Privatization… Organization became a joint-stock 33% sold via voucher method to the russian citizens 15% sold to the to the employees 40% retained by state Heavy regulations by law on the possible share of foreigners = upper ceiling was 9%

• 2000, 38% downsized share of state

• 1997 – 2000 , Corruption ( Tax Evasion , Asset Stripping..etc)

• 2000-2003, Putin and his reforms

• 2005, Establishment of government control – State owned company Rosneftgazpurchased 11% share of Gazprom and Russian state took the control

• (The Russian government controls 50.002% of shares in Gazprom

Gazprom – Gas Prices and Nationalization

Gazprom Shareholders as a Percentage of Capital Structure

Index of natural gas end-user prices

Gazprom – Motivations for Re-Intervention ?

• Strategic importance of the natural gas sector

• Subsidizing local consumer and producers at reasonable prices

• Russia’s foreign policy approach after Putin came into force.

Export Monopoly Benefits

• Increasing energy prices

Gazprom’s Corporate Behaviour under Question ? Instrument of State or Private Enterprise ?

Signs of behaving as an Instrument of State

• Suppliyng the inefficient domestic market at low prices = Low profitability in the domestic market

• Economically irrational and selective business decissions on the international level

• Weak corporate governance and managerial efficiency problems. Gazprom is still managed like a Soviet enterprise.

• Dominant role of political connections on the governance style

• Weak control of shareholders

• Activities in the unrelated industries like media and footbal. Especially the dominant control of media

• Lack of investment to keep and increase the production capacity

• High profits & High profitability

• Slightly increased stock prices

• International and overseas activities

• Ambitious corporate aims to become an international player

• Ambitious investment projects in four continents

Signs of behaving as a Private Enterprise

Gazprom – Ratings

Sales, EBITDA, Profit , million RUR (2003-2010)

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

3.500.000

4.000.000

2003 2004 2005 2006 2007 2008 2009 2010

Sales

EBITDAProfit

Re-interventation

Gazprom – Ratings

Net Margin(%) , Return on Equity (%), Return on Capital (%)

0%

5%

10%

15%

20%

25%

30%

35%

2003 2004 2005 2006 2007 2008 2009 2010

Net margin (%)

Return on equity (%)

Return on capital (%)

Re-interventation

Gazprom – Expectations & Challenges

Expectations

• Being able to compete with the majors in their own territories

• Keeping the market share

• Diversifying the transportation opportunities

• Progressive deregulation of the European gas market (biggest market) . There will be most likely significant changes in the future long term contracts

• Production is stagnant

• Investments are insufficient

• The biggest fields are in decline

• High depence on the current pipeline system to deliver russian gas (e.g conflicts with Ukraine)

Challenges


ConclusionChinese Petro-Majors


Petrobras

Petrobras

• Founded in 1953• It is a semi-public company, and the Brazilian Government has the majority of

the voting shares, being the controller:

• Shares traded in Stock Exchanges in New York, Sao Paulo, Madrid and Buenos Aires

• Has operations in Exploration and Production; Refining and Downstream; Gas and Power and Bio-fuels

• Has activities in 27 countries with all the segments listed above

Petrobras

• Market Cap: USD 147 billion (September, 2011)

• Ebitda: USD 32 billion – 77% E&P (2010)

• 2010 Oil and Gas Production: 2.6 mm/boe/day (ranked 5th)

• 2010 Proven Reserves: 16 billion boe (ranked 4th) – 70% in Deep Water and Ultra-Deep Water

• World Leader and Technological Reference in E&P in Deep Water and Ultra-Deep Water – 20% of global DP and DPW production in 2010

Petrobras

• Presence in 27 countries in all 5 continents

• Activities in all segments of oil and gas industry (E&P; Refining; Distribution)

• Key Operations: Gulf of Mexico; Africa’s West Coast and Latin America.

• Investments of USD 11.5 billion for the period 2010-2015

Process divided in 3 stages, showing different demands and strategies from the State. The late one could be defined clearly as a “re-intervention”, as we going to see in the next few slides.

Petrobras• Phase 1 - Self-sufficiency – 1972 to mid 1990’s

Creation of the subsidiary Braspetro to be the international arm on the company. Political Decision (from the State): seek self-sufficiency of oil production after

the oil crises. Focus on Middle East (Iran and Iraq) and west Africa (Angola and Nigeria). Some

investments in Latin America (Colombia and Gulf of Mexico) To use abroad the expertise created internally on deep waters E&P.

Self-sufficiency was achieved only at the early 2000’s.

• Phase 2 – Going Global – mid 1990’s to late 2000’s

Following the marketing opening in Brazil, and the end of the national monopoly: Seek of competitiveness, technology catch up, self- survival (of the company): Market Oriented decision. Expand to Europe, US and Japan. Consolidate presence in Africa (considered ‘natural market’) and Middle East. Being a leader in Latina America (considered ‘natural market’). In 2006 invested USD 2.6 billion abroad, and had revenues of USD 5 billion abroad, in 27 countries (excluding Brazil).

Petrobras• Phase 2 (cont)

2 Landmarks: 1) 1997 - Bolivia-Brazil gas pipeline (with the exploration of the majority of local gas fields, it become the largest private company in Bolivia, accounting for 20% of Bolivian GDP). 2) 2002 - Acquisition of Perez Companc in Argentina (a local leader in refining and distribution) by USD 3.5 billion.

In 2003, change of government. Under Lula administration (until late 2000’s), the international expansion gained political support (from the State): To be a Brazilian MTN, and serve to the Brazilian interest abroad

Re-Intervation: From market-oriented (late 1990’s) to state-led (early 2000’s). Petrobras is a tool from the State, and its foreign activities are part of the Brazilian Foreign Policy.

In South America, Petrobras was a major player in all activities from the oil industry: E&P, refining, distribution (Argentina, Paraguay, Uruguay, Bolivia, Chile, Ecuador, Colombia and Venezuela).

Internally, the broken monopoly was inefficient. Petrobras still have a de factomonopoly of oil industry activities: E&P; refining and petrochemical; distribution

Petrobras• Phase 3 – Pre-Salt Era

In 2006 / 2007, Petrobras has discovered large oil fields in Brazil, at ultra-deep water (called Pre Salt “bellow the salt layer”). Estimated reserves surpass 50 billion barrels in these new camps

Technological and logistic challenge: Average distance of 300 Km from the coast, and 7,000 meters of depth.

Need huge investments: expected capex – USD 224 billion in 4 years.

Investments in vessels and platforms, human capital, R&D capacity and so on.

So, reduce of the investments abroad to focus the money on pre salt. It is not discarded the selling of international assets to capitalize the company (company needs USD 96 billion) – it is already happening, but some small and localized operations.

Petrobras• Phase 3 (cont)

Political decision (from the State): To use the so huge Petrobras investment to foster local industry. Requirement of local content. Intention to develop a competitive industry on material to the oil industry. Focus on R&D activities and high tech products to be produced and developed in the country. (USD 11.4 billion on R&D and USD 142.2 billion of purchases in the Brazilian market – national content of 67% of the investment).

Focus on international partnership with foreign suppliers to invest in R&D and production in Brazil (expected investment of foreign partners in Brazil: USD 46.4 billion until 2014).

New Re-Intervation: State Led – Petrobras is a tool to the Industrial Policyby it’s procurement of high-tech products.

Petrobras - Conclusion on 3 Phases

• Phase 1 - Self-sufficiency – 1972 to mid 1990’s

• Phase 2 – Going Global – mid 1990’s to late 2000’s

• Phase 3 – Pre Salt Era

Chinese Petro-Majors - Background

• Responsibility for exploiting petroleum resources lay with Chinese Petroleum Industry Department

• Market-oriented reforms between 1983-1988 saw three major oil firms emerge out of the PID :

CNPC – mandated to exploit onshore petroleum reserves

CNOOC – sole responsibility is exploiting offshore reserves

Sinopec – refining is sole responsibility

Motivations for reform

•Overseas energy acquisitions emerged as important objective by the 21st Century

•“The natural resource-seeking ODI of the Chinese energy majors is intimately connected with the government’s pursuit of a national energy security agenda to secure overseas assets and supply agreements”. (Salidjanova, 2011)

But!

● Industrial structure and management systems of the Chinese petroleum sector were outmoded, uncompetitive and impractical.

● The sector would be grossly inefficient in exercising energy policy within China, and practically useless in thepursuit of any external energy policy objective.

A Look At The Reform Process

•A globalised economy required market fundamentals and the state-run oil majors underwent ‘comprehensive reorganisation’.

•This reorganisation was geared at:

Separating state functions from those of the enterprise

Breaking the traditional upstream/downstream monopolies by establishing a competitive environment.

How was reform implemented ?● Traditional government functions changed so state

participation in management activities via administrative directives could no longer occur.

● Between 1998-2001, assets of CNPC and Sinopec were redistributed vertically

● In 2000, CNPC and Sinopec became holding companies instead of 'public corporations'.

● These restructuring efforts led to international stock market participation from 2000 onwards (i.e., public offer approach to privatisation)

Overview of Stock Market Listings

Reforms cont’d

Main results were:

Autonomously managed firms

Relaxing industrial structure rules to allow the firms to pursue activities outside original ‘enforced niche’ i.e., blurring the lines between upstream and downstream companies.

More efficient employment levels

Separating ‘main business from auxiliary business’.

Did Reform Create successful firms ?

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-40

-20

0

20

40

60

80

100

120

Bn. R

MB

Profits of CNOOC & Sinopec

CNOOCSinopec

Reform Success Cont.

-6

-5

-4

-3

-2

-1

0

1

2

3

4

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Inde

x; 1

997=

1Profit Index - CNOOC & Sinopec

CNOOC

Sinopec

Reform Success

• Internal Success – more profitable, technically capable and competitive companies.

• PetroChina, the subsidiary of CNPC is the company with the highest market capitalisation on earth (first trillion dollar company ever).

• External Success – Chinese mining FDI increase sevenfold between 2004 and 2010.

• The three largest Chinese TNC's, ranked by outward FDI stock are PetroChına, CNPC, and CNOOC

Re-Interventionism?

• Not a re-intervention as such: Chinese state ceded some ownership and especially, management, of the Petro-majors.

• Importantly, the major gains to the companies are attributable to the effects of privatisation

• However, where increasing intervention is clear is in the preferential incentives given to these firms by the Chinese state.

Certainly 'Interventionism'

•Chinese SOE’s still subject to regulation within the state’s macroeconomic policy framework.

•Chinese SOE’s also entitled to significant subsidies and low cost financing from state banks, especially if they concern foreign interests.

•Ties with the Communist Party are still strong

• Companies on the front lines of state's 'resource diplomacy' objectives

Subsidizing Petro-Majors – The Case of Sinopec

● Sinopec received subsidies worth US$1.7 billion in 2010, worth an estimated 12% of its operating profit.

● Has received direct subsidies consecutively since 2008 oil price crash.

● Sinopec itself redistributes subsidies internally to satisfy national production policy.

● Refiner subsidies result in consumer subsidies in gasoline and diesel between US$15-23 billion between 2005-2008 (Tan, Wolack 2009)

Expectations & Conclusions

● Companies became more competitive

● Able to execute state agendas better than when the were arms of public corporations

● Subsidy and support cost is high, even in light of China's capital surplus

● Period of 'easy gains' might be drawing to a close, and a deepening of the current approach (further privatization) may be required to increase productivity.


Petrobras Chinese Petro-Majors


Conclusion

Conclusions• What are the reasons / motivations for re-intervention of governments

in energy sector ? Geopolitical benefits of export monopoly Maintaining technological investments Security of supply

• What is the relationship of interventation and energy prices ? Generally related with a few caveats

• Do the activities of the SOEs reflect success in achieving their motivations / objectives ? Yes

• Do the selected SOEs behave as an instrument of state rather than a private enterprise ? Yes

• What are the main expectations and challenges for the future ? Sustainability Uncertainity of energy prices

● Re-interventation success from the market perspective is unclear

● Re-interventation does not necessarily mean increasing the government share.

Conclusions

Why governments steps in again ?

Governments would consider their re-interventaion successful because they feel that they act in the national interest which

they do not measure only in economic terms

Conclusions

Thank you !

References• OECD, ‘(2011), Corporate Governance of State Owned Enterprices, Change and Reform in

OECD Countries since 2005’• Nadejda Makarova Victor, (2008), ‘Gazprom: Gas Giant Under Strain’• Rosner, (2006) ‘Gazprom and the Russian State’• Gazprom, (2010), ‘Annual Report’,• Toral,(2011) ‘Multinational Enterprises in Latin America since the 1990s’• Program on ‘Energy & Sustainable Development Stanford University, (2006), National

Oil Companies : Strategy , Performance and Implications for Global Energy Markets• Annual Reports of Sinopec, CNOOC, 1997-2011• Guo, S., (2007), 'The Business development of China's National oil companies: The

Government to Business relationship in China', The James A. Baker III Institute for Public police, Rice University.

• Salidjanova, N., (2011), 'Going Out: An Overview of China's Outward Foreign Investment', US-China Economic and Security Review Commission.

• Tan, X., & Wolack, F., (2009), 'Does China Underprice its Oil Consumption,' Department of Economics, Stanford University

• Carvalho, Flavia & Goldstein, Andrea. United Nations University UNU-MERIT; Working Papers (2008) ’The “making” national giants: technology and governments shaping the international expansion of oil companies from Brazil and China’. , 2008-021.

• Casanova,(2009) Lourdes & HOEBER, Henning. ’Petrobras – A bordeless barrel. In IDB “From Multilatinas to Global Latinas’ – The New Latin America Multinationals”. Inter-American Development Bank, Washington, 2009.

• Goldstein,(2010) Andrea. The Emergence of Multilatinas – The Petrobras Experience. In Universia Business Review, Primer Cuadrimestre.

• Petrobras,(2011) Petrobras at a Glance. Petrobras, Investor Relations Department,

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