Complete privatization of extractive assets in petroleum industry, exception to the rules

5 july 2017 | Rossiyskaya Gazeta

The privatization of national oil companies (NOC) in the near future will make competition between petroleum companies more challenging and intense, simultaneously reducing the possibility of NOC manipulation for political goals. Such outcome of the divestiture of government assets in different parts of the world is expected by the Analytical Center’s experts. In the June issue of the Energy Bulletin, analysts note that privatization has also affected Asia and Latin America, while new NOC are being established by countries in the processing and sales segments, and not extractive segments.

Irina Pominova
Irina Pominova
Department for Fuel and Energy Sector

“When a company is controlled by private capital, the primary goal of the business is profit maximization. Shares should yield income, or else shareholders, especially minorities, will get rid of them in search of more profitable investment, affecting adversely the company’s capitalization,” Analytical Center’s expert Irina Pominova comments the situation in an interview with a reporter of the Rossiyskaya Gazeta.”

A government-controlled company may pursue different goals, including social ones, not excluding government support, either, the professional believes. “In this sense, government-owned corporations represent a transition type. More specifically, in Russia, they are able to justify dividend payment in smaller amounts than expected by the Government (as the principal owner) if it has to do with financial stability, development and so forth. Moreover, the Government, as a regulator, has other possible ways to increase proceeds from the petroleum industry, primarily tax policy,” Ms. Pominova said.

Global experience shows that complete privatization of extractive assets accompanied by the loss of control is still more of an exception to the rule (the Anglo-Saxon model) in the petroleum industry as it entails strategic interest, the expert notes. However, generally, the Government, as a shareholder, can resort to the sale of shares (privatization) unless a company yields the expected profit.

Partial privatization (with the preservation of government control) is unlikely to have a notable impact on the dividend policy of oil companies, Ms. Pominova believes. Such privatization and an increase in the government-owned corporations’ dividend can be viewed as parallel processes aimed at increasing the federal budget revenues in a challenging economic situation, the expert explains.

“Theoretically, IPO Saudi Aramco is able to have a certain adverse effect on the placement of shares in the Russian oil companies (if they coincide in time), thus boosting the competition for potential investors, and in this sense, dividend policy can have a role to play, yet far from being decisive. So, there is no point in connecting changes in dividend payment by Russia’s oil companies and the privatization of Saudi Aramco,” Ms. Pominova summarized.