State Owned Enterprises and Privatization Lecturer : Prof. Dr. Ulrich Wurzel

Report on group Presentation:

Why Government Steps in Again? A Comparative Analysis of Dominant Energy Sector SOEs of Russia,

Brazil and China

Volkan Emre 0534436 Turkey

Berlin, February 2012

1. Introduction

This paper aims to give a summary of the group presentation which was presented on the

12th of January 2012. The main motivation of the presentation was to analyze different

trends for increased governmental intervention and re-intervention in the energy markets

in Russia, Brazil and China in line with the main research question ‘Why government steps

in again?’.

One of the major determinants of the future global economic growth is energy security for

the expanding world demand. Having a better understanding in increasing interest of

state in energy market intervention is therefore very important.

Presentation was divided in three main case studies from above listed countries. In each

case selected monopolistic and oligopolistic SOEs (state owned enterprises) were subject

to the following questions:

What are the reasons and motivations for re-intervention of governments in

energy sector ?

What is the relationship of intervention and energy prices ?

Do the activities of the selected SOEs reflect success in achieving their

objectives ?

Do selected SOEs behave as an instrument of state rather than a private

enterprise ?

What are the main expectations and challenges for the future ?

2. Energy prices

The starting point was the analysis of energy prices in the last 20 years. Especially in the

last decade both oil and gas prices had been risen sharply. The main reasoning behind

those increases was the strong global economic growth which increased the demand in

both crude oil and natural gas.

Table 1. Total energy real end-use price index for industry and households

Source: OECD

Surprisingly the last decade was also a time period at which we observed several

nationalizations in the energy sector that led us question possible relationships between

energy prices and governmental interventions in the selected case studies.

3. Gazprom

The next point of the presentation was the evaluation of Gazprom as the gas giant of

Russia, that holds the world’s largest natural gas reserves . In the case of Russia we could

observe both privatization and nationalization of the Gazprom and therefore a relatively

clearer line in re-intervention through increasing the government share compared with

the other selected state owned enterprises.

After giving some background information about Gazprom, we discussed about the

relationship between energy prices and re-intervention of the Russian state. Depending

on our analysis we concluded that there is a correlation between intervention and energy

prices.

The next step was a closer look at the motivations for re-intervention. Strategic

importance of the natural gas sector was listed as the first motivation. Subsidizing local

consumers and producers at reasonable prices was the second finding. Russia’s foreign

policy which was described as ‘Export Monopoly Benefits’ especially in its main export

destination to Europe, was defined as a major motivation.

The third phase was questioning the autonomy of Gazprom. Depending on our arguments

we decided that signs of behaving as an instrument of state were more dominant than

signs of behaving as a private enterprise.

Another interesting finding was that the re-intervention could not increase the net profit

margin, return on equity, return on capital despite the increasing trend of the natural gas

prices. Those empirical findings allowed us to question the managerial efficiency of the

Russian state in Gazprom’s activities.

Progressive deregulation of the European Gas Market, stagnant production, insufficient

investments, high dependence on the current pipeline systems and decline in the biggest

fields were listed as the main challenges for Gazprom.

4. Petrobras

Petrobras, the largest company of Brazil and the Southern Hemisphere, was the second

SOE in the spotlight. We observed that the state intervention process was divided in three

stages in this case. Those stages are respectively: Self sufficiency between 1972 to 1990s,

going global between mid 1990s to 2000s and pre salt era from 2000s up to date.

The first stage started right after the oil crises in 1970s. Petrobras was used as an

instrument of state to seek self sufficiency in oil extraction and production. The

interesting point was that the international activities of the SOE during that time period

led to the second stage of going global. Petrobras focused more on market oriented

decisions rather than on its domestic monopoly benefits in order to become a global

player in the world oil market. But SOE still behaved in the interest of state; this time in

line with Brazilian Foreign Policy. The final stage started under Lula administration. This

time market oriented decisions changed their directions to the state led policies.

Petrobras became a tool of Brazilian State’s the industrial and foreign policy by its

procurement of high tech activities and products which are involved in ultra deep water

oil extraction and production.

As in the Russian case, we concluded that the increasing trend in energy prices played an

important role in Brazilian State’s decisions in different time periods. Especially high costs

of the deep water oil extraction activities need big investments and production costs

would be only justified in case of high crude oil prices in the global markets.

5. Chinese Petro - Majors

China’s impressive economic growth rely heavily on the energy resources, especially on

oil. There are three main state owned enterprises which came out in the late 1980s to

sustain the energy supply security. CNPC was mandated to exploit onshore petroleum

reserves, CNNOC to exploit offshore reserves and SINOPEC to refine petroleum.

Unlike the other case studies, selected SOEs in China has been always dominantly

controlled by state. With that regard, they never experienced large privatizations and re-

nationalizations. However the intervention came with managerial reforms to re-organize

SOEs for the global competition by eliminating outmoded, uncompetitive and impractical

implementations since the Chinese petroleum sector were practically useless in the

pursuit of any external energy policy objective.

Reorganization took place by separating state functions from SOEs and by breaking the

traditional upstream–downstream monopolies through the establishment of a

competitive environment. In different terms, state gave the autonomy to the SOEs by its

own willingness to make them more competitive within the state’s macroeconomic

framework. On the other hand Chinese governments subsidized Chinese petro majors

enormously in direct and indirect ways. Subsidy and supports costs were high.

Depending on our evaluation, the state intervention and reforms were successful

internally and externally mainly due to remarkable increases in FDI and efficiency in the

given time period. Additionally companies become more competitive. Companies were

able to execute state agendas better than when they were arms of public corporations’.

Yet again, we observed some correlation between energy prices and intervention, but not

as strong as in other two case studies.

6. Conclusions

We have discussed why government steps in the energy markets in three different case

studies. In each case we found different motivations. In the case of Gazprom we observed

the geopolitical benefits of export monopoly. On the other hand, Petrobras aims to

maintain technological investments to support the local industry and also gain export

revenues. Finally, the Chinese petro –majors aimed to guarantee the security of energy

supply for the growing domestic economy.

In both case studies we observed correlations between government intervention and

energy prices with a few caveats. Activities of the selected state owned enterprises

reflected success in achieving their objectives in all cases. In that regard we also

concluded that both enterprises behave as instruments of states rather than private

enterprises. However. re-intervention success from market perspective was unclear.

Sustainability and uncertainty of energy prices are defined as main challenges for the

both selected state owned enterprises’ future.

One of the important findings was that re-intervention does not necessarily mean

increasing government share in the modern intervention context.

Our final conclusion was that 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.