The partially renationalisation of Repsol-YPF has been in the news recently. It is quite interesting to take a closer historical look at the privatizations, recapitalisations and expropriations of National Oil Companies (or the whole domestic oil industry) in Latin America. Privatisations as well as expropriations are often presented as populist and nationalistic measures by politicians, using false arguments. Privatizations are often executed by (neo-)liberal governments because State owned oil companies got too bureaucratic, too slow and too inefficient. Expropriations are often executed by socialist governments, because the government thinks oil companies are making too much profit and the state is getting too little royalties. After expropriations State owned Oil companies often have to pay too much taxes, do become a major source of revenue for the government's budget and are usually heavily indebted, which leaves very little money for investments. Some oil companies have even experienced several privatizations and expropriations cycles. Let's illustrate this with a concise review of the most significant LatAm National Oil companies:
Mexico's PEMEX
In 1938, President Lázaro Cárdenas sided with oil workers striking against foreign-owned oil companies for an increase in pay and social services. On March 18, 1938, citing the 27th article of the 1917 constitution, President Cárdenas embarked on the state-expropriation of all resources and facilities, nationalizing the United States and Anglo–Dutch operating companies, creating PEMEX. PEMEX' debt has grown to $ 42 Billion this year. The state owned company badly needs capital to upgrade his refineries and to invest in projects of exploration and production, President Calderón made clear at the beginning of his presidency that he would try his best to open up the sector to private investment.
Venezuela's PDVSA
Venezuela's PDVSA
Venezuela nationalized its oil industry in 1975-1976, creating Petroleos de Venezuela S.A. (PDVSA), the country's 100% state owned and state run oil and natural gas company. PDVSA purchased 50% of the United States gasoline brand Citgo from Southland Corporation in 1986 and the remainder in 1990. In the 1990s, Venezuela opened its upstream oil sector to private (foreign) investment. Under the influence of President Chávez, the Venezuelan government has reduced PDVSA’s previous autonomy and amended the rules regulating the country’s hydrocarbons sector. Nearly one-half of PDVSA’s employees walked off the job on December 2, 2002 in protest against the rule of President Chavez, practically bringing all the company’s operations to a halt. Chávez fired 19,000 workers following the strike, draining the company of technical knowledge and expertise. From 2005 on, PDVSA started to follow up the 2002 MEM law and began converting Operating Service Agreements into new PDVSA joint ventures, meaning many expropriations of foreign investments. Under the Chávez administration, PDVSA became a big collection of all kind of expropriated companies and a government institute to distribute social development funds. Oil production and company capital decreased considerably, while bureaucracy increased dramatically.
Colombia's ECOPETROL
Colombia's ECOPETROL
Empresa Colombiana de Petróleos was created in 1948 by means of Law 165 of that same year after the 30 year De Mares concession expired and was reversed. No state-expropriations were executed. From then on, the field was developed by the Ecopetrol. Ecopetrol became a success because of the Colombian government’s strict honoring of contracts with private companies and a great deal of pragmatism of the political and business leaders in dealing with international oil companies made Ecopetrol. Also the establishing of more investor-friendly fiscal policies contributed to Ecopetrol's success. It attracted over 130 exploration & production companies from around the world. Ecopetrol has been partially privatized since 2003 in order to internationalize it and make it more competitive.
Argentina's YPF
Argentina's YPF
Yacimientos Petrolíferos Fiscales was founded in 1922 under President Hipólito Yrigoyen's administration. Nationalization of oil resources started in 1928, but was never achieved due to a 1930 military coup against Yrigoyen backed by foreign Standard Oil. President Carlos Menem initiated the privatization of many of the firm's refineries, filling stations, pipelines, and oil fields in 1991. As part of the Government privatization program, YPF completed an initial public offering in 1993. As a result, the Argentine government ownership of YPF was reduced from 100 percent to approx. 15% of the shares. In January 1998, the Argentine government announced its intention to sell its holding in YPF. On January 20, 1999. Repsol won the bidding at the minimum price of $38.00 per share (total US$2 billion), reflecting the absence of any other bidders. The WSJ remarked at the time: "It's a steal, noting that Repsol would be acquiring YPF's energy reserves at a comparatively cheap price of $3.65 per barrel." The Argentine government would remain a golden share that would permit the government to exercise veto power in (1) a merger of YPF with any other company. (2) acquisition by any other company of more than 50 percent of the capital (3) sales of significant assets involved in exploration and production activities, and (4) dissolution of the company. In 1999 Repsol purchased a further 83% (totaling to 98%) for over US$13 billion including all remaining public sector shares (10%, equally divided between the nation and the provinces) as well as most of the outstanding investor shares. The 98% Repsol ownership of YPF in 1999 decreased to 58% in 2012; 25% is now owned by Eskenazi family of Buenos Aires and 16% remained in private portfolios. The partial renationalisation of 51% of YPF was initiated in April 2012 by President Cristina Fernández de Kirchner. The state would purchase a 51% share, with the national government controlling 51% of this package and ten provincial governments receiving the remaining 49%.
Brazil's PETROBRAS
Brazil's PETROBRAS
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Petrobras (Petróleo BrasileiroGetúlio Vargas as a 100% government-owned monopoly to prospect, extract, and refine domestic petroleum and to transport that oil and its derivatives. Petrobrás was granted a monopoly over Brazil’s imports of crude oil in 1963, and it took over Brazil’s privately owned refineries after they were nationalized in 1964. Brazilian Government owns 54% Petrobras. In 1997 the government approved Law N. 9.478, essentially breaking the Petrobras' monopoly in Brazil and allowing competitors to develop the country's oil fields, never the less foreign investment has been lackluster. From then on the company executed agreements with other Latin American governments and began operations outside of Brazilian domains. Petrobas was re-capitalized in 2000. Nearly one-third of the company’s voting shares were sold in 2000, and there were subsequent sales in 2001 and 2002. The government, however, still holds 55.7% of Petrobras’ common shares, and therefore of its voting capital, and 32.2% of the company’s total capital stock.Ecuador's PETROECUADOR
PETROECUADOR was founded on September 26, 1989. It is the successor to CEPE (Corporación Estatal Petrolera Ecuatoriana) which was formed in 1972. A new hydrocarbon law was introduced in September 1971 and renegotiations of concessions made prior to 1969 took place. This enabled CEPE to gain control of the Amazon region to the East and on the coast. Foreign company concessions such as Texaco-Gulf contract were greatly reduced. Gulf, after a series of disagreements with the government, decided to pull out of Ecuador entirely in 1976. In 1988 CEPE began suffering from unprecedented financial difficulties resulting from the 1986 world oil price collapse. Ecuador's 1987 earthquake, which destroyed 40 kilometers of the trans-Ecuador pipeline, the main method of transport for crude exports, affected 25 of its oil fields. In 2010 President Correa was threatening to expropriate private oil companies if they refused to convert their contracts that allow private oil operations to benefit directly from the oil they produce to contracts on which they would be paid a production fee and reimbursed for investment costs. Private oil companies in Ecuador are responsible for 42% of the country's production of around 466,000 barrels per day. Expropriations (so called "confiscations" over a raised windfall tax dispute) by the Ecuador government has taken place in the last few years. The raised windfall tax by Correa caused private oil production in the country to fall from 255,700 barrels per day to 162,000, while private investments in oil production decreased considerablyBolivia's YPFB
Chile's ENAP
Peru's PETROPERU
Common Thread
There seems to be a common thread running through most of these stories of National State owned Oil Companies. Expropriation, re-capitalization and privatization of national hydrocarbon industries are taking turns in most LatAm countries. Somehow often the same scenario with some variations seems to unfold. State owned Oil companies seem to have continuous difficulties to find a healthy balance between capital reservations for investments in exploration and production and skimming maximum taxes to fund the government's budget. Populist government's always let the budget win. So, at a certain point in time - when national capital has run out - private companies are invited to invest in exploration and production. When foreign companies have invested and negotiated royalties, the government raises royalties after some time, which forces private companies to decrease investments considerably. The next step is that the government expropriates these private investments because production (royalties) from these investments become too low. In their capital negotiations with foreign investors, governments have to carefully balance the tax level against the private investment obligations too. The higher the tax level, the lower the investments can be and thus production and vice versa. There is always an optimum that maximizes the government's income flow. Unfortunately populist governments tend to choose for maximum tax levels and not maximum income. The next stage is that foreign investors are not willing to invest anymore; production will further decrease and so the government's income. Finally the state-owned oil company gets privatized, the government receives a large sum and soon we will be back on square one...
What Works Best?
The State-Private Competitive Model of Brazil and Colombia seems to be the most successful. In this model, state-owned companies that previously enjoyed a monopoly were not privatized, but were forced to compete in an open market. In Brazil, the state company maintains its dominant position as the largest producer and investor, while in Colombia, the private sector has in comparison a larger share in both upstream and downstream operations. ECOPETROL in Colombia, and PETROBRAS in Brazil, are both state-controlled companies but with a mix of state-private shares that participate in joint venture initiatives with private companies. In terms of economic performance, oil sector indicators in Colombia and Brazil have been positive in recent years. Proven reserves increased only in countries using the state-private model in Latin America. Finally, oil production increased in both Brazil and Colombia, and Brazil moved from being a net importer to covering domestic demand for the first time in its history. The model has also proven to be politically stable, with neither Colombia nor Brazil seeing the kinds of protests and social conflict present in the privatization countries.
More to read:
http://latam-threads.blogspot.com/2011/11/oil-production-in-venezuela-and.html#more
http://www.economist.com/blogs/americasview/2010/11/ecuadors_oil_industry
George Philip - Oil and Politics in Latin America: Nationalist Movements and State Companies
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