Energy Information Administration
FedStats
The privatization of state-owned industry is a development of historic dimensions. For many nations, their formerly-state owned energy companies have been among the largest of companies to be privatized. Energy companies that have been privatized include some of world's largest petroleum companies based in the industrialized nations. Global giants, such as British Petroleum, British Gas, Elf Aquitaine (France), ENI (Italy), Petro Canada, Repsol (Spain), and TOTAL (France), have all recently undergone transitions from state-owned to some significant degree of private ownership. Other large petroleum companies lie in the countries of the Former Soviet Union and in Latin America, and have also been moving towards private ownership. These privatization efforts have led to billions of dollars in new investments and have presented opportunities to add oil and gas reserves of a magnitude unseen since the discovery of the North Sea and Prudhoe Bay fields.
Since the means by which different countries have privatized state-owned industries have varied considerably, we treat privatization in this report as any movement toward a market-driven economy--or any movement that diminishes public ownership and control and increases private ownership and control.
Privatization presents several concerns to shareholders, energy analysts, energy companies, policy makers, and to the general public at large. The opening of previously-closed overseas energy investments raises a number of issues. For example, for U.S. companies investing in newly-privatized energy activities abroad, in many cases, political risk has been a dominant element in privatization-related investment decisions. Often times, individual companies have committed hundreds of millions of dollars to these investments with serious uncertainty over even the short-term prospects of such projects. This development is one also watched carefully by shareholders and investment analysts. For U.S. policy makers, the impact that privatization might have on maintaining a secure and affordable energy supply to U.S. consumers is also of importance. As more and more U.S. companies enter into foreign energy investments (often for the first time), the effects such investments will have on these companies' financial health and their domestic operations become another area of concern for policy makers.
Privatization has been widespread in electrical power generation, transmission, and distribution as well as in natural gas transmission and distribution. In Latin America and the United Kingdom, privatization of electric utilities and natural gas utilities has been mainly responsible for the emergence of new classes of investors, new hybrid energy companies, new investment financing vehicles, and massive cross-border investments.
This report discusses recent efforts at privatization in petroleum, electricity, and coal, as well as the impetus that privatization has provided in fostering the evolution of the multinational and multidimensional energy company. Of particular note:
There are both geographic and energy specific dimensions to privatization, both of which have served to form the outline of this report. The following sections highlight privatization efforts among global regions and forms of energy.
Relative to other energy companies surveyed in this report, privatization of the major oil companies located in countries belonging to the Organization for Economic Cooperation and Development (OECD) has caused only modest changes in industry behavior. Traditionally, OECD governments have exerted a much more limited degree of control over their nationalized petroleum companies than government in most other regions. Although many of the OECD's petroleum giants have until recently been publicly held, in many ways even these companies have operated almost as autonomously as some of the world's privately-held petroleum companies. Thus far, the most pronounced impact of privatization may be the increased level of ownership of several formerly-state run petroleum companies by foreign investors--particularly those from the United States. For many of these recently-privatized petroleum companies, reduced government oversight may have also freed management to pursue such politically sensitive decisions as redirecting investment spending overseas, and undertaking downsizing initiatives, particularly where reductions in labor force have taken place.
Latin America is an area of rapidly growing exploration and development activity for U.S. energy companies. Privatization of petroleum operations in Latin America has occurred against a backdrop of sweeping free market economic reform. Central to Latin American economic reforms has been the privatization of a range of state-owned industries--from phone companies, to natural gas and electric utilities, to petroleum companies. The various countries of Latin America, however, have pursued different routes to privatization. At one extreme lies Argentina, which completely privatized its formerly-state owned petroleum company, YPF. At the other end of the spectrum lies Mexico, which has largely maintained its state-owned petroleum monopoly, Pemex, although allowing more latitude to foreign investors in Mexican petrochemicals. In general, privatization has allowed Latin American companies more freedom to pursue joint ventures with foreign companies. It has also led to an upswing in overall Latin American petroleum investment and may have encouraged the acquisition of some Latin American petroleum companies by foreign firms as well as the acquisition of foreign companies by some Latin American firms.
In most Communist and former-Communist countries, the regimes recognize a need to rebuild their economies and are currently in a period of transition as they begin to adopt various market reforms. Each regime has embarked upon its own unique petroleum privatization scheme, allowing for different industry and ownership structures to emerge.
Privatization in Russia has involved both the creation of a domestic (and largely privately-held) industry out of the former state-owned petroleum monopolies and the opening up of Russian petroleum to foreign investors.
Foreign investment in Russia had long been put on hold, largely due to delays in the passage of a property rights law. Even after the legislation, the Oil and Gas Law, was enacted, apprehensions over the survivability of Russian democracy (and corresponding economic reform) continued to discourage foreign investment. In the Caspian Sea area, which includes Azerbaijan and Kazakhstan, in addition to Russia, delays in reaching an agreement on the route of an export pipeline (due to political differences among the nations involved) has held up billions of dollars in upstream investment in this region.
In other eastern European countries, privatization of petroleum has largely been a downstream affair. With the exception of Romania, eastern Europe has little in the way of petroleum production. Several eastern European nations have allowed foreign petroleum companies to invest in petroleum refining and marketing operations. The Communist governments of China and Vietnam are also attempting economic reform, albeit while retaining a monopoly hold on political power. Recent reforms in China and Vietnam include opening up areas for petroleum exploration that were previously inaccessible to foreign participation. Most of the resulting foreign investment in these countries is in the way of joint ventures and production-sharing agreements, and investment in petroleum exploration and development activity has proceeded at a uneven pace. Political uncertainties and legal difficulties remain the largest impediments to investment in these countries.
Many developing countries are facing imminent power shortages as a result of rapid future growth in the demand for electric power. The future power generation needs of populous countries, such as Brazil, China, India, and Indonesia, are immense and present investment demands beyond the financial means of domestic capital markets. In the developing nations, privatization has largely involved the construction of new generating capacity and transmission lines. Foreign companies participating in these privatization efforts come from a variety of countries and represent a variety of industries.
In Latin America, privatization of electricity generation facilities has been widespread. Argentina has been a leader in the privatization of electric power, as it was in petroleum. Latin American electricity privatization has been primarily driven by a rapid increase in electricity demand, coupled with a shortage of domestic capital to meet future electric power generation investment needs. Privatization has involved both the sale of power operations to investors (both foreign and domestic) and agreements to allow incremental private investment (both foreign and domestic) in new electric facilities. Prominent among foreign investors are a number of U.S. electric utilities as well as some non-U.S. foreign utilities. Several petroleum companies have also entered the Latin American electricity market.
In Latin America, the privatization of electric utilities is related to the privatization of natural gas exploration and development operations. The emergence of a regional natural gas transportation system is critical to the development of new natural gas-fired electricity generation units. As a consequence, many international petroleum companies (particularly those with substantial natural gas production and transportation businesses) have vertically integrated themselves further downstream towards electricity generation in several Latin American countries.
Developed countries have also taken steps to privatize their electric power sectors. The most far-reaching of these privatizations have occurred in Australia and the United Kingdom. The evolving energy industries, as a result of privatization, have grown more integrated--both horizontally and vertically. In the United Kingdom, full service companies providing power generation and distribution, along with natural gas production and distribution, have emerged. In a few cases, recently-privatized water utilities and recently-privatized electric utilities have been combined. Another result of privatization has been the large-scale entry of foreign companies into these industries, largely through mergers and acquisitions. In both Australia and the United Kingdom (UK), U.S. investors--particularly U.S. electrical utilities--have been the most prominent foreign investors.
The privatization of the coal industries in Germany and the United Kingdom has had a decided impact on coal investment both in Europe and overseas. The removal of coal subsidies (an act of privatization) by these two European nations is largely responsible for the constriction of their domestic coal industries and the redirection of billions of investment dollars from coal operations in the United Kingdom and Germany to coal operations overseas. Well established producing countries, such as Australia and the United States, have been large beneficiaries of this redirected investment capital. Significant emerging coal-producing countries, such as Colombia and Venezuela, have also seen an increase in foreign investment in domestic coal operations, a fact which could result in these nations becoming substantial coal exporters.