1. Why Government Steps in Again ?
A Comperative Analysis of Dominant Energy Sector SOEs
of Russia, Brasil and China
Volkan Emre
Stefan Edwards
Gabriel Kohlmann
Bereket Asfaha

2. 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 ?

3. Why government steps in again ?

4. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

5. 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

6. 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.

7. 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

8. 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

9. 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

10. 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

11. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

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

13. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

14. 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 reserves
o Russia is world’s second largest oil producer
o Large privatization of exploration & extraction
o Pipeline infrastructure kept under the state control
 Gas:
o Russia holds worlds largest reserves
o 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

15. 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

16. 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

17. Gazprom’s Activities at Glance

18. 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 Rosneftgaz
purchased 11% share of Gazprom and Russian state took the control
• (The Russian government controls 50.002% of shares in Gazprom

19. Gazprom – Gas Prices and Nationalization
Gazprom Shareholders as a Percentage of Capital Structure
Index of natural gas end-user prices

20. 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

21. Gazprom’s Corporate Behaviour under Question ?
Instrument of State or Private Enterprise ?
Signs of behaving as Signs of behaving as a
an Instrument of State Private Enterprise
• Suppliyng the inefficient domestic market at
low prices = Low profitability in the domestic • High profits & High profitability
market
• Slightly increased stock prices
• Economically irrational and selective
business decissions on the international level • International and overseas
activities
• Weak corporate governance and managerial
efficiency problems. Gazprom is still • Ambitious corporate aims to
managed like a Soviet enterprise. become an international player
• Dominant role of political connections on the • Ambitious investment projects in
governance style four continents
• 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

22. Gazprom – Ratings
Sales, EBITDA, Profit , million RUR
(2003-2010)
4.000.000
3.500.000
Re-interventation
3.000.000
2.500.000
Sales
2.000.000
EBITDA
1.500.000 Profit
1.000.000
500.000
0
2003 2004 2005 2006 2007 2008 2009 2010

23. Gazprom – Ratings
Net Margin(%) , Return on Equity (%), Return on Capital (%)
35%
30%
Re-interventation
25%
20%
Net margin (%)
15%
Return on equity (%)
Return on capital (%)
10%
5%
0%
2003 2004 2005 2006 2007 2008 2009 2010

24. Gazprom – Expectations & Challenges
Expectations Challenges
• Being able to compete with the majors • Progressive deregulation of the
in their own territories European gas market (biggest
market) . There will be most likely
significant changes in the future
• Keeping the market share
long term contracts
• Diversifying the transportation
• Production is stagnant
opportunities
• 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)

25. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

26. 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

27. 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

28. 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.

29. 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).

30. 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 facto
monopoly of oil industry activities: E&P; refining and petrochemical; distribution

31. 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.

32. 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 Policy
by it’s procurement of high-tech products.

33. 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

34. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

35. 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

36. 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)

37. 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 the
pursuit of any external energy policy objective.

38. 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.

39. 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)

40. Overview of Stock Market Listings

41. 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’.

42. Did Reform Create successful firms ?
Profits of CNOOC & Sinopec
120
100
80
60
CNOOC
40
Sinopec
20
Bn. RMB
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-20
-40

43. Reform Success Cont.
Profit Index - CNOOC & Sinopec
4
3
2
1
0
Index; 1997=1
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
CNOOC
-1
Sinopec
-2
-3
-4
-5
-6

44. Reform Success
• Internal Policy Success –
• External Policy 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

45. Re-Interventionism?
•Not a re-intervention as such: Chinese SOE’s now
have significant shares of private ownership where
they were entirely state owned before.
•All three majors have limited liability subsidiaries
that are listed on major stock markets.
PetroChina, the subsidiary of CNPC is the
•
company with the highest market capitalisation on
earth (first trillion dollar company ever).

46. 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.
Government still majority shareholder.
•

47. Subsidising 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)

48. 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.

49. A General Look at
Introduction the Energy Prices Gazprom
Chinese Petro- Conclusion
Petrobras
Majors

50. 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

51. Conclusions
● Re-interventation success from the market
perspective is unclear
● Re-interventation does not necessarily mean
increasing the government share.

52. 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

53. Thank you !

54. References
• OECD, ‘Corporate Governance of State Owned Enterprices, Change and
Reform in OECD Countries since 2005’, 2011
• Nadejda Makarova Victor, ‘Gazprom: Gas Giant Under Strain’, 2008
• Rosner, ‘Gazprom and the Russian State’, 2006
• Gazprom, ‘Annual Report’, 2010
• Toral, ‘Multinational Enterprises in Latin America since the 1990s’, 2011
• Program on ‘Energy & Sustainable Development Stanford University, National
Oil Companies : Strategy , Performance and Implications for Global Energy
Markets’, 2006