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Latin America’s NOCs fall from grace

The state’s heavy hand will slow recovery for the region’s state firms, hurting production and new exploration for years to come

NOT LONG ago, national oil companies (NOCs) were seen as the future of the industry. Powerful state companies were gatekeepers to much of the world's remaining oil trove and international investors had little choice but to work with them.

Nowhere was this truer than in Latin America. The region's state energy champions rose in prominence through the 2000s. Petrobras was the standard bearer - its $70bn public offering was the largest in history and its market value at one point surpassed Shell and Chevron. Others also thrived. Ecopetrol rode Colombia's oil wave to regional prominence. Mexico's Pemex and Venezuela's PdV have long showed signs of stress, but high oil prices made them vital cash cows that pumped huge sums into their national treasuries.

But in each of them the downturn has exposed fundamental problems that run much deeper than the low oil price. Their mandates stretch well beyond the everyday business of getting oil and gas out of the ground: they must pay part of the government's budget, build key infrastructure, support social programmes and buoy national employment. These conflicting priorities have amplified the NOCs' financial stress and will - without significant reforms - slow their recovery. Because of the central role state companies play in nearly every country in Latin America, new exploration and production growth will suffer across the region.

Fall from grace

Petrobras rode highest in the oil boom, and has fallen farthest in the downturn; a tarnished emblem of NOC politicisation. President Dilma Rousseff's government built an industrial policy that demanded Petrobras, and other producers, use costlier domestic suppliers rather than international competitors. The state firm also had to own and operate all pre-salt projects. The combination sent Petrobras' costs spiraling ever upwards, leading it into a ruinous and world-beating debt load of $130bn. The sum now cripples the company's operational ability.

Venezuela's PdV became the funder for billions of dollars' worth of social programmes and other government initiatives - money that could otherwise have been invested in its oilfields over the past decade. It was left with no financial cushion for the downturn: inevitably production and earnings are now falling sharply and taking the nation's finances with it. Pemex has racked up more than $70bn in losses in recent years. Economic mismanagement was partly to blame. But the government also relies on Pemex to fund 30% of its state budget: a colossal and activity-sapping weight for the company.

Petrobras rode highest in the oil boom, and has fallen farthest in the downturn; a tarnished emblem of NOC politicisation

High labour costs have been another problem for the region's NOCs. Oil workers' unions have pushed back hard against the sort of mass layoffs seen that have roiled American and European oil companies but ultimately made them more competitive. With bloated payrolls, companies have been forced to cut capital investment.

The damage will be lasting. Moody's, the credit rating agency, doesn't see any recovery in the region's oil finances until at least the middle of next year, and it will probably take even longer. "The recent rally in oil prices will only offer minimal relief from the stress that the longer-term decline in prices has inflicted on the sector," the agency's analysts said in a recent report. For companies across Latin America, paying down debt will siphon cash from capital-spending programmes, hitting production and new exploration.

Solutions are not easy. In the short-term, many companies hope asset sales and new joint ventures will offer a financial lifeline. Petrobras' financial recovery depends on a $15bn asset-divestment plan. But it is selling into the friendliest buyer's market in a generation. To get anywhere near its target it will have to offload highly prospective pre-salt fields for a song. Pemex wants new joint ventures to inject the cash into new projects that it cannot: the firm's only hope of stemming production declines. But the long-time monopoly is in uncharted territory and its farm outs have been slow to get off the ground.

Putting some distance between state oil companies and politicians would be the best long-term fix. Petrobras's new chief executive, Pedro Parente, says the political meddling in his company is over. That would be sensible, but seems doubtful. The temptation to keep squeezing life out of Latin America's NOCs has too often been irresistible to the region's politicians.

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