Petro-Canada International Assistance Corporation and World Bank 1988 Conference on Petroleum Industry Management (Vol. 8 of 9) : The National Oil Companies in Latin America: Issues in Organization and Management

A sJ 73 , - f - 1I74/50 v. c THE NATIONAL OIL COMPANIES IN LATIN AMERICA: ISSUES IN ORGANIZATION AND MANAGEMENT by Chakib Khelil Energy Unit Chief Infrastructure and Energy Division Latin America and Caribbean Technical Department World Bank A .. t 3 i<w;W>,St  THE NATIONAL OIL COMPANIES IN LATIN AMERICA: ISSUES IN ORGANIZATION AND MANAGEMENT Chakib Khelil, World Bank 1. Background. During the last one hundred years the world has witnessed a spectacular expansion of the oil sector due to the growing and continued importance of petroleum and its derivatives in both developed and developing countries' energy requirements. Starting with the Drake oil discovery, the oil era saw the private U.S. sector grow very strong quickly: initially iSt went through a very anarchic phase brought about by unregulated fierce competition and then later in a phase that saw the survival of the fittest that achieved a quasi monopoly of the oil sector. However, the latter has been marked since its birth by Government desire to regulate, not necessarily only in the U.S. but also in other European countries and Japan. The oil monopoly in the U.S. was broken down by antitrust laws with the establishment of several competing entities, some of which have only been absorbed recently by others in the wave of acquisitions and mergers (Table 1). It is worth mentioning as a historical interest that there was one effort, that failed, to set up a Federal U.S. oil company during President Carter's Administration. 2. In the early 1900's state oil companies were first established in Europe in Austria, France and Italy and also for the first time in Latin America in Argentina, with the establishment of Yacimientos Petroliferos Fiscales (YPF). By the early 1960's most Latin American countries had  -2- already their State Oil Companies: Petroleos Mexicanos (PEMEX) of Mexico, Empresa Colombiana de Petroleo (ECOPETROL) of Colombia, Corporacion Estatal Petrolera Ecuatoriana (CEPE) of Ecuador, Petroleos del Peru (PETROPERU), Petroleo do Brasil (PETROBRAS), Yacimientos Petroliferos Fiscales de Bolivia (YPFB), Administracion Nacional de Combustibles, Alcohol y Portland (ANCAP) of Uruguay, Corporation Venezolana del Petroleo, now Petroleos de Venezuela S.A. (PDVSA) and Empresa Nacional del Petroleo (ENAP) of Chile to name a few (Figure 1). These national oil companies (NOC's) are all members of Asistencia Reciproca Petrolera Estatal Latino Americana (ARPEL), a regional organization promoting mutual cooperation and assistance in the oil sector. These oil companies are responsible for all petroleum related activities including the gas sector except for two countries: Brazil, where gas is distributed by State companies such as Companhia do Gas do Estado do Sao Paulo (COMGAS) and Companhia do Gas do Rio de Janeiro (CEG) and Argentina, where Gas del Estado is entrusted with the transmission and distribution of gas. 3. The wave of establishment of NOC's continued in the 1960's following the footsteps of the independence movement in Africa (SONATRACH of Algeria, PETROCI of Ivory Coast, TPDC of Tanzania, etc.), and finally in the 1970's with a new wave concentrated in Europe in response to the oil crisis (VEBA of Germany, BNOC of the United Kingdom, STATOIL of Norway). 4. Scope of the Paper. This paper analyzes the most important issues that have faced and are still facing the organization and management of NOC's in Latin America based on the Bank's experience in the petroleum sector. W4hile this experience has been extensive only in Colombia, Ecuador, Peru,  -3- Brazil, Bolivia and Argentina, it appears to be rather representative of issues encountered elsewhere in Latin America. The paper concentrates on a regional overview but case by case analyses of each of the NOC's are also included in the Annex. The most important issues cover (i) the energy sector organization and management, and (ii) the role and organization of the NOC's and their managerial and financial autonomy. Finally the paper will draw some general lessons that have been learned through this exercise. 5. Rationale for the NOC Establishment in Latin America. The rationale for NOC establishment in Latin America was no different than that used by European Governments in setting up their own NOC's. Clemenceau, a French Army General, declared that oil was too serious a business to be left in the hands of a few private companies. NOC's were established to achieve not only specific economic (self-sufficiency in oil, export of surplus to earn foreign currency exchange, minimize cost of imports, etc.), but also political (control over a natural resource to benefit public interest, national prestige) and social objectives (achieve high rate of employment, provide jobs and development to less developed regions of the country, etc.). In addition, NOC's were responsible for mastering the petroleum sector technology with a view to promote national industries for materials, equipment and services. 6. In setting up NOC's, the Governments recognized that the NOC's were responsible not only for economic services, but also for social and political tasks. In addition, most of them were less competitive than multinational companies that had considerable sunk investments and diversified sources of  -4t production and markets. In order to make up for this, the Governments in the region supported the NOC's with subsidies, loans and equity injections, granted them preferential exploration areas, distribution monopolies and representation of the Government in dealings with other countries and guaranteed NOC's loans in international markets. In certain cases, the Government allocated part or all of the economic rent that accrued betwee!1 the cost of locally produced oil and price of imported crude to the NOC's, 7. While the Government injected considerable capital and human resources in order to establish a financially viable national entity, the NOC's management was faced from the beginning with the tasks of achieving sometimes two conflicting objectives, i.e., achieve an adequate economic return on investment and at the same time meet socio-political goals. 8. Development of Latin American NOC's. Except for Argentina where private national oil companies developed concurrently with YPF and where the exploration domain attributed to the NOC was limited, most Latin American NOC's were set up to carry out petroleum operation activities over the whole country, i.e., no risk contract was allowed to private oil companies except for areas already assigned to them. In most cases, the NOC's took over operations and personnel previously managed by the international/local companies. 9. Today, however, Mexico remains the only country in Latin America that still does not allow risk contracts to private oil companies. In response to the oil crisis of the early 1970's that proved to be costly to most Latin American economies, legislative/contractual changes were brought  -5- about by the need to attract investments by the International Oil Companies (IOC's). For example, Peru, Colombia, Brazil, Ecuador and then recently Argentina all formulated new or improved contractual arrangements in the form of production sharing, association and service contracts. These provided new incentives and more flexible terms which in turn attracted considerable new investments in exploration by IOC's in those countries. This evolution in the contractual framework was sometimes accompanied by restrictions in the NOC expenditures in exploration due to the Government budget constraints. 10. Table 2 lists some key operating data for the Latin American NOC's. The figures apply to the years 1983-1985 for all companies except Petroperu where figures for 1981 were used and only intends to give orders of magnitudes for various parameters. Tables 3 and 4 taken from L.E. Grayson (National Oil Companies, John Wiley and Sons, 1981) although outdated (1974) give the same general information for some IOC's and European NOC's for general comparative purposes. Given their socio-policital objectives in addition to their economic ones, the performance of NOC's cannot be evaluated using the same indicators as the IOC's. In addition to how profitable they are, NOC's should be evaluated in how well they have implemented Governmental policy in the petroleum sector and how satisfied the people are with the goods and services they deliver. II. In order to achieve more autonomy and counter-balance the Government influence, the NOC's naturally tried to achieve a power base of their own. This could be done by investing in locations which were of interest to powerful politicans and through recruitment of a large, highly  -6- trained and slilled workforce who could provide a loyal constituency. The NOC's efforts to diversify their activities and in some cases go into foreign operations also tend to make Governments evaluation and control more difficult. 12. Energy Sector Organization. There are three levels of decision making that influence the energy sector in general and the petroleum sector in particular: the highest resides with the Government which agrees on macroeconomic objectives for the country such as the economic growth rate, investments levels, balance of payments, fiscal deficits, etc. The second level of decision consists of sector allocations among for example agriculture, industry, energy, education, others. Finally, the third level of decisions entails the allocation of resources among public sector enterprises responsible for a specific subsector such as the petroleum sector. 13. Generally, the NOC's in Latin America reports to the Ministry of Mines and Energy, Energy Secretariat, or Ministry of Public Works (referred to as Sector Ministry). The Sector Ministry (SM) is responsible for ensuring that the National Petroleum Policy is implemented. After review by the SM, the budget of the NOC is approved by the Government through the Ministry of Finance. The NOC is required to submit a four or five year plan to the Ministry of Planning or its equivalent through its SM. The Ministry of Planning (MP) consolidates and reviews the various sectors' investment programs taking into account the government macroeconomic objectives. Thpe MP then submits for Government discussion and approval alternative investment  -7- programs proposals. While the Government may consider the program as part of the country's investment plan for planning purposes, the Government approves NOC's first year budget only. This of course raises the issue that NOC's cannot count on a medium to long term commitment of expenditures by the Government. As a result, this impacts greatly on the ability of the NOC's to plan ahead their financial and human resources. Only lately have the IOC's experienced this uncertainty on their side due to recent market price volatility and fluctuations. 14. Pricing and setting o7f excise tax levels of petroleum products and gas derived products are the responsibility of the Ministry of Mines and Energy after consultation with the Ministry of Finances. Because of the political sensitivity of pricing decisions these are not made without a broad consensus in the Government. Also before pricing decisions are made the NOC usually have an opportunity to present their views on the impact these decisions would have on the NOC investment programs and financial prospects. 15. In Latin America investment programs are prepared by the entities responsible for the subsector. They are then consolidated at the sector level (the Ministry of Mines and Energy) and reviewed and approved at the Government level (through the Ministry of Planning). This is a bottoms-up operation where the Government then proceeds with reallocations, sometimes cutting across the board without segregating between profit and non-profit earning entities or taking into account possible impact on macroeconomic objectives of the country. Only recently in certain Latin American countries has been an effort made to carry out a top down resources allocation taking into account macroeconomic objectives such as, for example, the need to limit  -8- investment expenditures in the public sector, reorient expenditures to meet social and other needs and reduce public debt. An effort has also been made in some countries (Colombia and Brazil to a certain extent) to develop an energy sector strategy aimed at achieving the least cost energy option from the country's point of view. In some countries, a National Energy Board (Colombia) is being envisioned to oversee a rational development of energy resources taking into account the country's macroeconomic objectives. In Brazil, an Energy Strategy Study has been initiated by the National Energy Commission (reporting to the President) in cooperation with the public sector energy companies (Electrobras and Petrobras) and the participation of all interested Ministries and State Gas Distribution Companies such as COMGAS of Sao Paulo State. 16. Role of the NOC. As a public enterprise, the NOC is responsible for implementing the country's petroleum sector policies. However, in maay countries, the NOC not only collects excise taxes on behalf of the Government, but also monitors the IOC's fulfillment of their contractual obligations in terms of work and investment program. As a result the NOC has a dual role which implies great demand on the staff time to inform and represent Government interests. In Ecuador, the Ministry basically duplicates and directs the NOC work while carrying out also a close monitoring of the IOC's. The NOC is generally very much involved in contract negotiations with IOC's and even in carrying out much of the groundwork for a new petroleum legislation.  -9- 17. Organization and Management of NOC's. Latin American NOC's are generally organized along centralized functional geographical lines. Functional lines comprise, in most cases, areas of activities such as exploration/production, industrialization (that may include refining and transport by pipelines), marketing, engineering/project development. In some instances, activities such as drilling services constitute a separate division. Operations in the field either report directly to the corresponding functional area at headquarters or to a coordinator- administrator in the field who in turn report directly to the General M4anager and laterally to the functional managers. Support functions such as finances, personnel, planning and organization, legal and logistics are generally centralized at the level of the general management whose role is to run the company on a day-to-day basis. To date, there is no company that has a completely decentralized organization where for example the support functions such as finances, planning and human resources are decentralized in the functional areas in order to provide autonomy to the functional areas and improve coordination. This is mainly due to the NOC's lack of sufficient number of competent managers. Some of the NOC's lost staff especially during the 1970's when top quality personnel went to work in better paying jobs in other countries. An effort has been made in some companies to set up planning groups within the functional areas to coordinate the planning effort with the Corporate Planning group of the company, draw on technical expertise in the functional area and make the planning exercise meaningful and realistic.  - 10 - 4 18. Recently, the Government of Bolivia decided to decentralize YPFB considering it to be too large to manage and cost inefficient. While this