Gazprom's woes

By Megan McArdle

The Russian oil giant joins the ranks of national oil companies in trouble:

Today, Gazprom is deep in debt and negotiating a government bailout. Its market cap, the total value of all the company's shares, has fallen 76 percent since the beginning of the year. Instead of becoming the world's largest company, it has tumbled to 35th place. And while bailouts are increasingly common, none of Gazprom's big private sector competitors in the West is looking for one.

That Russia's largest state-run energy company needs a bailout so soon after oil hit record highs last summer is a telling postscript to a turbulent period. Once the emblem of the pride and the menace of a resurgent Russia, Gazprom has become a symbol of this oil state's rapid economic decline.

State oil companies are lovely cash cows when gas prices are rising.  But they tend, on the whole, to be very badly run as companies.  One often hears that government planning lets companies invest for the very long term, unlike the psychotic short-termism of the stock market.  But at least in the case of oil, this often seems to be reversed.  The government's priority is maximizing the size of the benefits available for its politicians to distribute now, not ten years ago when they'll be dead or out of office.  The private oil companies planned for the strong possibility that the price of oil would drop dramatically.  Meanwhile, other state-owned companies let the money run out as fast as it came in.  Venezuela and Iran notoriously diverted desperately needed investment funds into social spending, while Gazprom and Rosneft went on a buying binge, snapping up assets that now look overpriced even though the government leaned on the private sellers to offer them at steep discounts.  Now investors are fleeing the Russian firms, and I imagine that Hugo Chavez, whose chronic underinvestment caused Venezuela's output to fall in absolute terms, is wondering how to tell the Venezuelan people that there's no money for all their favorite programs.  At least he doesn't have nukes.

There are exceptions--I understand that Aramco, Saudi Arabia's secretive oil giant, is supposed to be very well run, and Norway is a model of how countries should handle the financial and business problem of using up a valuable resource.  Sadly, before Chavez, PDVSA was also known for being first class. But most national oil companies are both less efficient at extracting and finding oil, and less intelligent about handling the money it generates.  It's not just excessive spending on patronage programs when times are good, or the difficulty of building up sufficient reserves for down times.  As the Times article points out:

The company, meanwhile, says it will go ahead with capital spending to develop new fields in the Arctic, and continues to pour money into subsidiaries in often losing sectors like agriculture and media. It is also assuming, through its banking arm, a new role in the financial crisis of bailing out struggling Russian banks and brokerages.

Investors say an unwillingness to cut costs in a downturn is a common problem for nationalized industries, and another reason they have fled the stock. When oil sold for less than $50 a barrel in 2004, Gazprom's capital outlay thatyear was $6.6 billion; for 2009, the company has budgeted more than $32 billion.

Gazprom executives say they are reviewing spending but will not cut major developments, including two undersea pipelines intended to reduce the company's reliance on Ukraine as a transit country for about 80 percent of exports to Europe. Gazprom and Ukraine are again locked in a dispute over pricing that Gazprom officials say could prompt them to cut supplies to Ukraine by Thursday.

I don't see any reason that governments need to control the rents on their oil fields by actually operating the equipment that pulls the oil from the ground.  Most countries would be better off financially if they leased the fields and let someone else do the dirty work.


This article available online at:

http://www.theatlantic.com/business/archive/2008/12/gazprom-apos-s-woes/4518/