State Oil Company Privatization

1
State Oil Company Privatization

• Aegis Energys Perspectives on Best Practices

2
CONTENTS

• Privatization Motivations
  3
• Privatization Goals
  4
• Privatization Methods
  5
• Best Practices Restructuring
  6
• Best Practices Promoting Competition
  7
• Best Practices Political Risks
  8
• Best Practices Process
  9
• Selected Privatization Synopsis

Argentina 10 Bolivia
10 Canada
11 China
11 Czech Republic
12 France
12 India
13 Italy
13 Lithuania 14
Mongolia 14 Norway
15 Philippines
15 Poland
16 Portugal
16 Russia
17 Spain
17 United Kingdom 18
3
Privatization Benefits

• The global trend toward petroleum-sector
  privatization is driven by the recognition that
  market-based economies are better suited to
  maximizing societal wealth than nationalized
  industries and planned economies
• Industry privatization and deregulation are
  necessary steps toward free market competition
• Eliminates conflicts of interests resulting from
  state ownership political versus economic
  objectives
• Promotes efficiency gains through the
  introduction of competition
• Benefits
• Raising revenue for the pursuit of other public
  policies through divestiture of government owned
  enterprises
• Raising external investment capital for the
  energy sector
• Establishing the basis for growth in taxable
  income
• Efficient allocation of resources (labor, natural
  resources, and capital)
• The promotion of efficiency and productivity
  gains
• The ultimate benefit of a privatization and
  industry de-regulation program should be the
  creation of an energy-sector which maximizes the
  value of a countrys energy resources through
  free market discipline

4
Privatization Goals

• Maximizing the value of the governments
  investment
• An enterprises value is best expressed at the
  present value future expected cash flows
  discounted at a rate commensurate to their risk
• The risk of future cash flows is priced in global
  capital markets
• Industry sector risks
• Political risks
• Privatization allows a formerly state-owned
  enterprise obtain financing at competitive terms
  in international capital markets
• The primary goals of a privatization program
• 1 maximizing future expected cash flows
• 2 minimizing the risk of these cash flows in
  global capital markets
• 3 ensuring a competitive marketplace

5
Privatization Methods

• Alternative methods of transferring ownership and
  control of petroleum assets from the public to
  private sector
• Sale of assets
• The direct sale of state-held assets or companies
  in the MA (mergers and acquisitions) markets
• Upstream exploration and development rights,
  reserves
• Downstream refineries, pipelines, terminals,
  and retail locations
• De facto importation of buyer expertise enhances
  the likelihood for success of the privatized
  company
• Two alternatives
• competitive auction
• negotiated transaction
• Government maintains complete control of process
• Initial and secondary public offerings
• Selling shares to a large number of domestic and
  international shareholders
• The capacity of financial markets to absorb
  shares must be assessed
• domestic and foreign markets (e.g. American
  Depository Receipts)
• IPO may be followed with numerous secondary
  offerings
• Creates broad company ownership and may allow for
  employee participation
• Reduces mispricing risk through a gradual market
  introduction that increases liquidity over time

6
Best Practices Restructuring

• A state-owned enterprise must have the managerial
  and physical asset bases to compete in a
  privatized market. Restructuring is a necessary
  step before privatization to ensure the financial
  viability and managerial competence of the
  privatized enterprise
• Managerial Restructuring
• Restrict the governments direct participation in
  management
• Prepare financial reports to International or
  U.S. GAAP standards
• financial transparency
• basis for management accountability
• Promote a corporate culture that fosters
  entrepreneurial risk taking and rewards
  individuals based upon performance
• Adopt industry best practices
• eliminate governmental patronage
• benchmark performance against public companies
  (e.g. staffing, compensation, training, etc.)
• Develop and promote core competencies that enable
  the company to compete with the industrys
  leaders
• Asset Restructuring
• Eliminate non-core assets and businesses
• Rationalize non-performing assets
• International Diversification
• Diversify through foreign acquisitions and
  alliances

7
Best Practices Promoting Competition

• For privatization to be successful, a state-owned
  enterprise must demonstrate that it can perform
  in an open, competitive market
• Eliminate Monopolistic Controls
• Abolish governmental price controls and establish
  global market-based crude oil and refined product
  pricing
• Address excessive market concentration
• establish anti-trust measures to ensure adequate
  competition
• force divestitures when needed
• split state-owned enterprise into multiple
  companies if necessary
• Eliminate barriers to external competition
• eliminate import duties and tariffs
• eliminate ownership restrictions on petroleum
  assets
• allow access to distribution infrastructure (e.g.
  pipelines and terminals)
• Divorce state-owned resource base from
  state-owned enterprise
• open licensing of exploration of development
  rights to competitive bidding
• Establish regulatory agency and policy for
  natural monopolies (e.g. pipelines)
• A state-owned enterprises performance cannot be
  predicated on the maintenance of monopolistic
  returns

8
Best Practices Political Risks

• The government must have a credible regulatory
  and legal framework
• Currency Exchange and Transferability
• Clear Central Bank policies on exchange rates and
  inflation
• Removal of restrictions on repatriation of
  earnings
• Tax Policy
• Petroleum excise taxes and royalties
• Corporate income taxes
• Regulatory Policy
• Environmental, Health, and Safety Law
• Energy Price Controls, Energy Regulatory
  Framework
• Wages and Pensions
• Legal Remedy
• Contract Law and Enforcement
• The government must establish a credible premise
  of the countrys future policies to reduce the
  political and regulatory uncertainty to investors

9
Best Practices Process

• Governments motivations for privatization must
  be transparent and its policy toward
  privatization must be both clear and credible
• The Governments privatization intentions must be
  clear and credible
• Establish finite timeframe for privatization
• Definitively declare the Governments intentions
• Divest, or maintain, controlling interest
• Retention of golden shares which would require
  governmental approval of such actions as a change
  in control
• Demonstrate political ability and will to
  implement privatization plans
• Transparent, open process
• Avoids allegations and appearance of misconduct
• Informs and prepares stakeholders through
  transition
• investment community
• employees
• public
• Regardless of the method chosen the governments
  intentions must be clear, credible, and
  transparent

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Selected Privatization Synopsis
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