Pemex, PDVSA and YPF. These three large oil companies have more in common than the fact that they are state-owned. Or that their home countries, Mexico, Venezuela and Argentina, are rich in hydrocarbons. Their most surprising similarity is that during a period in which oil prices are booming, these three companies are declining. Their production, reserves and potential are lower than they used to be and their performance is far poorer than it could be, given the rich geology of the areas over which they enjoy a virtual monopoly.
Underinvestment, mismanagement, limited access to new technologies and the mistreatment of foreign partners are some of the ills they share. These ills are, of course, manifestations of the politicisation that has infected them. And the political meddling goes beyond the cronyism and patronage that undermine their ability to operate efficiently. Their governments impose taxes, regulations and price controls that cripple them and, in some cases, force them into activities that have nothing to do with their core mission.
Venezuela’s PDVSA, which used to be a paragon of a well-run state-owned company, is now an ineptly managed behemoth also engaged in large-scale import and distribution of subsidised food, social programmes, agriculture, housing and a huge foreign aid programme. Inevitably, rumours of corruption and suspiciously bad deals swirl around these companies.
Their decline is brought into even sharper focus by the rapid ascent of Brazil and Colombia as oil-producing countries. Brazil’s Petrobras, while state-controlled, has a governance structure designed to protect its management from political interference. The company has become a global player in the same period that its less fortunate Latin competitors were falling. Petrobras’ discovery of large Brazilian offshore reserves may well propel it to the top of the industry leagues once production there starts. Colombia, a nation that until recently had no significant presence in the oil industry, is also growing very rapidly.
This is part of the context in which Cristina Fernández de Kirchner announced on Monday that her government was taking over YPF, which was privatised a few years ago and acquired by Repsol, a Spanish company. Repsol “pursued a policy of pillage, not of production, not of exploration,” the Argentine president thundered. “They practically made the country unviable with their business policies, not resource policies.”
John Paul Rathbone explained in these pages the convoluted reasons behind the Argentine government’s decision. Objective observers agree that, despite the president’s fiery rhetoric, it was not part of an overarching development strategy, nor a manifestation of resource nationalism, nor any other carefully crafted initiative forming part of a broader design. Cronyism, rifts between rival oligarchs, political expediency, populism and the wish to please a public resentful of the privatisations of the 1990s all played into the decision.
Given Argentina’s track record with nationalisations, there is widespread scepticism that the government will run YPF efficiently. In the past decade, the Buenos Aires water company, the national airline, Aerolineas Argentinas, and several electricity companies that had been privatised in the 1990s have been re-nationalised with politically charged arguments similar to those now used to justify Repsol’s takeover. As Jorge Colina, an economist at the Institute of Argentine Social Development in Buenos Aires, explained to the journalist Charles Newbery, these three government-run companies are accumulating colossal losses. Last year, the state subsidy for them was 80 per cent larger than the spending on a child welfare programme.
Moreover, Ms Fernández took the decision to nationalise Repsol in the context of a rapidly deteriorating economic and political situation. Economic imbalances and distortions have been accumulating and will inevitably reach a boiling point, forcing the government to make the painful adjustments it has so far been able to avoid. Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors. It has had limited access to the international financial system since defaulting on its debts in 2001. Many of the president’s erstwhile supporters are abandoning her and labour unrest is becoming more frequent.
The question is not if but when will Argentina make the changes in its economic policies that will put the nation on a more sustainable path. The country needs to adjust and sooner or later the situation will become unsustainable and force the government to undertake what will surely be unpopular reforms. If Ms Fernández keeps postponing the reforms, her
last years in office will be a political and economic nightmare. At that point, nationalising yet another company will achieve nothing and YPF will be the least of her problems.
The writer is senior associate in the international economics programme at the Carnegie Endowment for International peace