The year 2007 will be remembered as the time when national oil companies (NOCs) gained newfound prominence in Latin America. Record-high oil prices brought Latin American NOCs to new fi nancial highs, motivating governments to rethink the role of state companies in the national economy. Led by Venezuelan President Hugo Chávez, a number of left-leaning countries in the region increased the reach of the NOCs in their oil and gas industries. Nationalization programs gave NOCs from these countries increased control of oil and gas operations, boosting government coffers while diminishing private investment. On the other side of the spectrum, countries followed Brazil’s example by restructuring their NOCs to run more like effi cient private-sector corporations and less like wasteful state-run bureaucracies.
So far, so good. But when prices fall, only companies with effi cient operations will be able to remain fi nancially healthy. Venezuela’s production is declining due to mismanaged investments and key personnel shortages, while Brazil is basking in the success of its mega-discovery Tupi - the fruit of its solid management and offshore technological prowess. NOCs that follow Petrobras’ lead will be better prepared for the future while those that follow PDVSA could suffer production and profi tability problems in years to come.
Chávez was anything but shy about wanting to lead the region’s push to increase the state’s role in the oil and gas industry. His oil “nationalization” program dominated headlines in 2007 as he gave PDVSA majority control of the prolifi c Orinoco projects, arguing the move was designed to give the poor at home and abroad greater access to oil profi ts. The Venezuelan leader used PDVSA as the fi nancial engine behind his Bolivarian revolution, promising billions in oil profi ts to the poor and to politically friendly countries seeking to develop their energy industries.
While PDVSA is suffering operational problems, Brazil’s Petrobras is setting an example in the region of what an effi cient NOC can achieveChávez’s pledges made it easier for his Ecuadorian counterpart Rafael Correa to alienate foreign investors with plans to implement a 99% oil tax on windfall profi ts.
Correa expects to replace disgruntled investors with NOCs - particularly Petroecuador and PDVSA, which has pledged to help the country get its oil industry on track.
Bolivian President Evo Morales, however, has been a bit more cautious. Morales’ own nationalization program, which gave state hydrocarbons company YPFB increased control of the country’s oil and gas industry, has forced companies operating in Bolivia to rethink whether to increase investments. Although Morales is openly sympathetic to Chávez’s “revolution,” the Bolivian leader continues to court new investors and work closely with companies already operating in the country.
On the other hand, Brazil’s Petrobras is setting an example in the region of what an effi cient NOC can achieve. Tupi is the world’s second largest oil discovery in 20 years and could catapult Brazil into the world’s major league of producers. Petrobras could not have made the deepwater discovery without the fi nancial clout, technological know-how and relative independence from politics that it enjoys.
Colombia’s state oil company Ecopetrol is following the Brazilian path. It started selling shares in 2007 and trading on the Bogotá exchange in order to raise money for an aggressive domestic and international investment program and, perhaps more importantly, to improve its corporate structure. The change will force Ecopetrol’s board to run more like a corporation, tightening corporate accountability standards and freeing it up from political pressures.
Mexico, which is suffering from dwindling oil reserves and reduced production, took a small step in Petrobras’ direction with reforms that will lower Pemex’s taxes. Although the oil company is still highly susceptible to political pressure and a major benefactor to the state, the reforms were a positive start
NOCs are not likely to change radically in 2008. The Ecopetrols and Pemexes of the region will continue to envy Petrobras as it develops Tupi. Operational problems will not be a major concern for PDVSA, Petroecuador and YPFB, as high prices will compensate for ineffi cient management. But when prices drop, as they always do, national economies will suffer and political leaders will be forced to rethink how NOCs should operate.
