Budgetary pressure, falling revenues, cost-cutting measures and general ambiguity – just a few of the characteristic traits that have marked the latest oil price recession period. State-owned companies, commonly executing the double task of carrying out energy-related activities and cross-subsidizing the government budget, find themselves increasingly vulnerable. Privatization represents an expedient variant of raising cash for state coffers and rendering oil companies more efficient by means of bringing in new ideas and adhering to free-market discipline – a multitude of national oil companies (NOCs) might be privatized in the coming years. Saudi Arabia has long been nourishing the idea of orchestrating its first-ever oil IPO, as does Kuwait, whilst Mexico and Russia have lately carried out privatizations with varying degrees of success.
Since NOCs control more than 70 percent of global oil reserves, they have been historically reluctant to open up equity access. NOC privatization, in itself, is a quite recent phenomenon – the first notable deal was BP’s 1977 partial privatization – and it has manifested itself unevenly around the globe. For instance, Latin America witnessed a powerful wave of privatizations in the 1990s (most distinctly in Argentina and Bolivia, later to be followed by Brazil and Colombia), yet Middle Eastern NOCs have largely stayed out of it. Until very recently. For the edification of companies designated to be privatized, here are some basic, yet as the fulfillment of some privatization schemes has proved, quite essential hints to be followed.
1. Don’t self-privatize
The most effective and meaningful way of carrying out NOC privatization is by offering shares to a third party, not to oneself. History provides quite a few examples of governments intending to sell privatized assets to another state-owned entity. For instance, it was assumed by many that during last year’s Rosneft privatization, the state-controlled company would privatize itself, buying the 19.5 percent share in question from a state-owned energy assets fund (Rosneftegaz). This has not happened. However, Glencore and Qatar Investment Authority’s eleventh-hour offer proved to be more favorable for all intents and purposes. Yet the story may repeat itself, especially in countries where national oil & gas assets are managed by means of asset funds. Related: Saudi Reshuffle Could Completely Shake Up Oil Markets
India offers another insight into how the prevalence of state interests can lead to self-privatization. Facing a hefty budget deficit, the government in 1999 instructed India’s leading state-owned companies – Indian Oil, Gas Authority of India, Oil & Natural Gas Company - to buy each other’s shares worth $1.2bn from state-owned holdings. Technically, the state’s equity share has dropped, however, since the abovementioned companies are majority owned by the federal government. The act was merely moving money from one pocket to another. Although the idea of the state oil sector’s gradual privatization has been flaunted since at least the early 1990s, till the present day it remained essentially stuck at the self-privatization level. Thus, long-term efficiency might not be that convincing if the given government is focused on settling short-term challenges.
2. Don’t roll back
NOC privatizations are most likely to turn out fruitful if given the time and space to flourish. In this aspect, Latin American privatization efforts are of special interest. Argentina had its national oil company, YPF, fully privatized by 1999, yet due to economic mismanagement and the subsequent largest-ever sovereign debt default, the nation never really assured itself of privatization’s purposefulness. Therefore, when in 2012 the Fernández Kirchner government stepped in to renationalize YPF-Repsol, the measure did not really encounter any widespread popular hostility. The same logic, among others, also applies to Evo Morales’ Bolivia mid-2000s and Venezuela prior to Hugo Chávez. Yet there need not be such an oscillation from one extreme (nationalization of everything) to another (predatory, if not comprador, capitalism). There are plentiful variants of maintaining government control whilst opening the market up to leading energy companies.
If a government is in straitened circumstances and needs additional cash, tweaks in the tax code might prove to be the optimal way out. If a government yearns to cover its bases and make sure that the new majority owner will not commit itself to an unfavourable development course; it can follow the Spanish example of implementing a “golden share” and stipulate that the Government can reject certain transactions if they adversely affect any state-owned entity’s business. Also, in order to avoid any potential privatization roll-backs, it is important to privatize in due time. The current Venezuelan constitution bars the privatization of PDVSA altogether – yet if a new government, having amended the Constitution, would launch a privatization effort straightaway, the desirable effects would fail to materialize as PDVSA is currently at its low point. Such a privatization would garner less money than expedient and anger wide swaths of the population (as their national property would be given away for a trifling sum). Related: Underperforming Energy Sector May Soon See M&A Wave
3. Don’t privatize the corrupt
Russia’s renationalization of assets in the early-2000s is a fitting example of how corruption can skew the optics of privatization. In the wake of Yukos’ shutting off in 2003, Rosneft acquired its first asset, Severnaya Neft, from a Federation Council senator for $600 million, doubly overpaying the market value of the company. What makes it even more interesting is the fact that Severnaya Neft’s most lucrative assets were acquired in a highly contestable auction, during which other companies offered 15 times as much for the Val Gamburtseva field. Its equity dealings had been murky, too – although LUKOIL owned 50 percent of the company, when it was time for renationalization, it was completely diluted from the ownership structure by means of share sales (by all appearances illegal). In the end, the whole privatization-asset buildup-renationalization chain was just a gradual enrichment scheme.
All in all, most contemporary oil & gas companies bear in mind the abovementioned guidelines, partly because times have changed for the better, partly because others’ mistakes serve as good ground rules. The most lucrative and talked-about upcoming privatization, Saudi Aramco’s 5 percent IPO in 2018 which is expected to raise $1 trillion, has so far been managed neatly. Postponed from 2016 to 2017, then to 2018, so as to carry out the IPO at the optimal moment, the Saudis have even managed to downplay their future commitments vis-à-vis the state, which might be a major matter of concern for potential strategic buyers. We will see how it all turns out in the end.
By Viktor Katona for Oilprice.com
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