Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company's shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world's largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom's big private sector competitors in the West is looking for one.
That Russia's largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state's rapid economic decline.
State oil companies are lovely cash cows when gas prices are rising. But they tend, on the whole, to be very badly run as companies. One often hears that government planning lets companies invest for the very long term, unlike the psychotic short-termism of the stock market. But at least in the case of oil, this often seems to be reversed. The government's priority is maximizing the size of the benefits available for its politicians to distribute now, not ten years ago when they'll be dead or out of office. The private oil companies planned for the strong possibility that the price of oil would drop dramatically. Meanwhile, other state-owned companies let the money run out as fast as it came in. Venezuela and Iran notoriously diverted desperately needed investment funds into social spending, while Gazprom and Rosneft went on a buying binge, snapping up assets that now look overpriced even though the government leaned on the private sellers to offer them at steep discounts. Now investors are fleeing the Russian firms, and I imagine that Hugo Chavez, whose chronic underinvestment caused Venezuela's output to fall in absolute terms, is wondering how to tell the Venezuelan people that there's no money for all their favorite programs. At least he doesn't have nukes.
There are exceptions--I understand that Aramco, Saudi Arabia's secretive oil giant, is supposed to be very well run, and Norway is a model of how countries should handle the financial and business problem of using up a valuable resource. Sadly, before Chavez, PDVSA was also known for being first class. But most national oil companies are both less efficient at extracting and finding oil, and less intelligent about handling the money it generates. It's not just excessive spending on patronage programs when times are good, or the difficulty of building up sufficient reserves for down times. As the Times article points out:
The company, meanwhile, says it will go ahead with capital spending to develop new fields in the Arctic, and continues to pour money into subsidiaries in often losing sectors like agriculture and media. It is also assuming, through its banking arm, a new role in the financial crisis of bailing out struggling Russian banks and brokerages.
Investors say an unwillingness to cut costs in a downturn is a common problem for nationalized industries, and another reason they have fled the stock. When oil sold for less than $50 a barrel in 2004, Gazprom's capital outlay thatyear was $6.6 billion; for 2009, the company has budgeted more than $32 billion.
Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company's reliance on Ukraine as a transit country for about 80 percent of exports to Europe. Gazprom and Ukraine are again locked in a dispute over pricing that Gazprom officials say could prompt them to cut supplies to Ukraine by Thursday.
I don't see any reason that governments need to control the rents on their oil fields by actually operating the equipment that pulls the oil from the ground. Most countries would be better off financially if they leased the fields and let someone else do the dirty work.
Exxon Mobil's management deserves credit from its prudence and restraint. Remember earlier in the year when critics complained about Exxon not investing enough in new production or levering up its balance sheet to buyback even more of its shares than it was already buying? Today, the company has $28 billion in net cash and a higher credit rating than most sovereign governments. It's well-positioned to buy reserves on the cheap from over-levered competitors.
What timing Megan!
I just commented at James Hamilton's:
Gazprom is the largest extractor of natural gas in the world, working in some of the world's most extreme and difficult terrains.
Give it its due.
I understand that Aramco, Saudi Arabia's secretive oil giant, is supposed to be very well run
Not surprising, given that they had a lot of Western help and aren't subject to the old adage about the electorate being able to vote themselves the treasury (though autocracy is of course otherwise a highly undesirable state of affairs).
pete, your comment is utterly beside the point. did you read the article?
Yeah, that's basically how Canada runs its oil industry. The governments own the fields, but don't pull a drop of oil out, we just take a royalty off the top. That's not to say that it's always done well - Alberta jacking up royalties last year because they felt like it was not exactly a shining moment in the history of governments being friendly to business - but it tends to work for the most part.
Pete: Nobody's saying that their job is easy, but that doesn't mean that they've done it well. It's still possible to do badly even by the standards of a difficult job.
I think what is obvious that those oil companies that have acquired leases, dirt cheap and years ago, will take all the profits and just pay the low cost of leases or royalty to the natives of these countries who own these resources. So the added efficiency means that their resources would be exported in a faster pace and that's all.
I believe the case regarding Venezuela was straight forward. Oil companies were paying 1% of their profit as royalty to them which is almost like stealing and a freebie access to oil fields and it would be very profitable to those who would own these leases. So those companies would not hesitate to extract as much as possible to cash in which is profitable for them and consumers but it is costly to the owners of these finite resources.
I believe that these countries fair better if they extract less and don't bother to lease at such a cheap cost that would encourage stealing of resources.
Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company's reliance on Ukraine as a transit country for about 80 percent of exports to Europe.
I haven't seen the numbers, but that smells like a classic example of a political decision overriding business sense. Putin wants to be able to cut off gas to Ukraine in the middle of winter if they make noises about joining NATO and/or integrating with Western missile defense.
Tev, whether or not the leases Venezuela had were "fair"--and in fact it's more complicated than you make out; the leases were, AFAIK, written in the late 1990s when oil prices happened to be low, and the government was mad when it found out price risk is, like, risky--that doesn't mean that Venezuela did itself a good turn by taking over operation. Oil reserves aren't simply a fixed amount; bad extraction means leaving a lot of oil in the ground that becomes unrecoverable because there's not enough pressure in the reservoir to push it up the pump. Venezuela's oil is particularly hard to get at; The Economists' energy correspondent told me that PDVSA needed to invest 25% of its take just to keep production level. It didn't, and production fell off, but rising prices masked the problem. Now the Venezuelan people are going to have less revenue than they did in 2004, when prices were last below $50 a barrel.
Sadly, before Chavez, PDVSA was also known for being first class.
That's true in a sense, but one has to appreciate both the public AND private roles of these companies. The reason we now have Hugo Chavez is because some of Venezuela's previous right-wing governments allowed poverty to fester while the country distributed its wealth to the upper classes who supported conservative governments.
What Venezuela needs (and never seems to get) is a middle ground-- a government that is willing to spend some money to alleviate poverty and ensure that everyone gets a share of the oil revenues while not being so profligate that the long-term outlook of its natural resource extraction is compromised.
Petrobras is another well-run state oil company. The quality of the state-owned firm has a lot to do with overall government quality, unfortunately.
And Statoil is not just well-run for a state-owned firm, but actually one of the best-run energy companies in the world. They've made really savvy investments around the world (including lately a partnership with Chesapeake), especially in LNG.
Tev, also see the Krugman article I like. It shows how not increasing/maintaining supply can function investment... for a time. Eventually game theory wins out and prices plummet.
I think any post trying to make a general statement about government-run versus private companies by citing the cases of Russia, Iran, and Venezuela isn't quite making the argument it thinks it's making.
The number of state-owned oil companies located in countries with good governments can be counted on the fingers of one hand.
Megan,
Stating, "The number of state-owned oil companies located in countries with good governments can be counted on the fingers of one hand," doesn't do much good when the total number of countries with any significant oil reserves can be counted on the fingers of two hands (and maybe a couple toes).
In comparison to Gazprom.. how's BP doing? They're gov't owned (51% stake by British Gov't--or at least it used to be that much..) and they're the 4th largest company in the world according to Fortune. Seems like they had a mediocre year this past year but they seem to be doing okay... Same thing with Total.. Of course Exxon/Mobil and Royal Dutch Shell also did well and were ahead of BP and Total.. but overall.. it just seems like oil companies stationed in countries with good governance do better.. not whether the company is private or not.. (I question whether private companies starting off in any non-western country would have a chance to actually exist for long before being swallowed up by the large Western firms..)
Megan, don't you think that politics of exploitation had a lot to do with those cheap leases!.
Venezuela is likely to have cashed in in one year what it would have cashed in 10 years even if they don't extract as much later. Even the gas stations were making more profit from their oil with those cheap leases.
Of course, developing oil fields is capital intensive but if these countries are not going to benefit fairly from their own resources, what use would having the resources be to them. It is terrible to see resource heavy countries who are not making much of a gain in standard of living while their resources are being sucked dry by the international consumers who don't want to pay their fair cost.
"Petrobras is another well-run state oil company. The quality of the state-owned firm has a lot to do with overall government quality, unfortunately.
And Statoil is not just well-run for a state-owned firm, but actually one of the best-run energy companies in the world."
Another thing Petrobras and Statoil have in common is that their operations aren't limited to their home countries. Statoil is active in the Gulf of Mexico, for example, and Petrobras is active in some of the Portuguese-speaking countries in West Africa, for example.
BP is not government owned. The British government's shareholding was sold off during the Thatcher era.
tricstmr,
As for your your opinion regarding nonwestern companies having a chance against western firms, I believe Ratan Tata (the new owner of Land Rover and Jaguar) would beg to differ.
quanticle, how many fingers do you have per hand? Wikipedia counts 17 countries with sizeable reserves (http://en.wikipedia.org/wiki/Oil_reserves). Of course the cut-off for significant oil reserves is arguable, but Mexico's oil supplies, for example, are sufficient to significantly affect the Mexian government's budget.
Tev, out of curiousity, how did you calculate that Venezula is likely to have cashed in in one year what it would have cashed in 10 years even if they don't extract as much later? In particular, what price of oil did you assume, and what loss in production efficiency?
quanticle, they were originally getting 1% profit.
What would be the profit after paying the extraction cost if they owned their resources with oil running say an average 80$ a barrel for 2008.
Assume 40$ a barrel for extraction cost, although it is lower and assume no debt which is unlikely. That would be 40$ profit per barrel. 40$/80$ = 50% profit which is much higher than 1% or 80$*1% = 0.8$ per barrel. That is a lot more return, 40 times more.
Even if they managed with royalty of 10% a barrel that would have yielded them as much they could have earned in 10 years.
I am not sure how they worked it out. I am just guessing.
Sorry my post was directed at Tracy.
Tracy, they were originally getting 1% royalty.
What would be the profit after paying the extraction cost if they owned their resources with oil running say an average 80$ a barrel for 2008.
Assume 40$ a barrel for extraction cost, although it is lower and assume no debt which is unlikely. That would be 40$ profit per barrel. 40$/80$ = 50% profit which is much higher than 1% or 80$*1% = 0.8$ per barrel. That is a lot more return, 40 times more.
Too good to be true that can be so I cut it down to 10 years. Even if they managed with royalty of 10% a barrel that would have yielded them as much they could have earned in 10 years.
I am not sure how they worked it out. I am just guessing.
"The reason we now have Hugo Chavez is because some of Venezuela's previous right-wing governments allowed poverty to fester while the country distributed its wealth to the upper classes who supported conservative governments."
That's a common misconception happily propagated by Chavistas. From 1958 to 1998 (when Chavez won the presidency) Venezuela had NO right-wing governments. Yes, they were to the right of Chavez, but compared to the US all of them were center-left. More to the left than any Democratic administration in the US. They were, though, very corrupt. Venezuelans were rightfully fed up about it. Alas, they chose a charismatic demagogue to be their president. Guess what? Venezuela is still very corrupt and on top of it their murder rate (which was not low) tripled in the last ten years.
One often hears that government planning lets companies invest for the very long term, unlike the psychotic short-termism of the stock market.
I have never understood that argument, except in the case of a stable monarchy, where the ruler expects to stay ruling until he dies or abdicates, and then hands the country over to one of his children.
In a stable democracy, or an unstable system of any kind, where no one knows who will be ruling in five years time, the ruler must devote most of his efforts to staying the ruler, or be replaced by someone who will devote most of his efforts to staying the ruler.
(Whereas even the most short term of investors must be aware that the price of the stock tomorrow will depend in part on what people expect it to be worth further into the future.)
So I do not see why anyone should be surprised at the mess Gazprom, PDVSA etc have got themselves into.
Aramco, of course, is owned by a monarchy. There is a good reason why that form of government used to be common.
Megan, don't you think that politics of exploitation had a lot to do with those cheap leases!.
Tev, granted that those leases were, in the long term, as bad for Venezuela and as good for the private oil companies as you say, who signed them, if not the Venezuelan government and the private oil companies?
So who was thinking in the long term, when they signed the oil lease contracts?
And anyone who thinks it OK for a government to break its contracts must presumably agree with the famous remark of Richard M Nixon that “when the President does it, that means that it is not a crime”.