r"' , \ / , f 52575 THE NATIONAL'UIL COMPANIES IN LATIN AMERICA: ISSUES IN ORGANIZATION AND MANAGEMENT by Chakib Khelil Energy Unit Chief Infrastructure and Energy Division Latin America and Caribbean Technical Department World Bank THE NATIONAL OIL COMPANIES IN LATIN AMERICA: ISSUES IN ORGANIZATION AND MANAGEMENT 1. Background. During the last one hundred years the world has witnessed a spectacular expansion of the oil sector due to the growing and continued importance of petroleum and its derivatives in both developed and developing countries' energy requirements. Starting with the Drake oil discovery, the oil era saw the private U.S. sector grow very strong quickly: initially it went through a very anarchic phase brought about by unregulated fierce competition and then later in a phase that saw the survival of the fittest that achieved a quasi monopoly of the oil sector. However, the latter has been marked since,fts birth by Government desire to regulate, not necessarily only in the U.S. but also in other European countries and Japan. The oil monopoly in the U.S. was broken down by antitrust laws with the establishment of several competing entities, some of which have only been absorbed recently by others in the wave of acquisitions and mergers (Table 1). It is worth mentioning as a'historical interest that there was one effort, that failed, to set up a Federal U.S. oil company during President Carter's Administration. 2. In the early 1900's state oil companies were first established in Europe in Austria, France and Italy and also for the first time in Latin America in Argentina, with the establishment of Yacimientos Petroliferos Fiscales (YPF). By the early 1960's most Latin American countries had already their State Oil Companies: Petroleos Mexicanos (PEMEX) of Mexico, Empresa Colombiana de Petroleo (ECOPETROL) of Colombia, Corporacion Estatal Petrolera Ecuatoriana (CEPE) of Ecuador, Petroleos del Peru (PETROPERU), Petroleo do Brasil (PETROBRAS), Yacimientos Petroliferos Fiscales de Bolivia (YPFB), Administracion Nacional de Combustibles, Alcohol y Portland (ANCAP) of Uruguay, Corporation Venezolana del Petroleo, now Petroleos de Venezuela S.A. (PDVSA) and Empresa Nacional del Petroleo (ENAP) of Chile to name a few (Figure 1). These national oil companies are all members of Asistencia Reciproca Petrolera Estatal LatinoAmericana (ARPEL), a regional organization promoting mutual cooperation and assistance in the oil sector. These oil companies are responsible for all petroleum related activities including the gas sector except for two countries: Brazil, where gas is distributed by State companies such as Companhia do Gas do Estado do Sao Paulo (COMGAS) and Companhia do Gas do Rio de Janeiro (CEG) and Argentina, where Gas del Estado is entrustec with the transmission and distribution of gas. 3. The wave of establishment of NOC's continued in the 1960's following in the footsteps of the independence movement in Africa (SONATRACH of Algeria, PETROCI of Ivory Coast, TPDC of Tanzania, etc.), and finally in the 1970's with a new wave concentrated in Europe in response to the oil crisis (VEBA of Germany, BNOC of the United Kingdom, STATOIL of Norway). - 2 4. -Scope of the Paper. This paper analyzes the most important issues that have faced and are still facing the organization and management of NOCIs in Latin America based on the Bank's experience in the oil sector. While this experience has been extensive only in Colombia, Ecuador, Peru, Brazil, Bolivia and Argentina, it appears to be rather representative of issues encountered elsewhere in Latin America. The paper presents a global review but also includes a case by case analysis of each of the NOC's in the Annex for those interested in learning more about these entities. The most important issues cover the energy sector organization and management, the role and organization of the NOC's and their managerial and financial autonomy. Finally the paper will draw some general lessons that have been learned through this exercise. 5. Rationale for the NOC Establishment in Latin America. The rationale for NOC establishment in Latin America was no different than that used by European Governments in setting up their own NOC's. Clemenceau, a French Army General, declared that oil was too serious a business to be left in the hands of a few private companies. NOC's were established to achieve not only specific economic (self-sufficiency in oil, export of surplus to earn foreign currency exchange, minimize cost of imports, etc.), but also political (control over a natural resource to benefit public interest, national prestige) and social objectives (achieve high rate of employment, provide jobs and development to less developed regions of the country, etc.). In addition, NOC's were responsible for mastering a technology with a view to promote national industries for materials, equipment and services. 6. In setting up NOCls, the Governments recognized that the NOC's were responsible not only for economic services, but also for social and political tasks and that in addition were less than competitive with multinational companies that had already considerable sunk investments and diversified sources of production and markets. In order to make up for this, the Government supported the NOC's with subsidies, loans and equity injections, granted them preferential exploration areas distribution monopolies and representation of the Government in dealings with other countries and guaranteed NOCIs loans in international markets. In certain cases, the Government allocated the economic rent that accrues between the cost of locally produced oil and price of imported crude to the NOCIs either in its totality or only partially. 7. While the Government injected considerable capital and human resources in order to establish a viable national entity, the NOC management was faced frDa the beginning with the tasks of achieVing sometimes two conflicting objectives, i.e., achieve an adequate return on investment and at the same time meet socio-political goals. 8. Development of Latin American NOC's. Except for Argentina where private national oil companies developed concurrently with YPF and where the exploration domain attributed to the NOC was limited, most Latin American NOCIs were set up to carry out petroleum operation activities over the whole country, i.e., no risk contract was allowed to private oil companies except for areas already assigned to them. In most cases the NOC's took over operations and personnel previously managed by the international/local companies. - 3 9. Today, however, Mexico remains the only country that still does not allow risk contracts to private oil companies. Legislative/contractual changes were brought about by the need to attract investments by the International Oil Companies (IOC) in response to the oil crisis of the early 1970's that proved to be costly to most Latin American economies. For example Peru, Colombia, Brazil, Ecuador and then recently Argentina all issued new or improved contractual arrangements in the form of production sharing, association and service contracts. These provided new incentives and more flexible terms which in turn attracted considerable new investments in exploration by IOC's in those countries. This evolution in the contractual framework was sometimes accompanied by restrictions in the NOC expenditures in exploration due to the Government budget constraints. 10. Table 2 lists some '~ey operating data for the Latin American NOC's. The figures apply to the years 1983-1985 for all companies except Petroperu where figures for 1981 were used and only intends to give orders of magnitudes for various parameters. Tables 3 and 4 taken from L.E. Grayson (National Oil Companies, John Wiley and. Sons, 1981) give the same general information for some IOC's and European-NOC's for general comparative purposes. Given their socio-policital objectives in addition to their economic ones, the performance of NOC's cannot be evaluated using the same indicators as the IOC's. In addition to how profitable they are, NOC's should be evaluated in how well they have implemented Governmental policy in the sector and how satisfied the people are with the goods and services they deliver. 11. In order to achieve more autonomy and counter-balance the Government influence the NOC's naturally tried to achieve a power base of their own through fast growth and concentration of a highly trained and skilled personnel who could provide a loyal constituency. The NOC's tried also to diversify their activities and in some cases go into foreign operations to make Governments evaluation and control more difficult. 12. Energy Sector Organization. There are three levels of decision making that influence the energy sector in general and the petroleum sector in particular: the highest resides with the Government which agrees on macroeconomic objectives for the country such as the economic growth rate, investments levels, balance of payments, fiscal deficit, etc. The second level of decision consists of sector allocations among for example agriculture. industry, energy, education, others. Finally, the third. level of decisiona entails the allocation of resources among public sector enterprises responsible for a specific subsector such as the petroleum sector. 13. Generally, the NOC reports to a Ministry of Mines and Energy or an Energy Secretariat or a Ministry of Public Works. After review by the Ministry of Mines and Energy, the budget of the NOC is approved by the Government through the Ministry of Finances and Economy. In certain countries the NOC is required to submit a four or five year plan to the Ministry of Planning. While the Government may consider the program as part of the country's investment plan for planning purposes, the Government approves the first year budget only. This of course raises the issue that the NOC cannot count on a medium to long term commitment of expenditures by - 4 the Government. As a result, this impacts greatly on the ability of the NOC's to plan ahead their financial and human resources. Only lately have the IOC's experienced this uncertainty on their side due to recent market price volatility and fluctuations. 14. Pricing and taxing of petroleum products and gas derived products are the responsibility of the Ministry of Mines and Energy (in cooperation with the Ministry of Finances) and the Ministry of Finances after discussion within the Government. The NOC usually have an opportunity to make their cases with the Government and negotiate their investments program and share of the petroleum and gas prices. 15. In Latin America investment programs are prepared by the entities responsible for the subsector. They are then consolidated at the sector level (the Ministry of Mines and Energy) and reviewed and approved at the Government level (usually the Ministry of Planning). This is a bottoms-up operation where the Government then proceeds with reallocations, sometimes cutting across the board without segregating between profit and non-profit earning entities or taking into accoun~ possible impact on macroeconomic objectives of the country. Only recently in certain Latin American countries has been an effort made to carry out a top down resources allocation taking into account macroeconomic objectives such as, for example, the need to limit investment expenditures in the public sector, reorient expenditures to meet social and other needs and reduce public debt. An effort has also been made in some countries to develop an energy sector strategy aimed at achieving the least cost energy option from the country's point of view. In some countries a National Energy Board is being envisioned to oversee a rational development of energy resources taking into account the country's macroeconomic objectives. In Brazil an Energy Strategy Study has been initiated by the National Energy Commission (reporating to the President) in cooperation with the public sector energy companies (Electrobras and Petrobras) and the participation of all interested Ministries and State Gas Distribution Companies such as COMGAS of Sao Paulo State. 16. Role of the NOC. As a public enterprise, the NOC is responsible for implementing the country's petroleum sector policies. However, in many countries the NOC not only collects taxes on behalf of the Government, but also monitors the IOC's fulfillment of their contractual obligations in terms of work and investment program. As a result the NOC has a dual role which implies great demand on the staff time to inform and represent Government interests. In one country the Ministry baSically duplicates the NOC work while carryiDg out also a close monitoring of the IOC's. The NOC is generally very much involved in contract negotiations with IOC's and even in carrying out auch of the groundwork for a new petroleum legislation. 17. Organization and Management of NOC's. Latin American NOC's are generally organized along centralized/geographical lines. Functional lines comprise in most cases areas of activities such as exploration/production, industrialization (that may include refining and transport by pipelines), marketing, engineering/project development. In some instances activities such as drilling services constitute a separate division. Operations in the field either report directly to the corresponding functional area or to a coordinator/administrator in the field who in turn report directly to the General Manager. Support functions such as finances, personnel, planning and - 5 organization, legal and logistics are generally centralized at the level of the general . .nagement whose role is to run the company on a day-to-day basis. To date, there is no company that has a completely decentralized organization where for example the support functions such as finances, planning and human resources are decentralized in the functional areas. This is due to the NOC's lack of sufficient number of competent managers. Some of the NOC's lost staff especially during the 1970's when top quality personnel went to work in better paying jobs in other countries. An effort has been made in some companies to set up planning groups within the functional areas to coordinate the planning effort with the Corporate Planning group of the company, draw on technical expertise in the functional area and make the planning exercise meaningful and realistic. 18. Recently the Gover~ment of Bolivia decided to decentralize YPFB. While this is still being done, the Government is looking towards the establishment of about four entities fully accountable for their area of responsibility but whose objectives and programs are coordinated at the level of a holding company. Also the Government of Argentina has decided to streamline YPF organization into functi9nal areas. It is not known at this stage how much autonomy (in terms of personnel and finance) these areas will have. 19. The responsibility of the General Manager (Executive Vice President, President or Director in other cases) vary from company to company, but generally his flexibility in running the company on a day-to-day basis is limited in terms of personnel policies and financial responsibility. In terms of personnel policies, he is bound by laws and deals with unions of workers, sometimes a large number of them. In terms of financial expenditures, he is usually authorized to sign only for small amounts by oil industry standards without having to go back to the board. While a program of works and a budget is approved at the beginning of the fiscal year, this approval does not mean that the General Manager can proceed with expenditures without first submitting it for approval to the Board. Level of approval of expenditures at various levels of the NOC hierarchy is limited and is inconsistent with the required flexibility and risk in the Petroleum Sector. In addition, awards for procurement of goods and services have to be submitted for the approval of the Board. In certain NOC's the General Manager does not participate in the decision by the Board. 20. While the Board of Directors has sometimes included people with expertise ia the oil sector (Case of Managing Board of Petrobras) it includes in general . .presentatives from the Ministry of Energy, Economy/Finance, and Armed Force__ While in Colombia and Ecuador the Chairman of the Board is the Minister of Energy this is not so in Peru, Argentina and Brazil. The Chairman of the Board/General Manager/President is always nominated by the Government. As a result the Government exercises an important role in running the NOC through its representatives on the Board and management of the NOC's. 21. A proposal has been made recently in Argentina to give YPF some autonomy through a contract-plan to be agreed between YPF and the Government. This contract-plan would specify the objectives to be assigned in agreement with the NOC that would specify also the Government commitment to provide the resources (human and financial) required by the NOC. YPF - 6 would then have all autonomy to achieve the objectives at the least cost, without having to go back to the Board for the day-to-day decision. While this would definitely be an improvement over the existing status, the chances for its success would depend to a large extent on the Government plan to relax the various constraints (pricing and taxation of petroleum products, cost of goods and services in the petroleum sector) in addition to various trade and labor legislations. 22. Financial Autonomy. While managerial autonomy of Latin American NOC's is only very limited, financial autonomy is even more elusive to achieve for the simple reason that resources are controlled by the Government. While this is a normal prerogative of the Government owner-shareholder, the decisions for allocations of these resources are sometimes unpredictable since.they are tied to the vagaries of the nation's economy. Often cuts are made across the board for all public enterprises without consideration for the impact that these decisions have in terms of lost production, increased cost due to delays and credibility of NOC with foreign partners. Even when there are no budget reallocations and only control by the Government agencies, the~e are in general formal only (this is true even in France or Italy) because the Government civil servants do not have the training and expertise (and the time) to review whether the investment program which is proposed by the NOC for example does make sense for the national economy or represents the least cost solution for achieving the objectives assigned to the NOC or is of a higher priority over other investments. 23. As an extreme case, CEPE of Ecuador receives an income for each barrel of oil produced either directly or through a joint venture with a foreign oil company. This income is defined by law as the cost of production plus a return of 15%. In this sense CEPE is treated like a Government Department or at best like a public utility. As a result this treatment does not take into account the high risk associated with petroleum operations that would justify a higher return and the need to provide CEPE with an incentive to be an efficient company. 24. In Peru and Colombia the NOC receives a share of the revenue per barrel sold at the pump. While this is satisfactory if the Government maintains price levels in constant terms as well as the same share of the revenues, this is not al~ays the case because of the political sensitivity of increases in petroleum prices. As a result, not only the Government may not increase price., but it may also decide to cut into the share of the NOC in the price ,.r barrel because of its needs to increase Government revenues. At the same ~1.. , because of the unpredictability of the timing and level of price increases which indirectly control NOC's revenues, the NOC's have considerable difficulty in planning ahead their short to medium term investment program. 25. Petrobras has been apparently more successful in pushing for petroleum product prices with the CNP (Conselho Nacional de Petroleo) on the bases of its financial requirements to achieve agreed upon targets of production of the national plan. Annual budgets are submitted by Petrobras to a Federal Entity for the Control of State Enterprises (SEST). Petrobras receives a per barrel fee at the refinery outlet reflecting import prices of crude for both imported and locally produced crude (Brazil imports about half - 7 of its consuaption). When oil prices were high, Petrobras was able to keep the margin between import price and cost of locally produced oil (referred to as the econoaic rent). The Government until recently got about 8% of the product prices at the pump (now about 17%). Today, however, with the decline of oil prices, the element of rent has been squeezed off and Petrobras has to convince the Government for further price increases that may not necessarily reflect import parity prices. In the context of the present economic difficulties of Brazil, this may be difficult to achieve by Petrobras. 26. In the case of IOC's the signals for allocation of their resources are given by the international oil market. While the IOC's have to evaluate the risks associated with oil price movements as they affect their profitability, they still plan their activities on a long-term basis through contingency planning. The NQC not only cannot do any meaningful long-term planning but they sometimes await budget allocation well into the fiscal year. 27. Until the early 1980's the NOC's were able to borrow on the basis of the value of their balance sheets and projections of their financial situation based in turn on an increasing oil price scenario. As a result they were not only able to borrow (sometimes on behalf of the Government) from Government Export Credit Agencies but also from commercial banks. The NOC's had lines of credit and eaSily set up revolving funds to cover their expenditures. However, with the debt crisis of most Latin American countries, the commercial banks have found it difficult to make loans to the NOC's given the issue of creditworthiness of the country. 28. Procurement of Goods and Services. Each NOC has its own procurement procedures for goods and services. These procedures are not standardized in all cases. Generally for purchase of goods certain contract amounts are specified for direct purchase, price quotations, bid invitations after publication in local and international press similar to the procedure used in the World Bank. However, certain countries' internal procedures are very cumbersome for the NOC necessitating in some instances not only the company's board approval but also a review by Controlaria (mainly to verify legal aspects) and the Auditoria (Audit Court). This results in considerable delays in project implementation with the possibility of interferences from the parties concerned by the bidding. Ecopetrol has developed a system whereby they proceed to continuously prequalify companies (both local and international) using objective quantitative criteria for their evaluation. This list of eoapanies is updated annually upon receipt of information by the compan1-!~1nterested in providing goods and services to Ecopetrol. Whenever Eca;etrol requires goods or services they would call upon the prequalified eoapanies to bid. 29. Lessons from EXperience of NOC's in Latin America. Three main categories of issues stand out in the analysis of the experience of NOC's in Latin America in the areas of organization and management: 1. Conflicting objectives assigned by the Government to NOC's; 2. Autonomy of NOC's versus the degree of Government involvement in NOC's decision making; and 3. Evaluation of NOC's performance by the Government. - 8 30. Concerning the issue of conflicting objectives assigned to the NOC's, the Government on the one hand should define the sector wide objectives by ensuring that macroeconomic objectives orient the activities of the NOC's and if necessary issue pricing, trade, labor and finance policies that would stress the economic role of the NOC and minimize as much as possible the socio-political role of the NOC. On the other hand the NOC's objectives should be defined in a Corporate Plan with specific targets and intermediate benchmarks to monitor achievement. Another way to define NOC's objectives would be through a Performance Contract to be discussed, negotiated and agreed upon with Government. The performance contract would not only define the company's obligations but also those of the Government. A performance contract would be preferable to a corporate plan since the two parties (NOC and Government) would use the opportunity for negotiations to understand the other side's constraints and concerns. 31. Concerning the issue of autonomy of NOC's versus the degree of Government involvement in the NOC decision-making, it is important that the Government specifically identifies what decisions it should make. For example, the Government should: (i) be involved and make the major decisions on long range planning of the NOC activities consistent with the macroeconomic objectives of the country; (ii) ensure intersectoral coordination; (iii) regulate pricing decisions of petroleum and gas-derived products; (iv) review financing decisions by the NOC that affect public funds; (v) assign basic objectives to the NOC such as production targets, investment levels, financial ratios, employment levels, etc; (vi) appoint a Chairman of the Board of Directors and Directors. While the Chairman could also be managing director the Government should allow autonomy to the NOC's to hire its management with the required expertise, experience and know-how. The Board of Directors should be nominated under a fixed term, small in terms of the number of well-qualified staff and well compensated; (vii) eyaluate periodically the performance of the NOC's in relation to ita assigned benchmarks and institution objectives, in particular on efficiency and profitability of the NOC; and should (viii) reward or penalize the NOC Chairman (Managing Director) on his performance. The Government should not: (i) get involved in a priori control of current expenditures; (ii) consolidate the NOC budget into the Government budget as it invites interference with expenditures on each line item. - 9 32. The Government should also streamline the organization in the sector and raise the quality of the skills requirements by eliminating excessive interference by the Sector Ministry and setting up a central organization which would carry out the needed analyses for informed decisions by the Government. This unit which could be set up outside the Sector Ministry to report directly to the highest level of power should be (i) small and well staffed and have (ii) a clear advisory mandate. In Brazil for example this function is assumed by SEST (Unit for the Control of State Enterprises) which is set up within SEPLAN, which until recently reported directly to the President. 33. There are advantages and disadvantages of a holding company concept (example PETROVEN shown in Annex). The advantages consist of: economy of scale, more effective in intecnational export and capital markets, easier to liquidate a non-viable subsidiary than the NOC, effective buffer against political interference. The disadvantages consist of: could become very political and bureaucratic, could promote monopolistic behavior, rather than close non-viable operations they may shift funds, inventories and skilled staff from profitable to unprofitable c9mpanies. Accountability for performance is difficult to trace. Holdings add another managerial layer where skilled managers may be in short supply. It is important that the managerial skills are constantly improved through appropriate selection, promotion and training. Managers should be well compensated in relation to their level of responsibility and performance. 34. Concerning the evaluation of NOC's performance by the Government it is important that the NOC's provide for a timely and adequate flow of information particularly in areas of cost accounting and management information systems (MIS). There is a need also to have the Government agree with the NOC on targets, benchmarks and indicators of performance. It is not necessary that these indicators be all quantitative. For example under Korean performance evaluation system, 30% of the target is composed of qualitative indicators: corporate planning, research and development, MIS and internal control systems and the quality of service. In addition qualitative indicators could include pollution of environment and safety regulations. Restructuring of U.S. Oil Industry >; BUYt:rts Stockholdt:r Com~anit:s Purchast: Prict: Shar.,s 1984 - I'JH5 Equity Date of $ $ Tradt:d Rank* ($Bil11on) Buyt:r Seller Salt: Bil110n Offer /Shart: Mil110ns ~t:r St::llt:r 19M 1985 Cht:vron Corp. Gulf Ent:rgy Oil Corp. March 19H4 13.2 80 85 5-4 H- 14.1 14.8 Tt:xaco Inc. Gdty Oil Jan. 1985 10.1 128 211 3-5 15 14.7 13.1 DuPont Conoco Inc. 1981 7.4 14-15 11.4 NA U.S. Steel Corp Marathon Pet. Co. Jan. 1982 6.2 125 30 16-14 NA NA Mobil Corp. Supt:rior Oil Co. May 1984 5.7 45 36 2-2 21- 13.9 13.6 Royal Dutch Shell U.S. Shell April 1985 5.7 58 7-6 11.4 12.5 U.S. Stt:e1 Corp. Texas O&G 1986 5.4 17 .42 38.9 39-33 NA 1.5 Occidental Pt:t. Corp. Ci tit:s Servict: Dt "I.' 0,067 ) '.609 (1,653 ) Fu.1 r.x····· ot GrOl. Retail Sal ·· : 25.6' ..l!:l! 37.21 ...B.t1! .l.!:l! 35.91 · Net eo...tlc Sal ·· to 'I'PF': 2,265 2,351 2,629 2,139 3,082 2,956 - Ol.count (Mergln) to Ret.llers: (111) [134' 0"') (99) (151 ) (185 ) + l-ocrt Subsidy: · Net Rev.,..,.. to YPF: ~ 2,471 ...!.!!.. 2,-'03 .....!1Z.. 2,655 I' 2,056 ---2... 2,nl 2.771 - Colt ot Goods SOld ~ Operating Costs: It· + Otl'l... Inc:c.t (Net) (2 ,5ces) - 47 (2,611 ) 110 - ,. (2,779) (2,590) 3ll (3,193 ) 208 <3,162) 200 - Flnancla' Costs: · Profit bet~. AdJus~t.: (303 ) (325) ( .... ..Jl!!! ) (667) (5M) .J.!!!! (995) (970) (1,024) .J.!!U (94 I) + Net Mon.t...y .nd Int,.tlon AdJu.~t: · ~otlt atter Adju.t.ents: -!!! 332 1,200 752 (1 ,283) (1,'77) (7.) O,71n l.&.!!!.. 754 - (941 ) 0 !I Provi.iona'. ~ "Otl'l." 'ncc.l" I. ' .. I.... ily ....fund of v.lue-Idded t.x. Thl. It. . . Iso IftClud.. Iftc:c.t f.-o- .a" ot utilltl ·· , ...vic.s, f""gl'lt .nd sc...p wl'llcl'l ......ltul ... sou..c.. of In~ to ttl. calPany. Not.: Th.s. stat...nts ......o.....ed In con,t.nt ,* US 4011 ...., converted.t tl'l. off Ic 1.1 ..at. of .xcl'l.nge fl"011 con.tlnt A "SO ..geftt Ift. "u Iv.l.,.t,. ,.,.,.,.s ..., not Idd bee.u.. of I"ound I ng. ~: YPF, .i .. /on c.tcul.tlons. 20. YPP'. (.dju.t.d) n.t vorth d.t.rior.t.d .i,nificantly, fro. l.vel. of US$2.4 billion .quiv.lent ·· of .nd-1980 to n.,.tiv. US$1.2 billion .quiv.lent ·· of end-1982. Whil. this .itu.tion v···ev.r., it .1.0 cbar.ct.ri&ed .11 ent.rpri ··· in u,.ntin. whicb borroved doll.r., h.ld p··o .... tI, .nd the ··rain,1 of which vera primarily in 10c.1 curr.ncy durin, this p.riod. Durin, 1981-1982, the r~t. of exch.n,e of the Ar,.ntin. p··o r.l.tive to the US ioll.r d.t.rior.t.d .or. r.pidly th.n do···tic r.te. of infl.tion by · f.ctor e.ch y · · r of .pproximately tvo to on·· 21. Th. dollar d.bt which YPP had out.t.ndin, ·· of y··r-end 1980- approximately US$1.5 billion--doubl.d in con.t.nt p··o t.rm. durin, 1981 .nd .,ain durin, 1982. Purther, YPP borrov.d .i,nificant addition.l amount. of doll.r. durin, the 1981-82 p.riod. Aft.r di.bur....nt of the dollar amount. borrowed by YPP v·· made to the C.ntr.l a.nk of Ar,.ntin. (and p·· o equival.nt amount··dvanc.d to YPP), how.ver, for.i,n .xchan,. va. not .ub··qu.ntly mad. avail.bl. to YPP to the .xt.nt of the r··ourc·· borrow.d. Much of the incr···· of YPP·. for.i,n d.bt durin, this period can b. con.id.r.d to bav. b··n incurr.d on behalf of thl Covernm.nt of Ar,.ntina for b.lanc.-of-p.ym.nts purpo.... Tlble 2.3 'fPF: Su_ry HI.toriell hllnee Sh..ts (Con.tlnt 198' USS .'Illon.) ~I ~ 1979 - 1910 l!!! 1982 .!.!!l ee.n Ind Inye.t.ent.: 56 145 202 .0 87 110 Credits: 479 303 32' 2QO 382 392 Inyentor.,: 279 lOS 329 25' 295 327 Net Fixed Assets. RltYII uIId: 2.97! 4,139 ',353 3,936 5,558 6,062 TOTAL ASSETS: 3,7. 4,895 5,_ 4,430 6,322 6,891 LIABILITIES Current Lllbilltle.: ec...relll Ind Other: 626 661 660 721 955 2,098 a.nkS end Other F Inlnc III : 719 1,052 2,407 3,051 3,232 3,233 Long-Ter. Lllbilltl ..: eo..&reill Ind Other: "5 177 2'5 265 21' 216 hnkS Ind Other Flnlnclll: TOTAL LIABILITIES: lS 2,092 m 2,'49 1,321 4,639 1,598 5,62' I,JOt 5,71' 1,390 6,931 Of _tlleh: loc.. Currenc.,: aoa 97' 121 70' l,otl Fore i gn Currenc.,: 1,215 1,411 3.'" 4,9.1 4,631 NET .::RTH 1,6" 2,4" ~ (1,212) 601 -~/ 2' ("6) 21 TOTAL LIABILI~ , NET .::RTH: 3,7. ',195 5,_ ',430 6,322 6,191 MEMOITtMS Current Ratio: Quick Ratio: .58 .lI ." .26 .21 .17 .Il .06 .11 .02 .15 .02 DeDt:Equity RatIo: 55:45 50:50 ":11 negltiye 90:10 negltlYe CIt· · IIt Con· ...,. Prl ca Iltdell: 160' 1011 1051 165' 3U' 627' CIt· · In USS bcn· · Rate: 6S' 41' 2101 355J 301' "2' Inde. of YPF SII,rl .. , USS (197'-1): 1.55 1.94 1.14 0.53 !I Prell.ln.,..,. 21 Includ. . ."ro.l.-tel., USS1.4 billion In c"lt,1 ,u'POrt during 1983 .nd 1984. BOLIVIA A fit G E N T N A GAS SYSTEM AND PRINCIPAL HYDROCARBON BASINS H' BRAZIL NA TUIIAI. GAl ""I.INU TIIUHtI. I.INU . '1.0111 I.INU UNU UNOIIICCNlTIIUCTICN _ I.INU UNOIII S'TI.IOY ..... ... --.. -... 0,1 ~ ...." ·· , ..... Oil 111··1...... YALOU - IASiIll o 0.1 " .... 00. ' ··Idl ..; is U T .lOtto. .-. ..... 1"..q r·.,..1 lev"...,., .,. SOUTH AMERICA "",---_ .. !'loo _ _ · _ _ "'~ .... ,...._ ....,..... .... " --:; --~ "..... ~ .....-. ............ -----.-... _. .., ... ....-.6JW11Wf' .... ............ ....- ..... .... r-. _ _ _ _ _ Q lCC .au 0Cl0 , \ I I! I;: ~ Z ;: ( .,;;~~' = c ~ .......-..-c....... cnOMtrf') I~ ! :-.:=..:::....... .. -..... ...-. ""~Uo '00 lOO )GO <100 I '-" 1- c.4· '0' I I~ :lliJ ~ Q ·Q..! : Q THE CORPORACION ESTATAL PETROLERA ECUATORlANA (CEPE) Background and Scope of Activities 1. The Corporacion Estatal Petrolera Ecuatoriana (CEPE) was established by. Decree No.522 of June 23, 1972. It is a state-owned corporation, which reports to the Ministry of Mines and Energy and, according to its Law and the Hydrocarbons Law, is the Government's commercial arm in all aspects of the petroleum industry including oil and gas exploration, deve1opment~ transport and marketing as well as the construction and operation of refineries, petrochemical plants and related industries. It can undertake all of these activities either on its own, in jojnt ventures, or through service contracts ~ith local or foreign firms. 2. CEPE's current activities are relatively limited in exploration/production but more predominant in refining and transportation/marketing of crude and products. It currently produces about 55,000 BD from its own fields, i.e. 20%, of the country's production, and holds a 62.5% financial share of the Texaco-CEPE Consortium :/, operated by Texaco, which produces the bulk of Ecuador's oil. CEPE is also associated with City Ecuadorian Production Co., in three fields which produce 4,100 BD. Since March l, 1986, CEPE is the sole owner of the Transecuadorian crude pipeline (including associated storage and export terminal facilities), which continues, however, to be operated by Texaco. CEPE also owns all of the count~ .as processing plants, products pipelines and distribution terminals, a~ll as a large proportion of the country's refining capacity 1/ Corresponding to Gulf's share in the original Texaco-Gulf Consortium, taken over in 1974. CEPE has a monopoly on internal wholesale marketing 1/ of petroleum products but contracts with private firms most products transport other than by pipeline. It markets its own crude and the Government's royalty crude, as well as the refinery's surplus of refined products, in international markets. Organi~ation and Management 3. CEPE's charter provides for a strong Board of Directors chaired by the Minister of Energy and Mines and including the Minister of Justice, the Minister of Finance, the Minister of Indu~try, Commerce and Integration, the Chief of the Joint Command of the Armed Forces and the President of CONADE, or their respective delegates. CEPE's General Manager participates in Board meetings but has no vote. The Board usually meets every week and has broad powers in the management of the company, including day-to-day operations (particularly for the award of contracts and recruitment of personnel). 4. Reporting to the Board is CEPE's General Manager who oversees 3 main line operating. Directorates (Gerencias): the Operations Directorate (responsible for exploration, production, refineries' related "industries", and engineering); the Marketing and Transport Directorate (responsible for Domestic & International Marketing, Transport and Storage, and the Guayaquil Branch); and the Admin istration/Finance Directorate (responsible for Administration, Finances, Personnel and Procurement). Also reporting to the General Manager are 2 staff Departments: the Corporat. Planning Department (responsible for planning, organi~ation and data processing) ... the Coordination Unit (responsible for following up the Consortium's activities). This organi~ation, detailed in Annex, was put in place in 1/ Most of the country's service stations are privately-owne~and operated (although they carry the CEPE logo). June 1986 and aims at facilitating delegation down the va~ious levels of decision make~s (a major imp~ovement compa~ed to the p~evious organization whe~e as many as 8 Depa~tment manaaers were reporting directly to the General Manager). CEPE's current general manager, an experienced manager drawn from the private sector, was named in 1985. He has brought with him a team of high-level advisers who have introduced private sector methods in order to improve CEPE's managerial efficiency, 5. Improvements in CEPE's. managerial efficiency are however constrained by the company's lack of autonomy. In particular the Board still has app~oval authority for any expenditure above US$___ Procurement of most contracts is subject to a cumbersome review by several outside Government entities. Furthermore, the Directorate of Hydrocarbons (DMH), HEM's department responsible for overseeing CEPE, is duplicating many activities carried out by CEPE, with technical groups carrying out much of the same studies, statistical reporting etc., that CEPE does. The Government intends to review CEPE's charter to provide for a greater degree of corporate autonomy. However, this situation has become embedded over a long period and basic changes will thus not likely be achieved quickly. In particular, a radical change in the relationship and respective responsibilities of ME~ and CEPE is not considered to be an achievable objective in the near term, given the high political sensitivity of the issue and the legal constraints involved (in fact, a draft law revising CEPE's charter has been blocked in Congress ~or the last two year.). Such a change, however, is more likely to occur if CEPE's organization and management are improved from within, such as an improvement of CEPE's management iriformation and financial systems making it easier for the Government to relax its rigid day-to-day control. Staffing and Training 6. As of Dec.1985, CEPE's staff numbered 4,085, of whom 993 were professionals. Staff growth, which had been very rapid in the company's first ten years due to the commissioning of the Esmeraldas refinery and the start of exploration/production activities in the Oriente, (from 251 in 1973 to 3815 in 1982) has since subsided, with an increase of only 7% between 1982 and 1985. In an effort to improve CEPE's efficiency, recruitment hiring has in fact been frozen since the arrival of the new management team. Although salaries are lower than in the private sector, particularly for professionals, they compare favorably with other semi autonomous public entities. Benefits include one-month annual leave, attractive medical insurance and retirement plans, education allowance for children, as well as special boni for large families, seniority, hardship posts, etc.. A new job classification system is being implemented with a view to reduce the number of grade levels (from 27 to 21) and optimize staff allocation. Salaries are adjusted every two years under collective contracts negotiated with the unions, which are numerOUS (32), strong, and well organized; a new contract entered into effect in July 1986. Largely due to the attractive remuneration package and the unions' strength, staff turnover is low except for higher-level managers whose appointment has been affected by political changes in the country. 7. CEPE 'had a training budaet of US$160,OOO in 1985 excluding the salaries of employees whit. in trainina, and training provided by contractors and suppliers. During that ~, about 65% of all staff participated in one of 250 training activities, rouahly half of which took place abroad. Training of CEPE's staff is expected to increase sianificantly in the next few years as a result of the terms of new exploration contracts whereby oil companies have to assign large amounts (averaging about US$ 250,000 per year per contract) to training of Ecuadorian staff. A weakness of CEPE's training program is that it focuses primarily on technical/operational subjects, whereas CEPE's fundamental weaknesses are in the administrative/financial area. Procurement 8. Contracts above US$___ equivalent are generally procured through competitive bidding following Government procedures, which are quite complex. Extensive bidding documents are subject first to a lengthy drafting and internal review process before being sent to the'eon~raloria (Auditor General) and the Procuradoria General de la Nacion (Attorney General), whose clearance can take up to several weeks or even months. Invitations to bid are then published and offers are reviewed by a bidding committee composed of representatives from MEM, the Contraloria and CEPE; the evaluation report and recommendation for award is then presented to CEPE's Board for decision. Lastly the Contraloria, Procuradoria and the Armed Forces have to give a final clearance to the decision. These procurement procedures are clea~ly cumbersome and cause substantial delays. Ways to reform them for the whole public sector are being studied under the Public Sector Management Project (Loan No.ll26-ECU). Accounting an~Control 9. Unti~1911, CEPE's accounts were marked by double counting or inconsistencies in the recording of sales, incomplete plant accounting, inconsistencies in the presentation of financial statements from year-to-year, and excessive delay. in their issuance. This situation has improved notably as a consequence of an in-house program initiated in 1981, which aimed at improving CEPE's financial management information and control systems. Among other things, this program resulted in the adoption of a chart of accounts and accounting procedures modeled after the CEPE- Texaco Consortium's basic accounting system, the setting up of 13 major cost centers, the full revamping of payroll and treasury systems, and significant progress being made in revising.plant and inventory control systems. Also, CEPE 1S now able to issue financial statements within a shorter time (three to five months from the end of the fiscal year). CEPE's efforts are now focused on revamping and integrating its various inventory control systems with the help of new data processing equipment. Financial Planning and Management Information Systems 10. CEPE's financial planning remains deficient. For one part, CEPE's annual budget is prepared according to public (instead of corporate) accounting formats and 1S not linked to the Company's own accounting system; there is no systematic review of variances nor performance control. In addition, CEPE's budgets are subject to Government review and approval (with frequent changes resulting in sudden mid-year cuts as has happened in 1986). Largely due to the complexity and unpredictability of the petroleum tax system to which CEPE is subjected, there is hardly any lo~ term financial planning; while CEPE now has a 5-year r~lling investment Pl~ it does not systematically allocates resources on the basis of economic rankin. and has frequently become obsolete before even been issued, as a result of sudden Government decisions (e.g. cuts in investments, tax changes). However, CEPE now has a financial planning model on which it can simulate the effect of changes in essential financial parameters, and which is being refined. 11. The management information system currently in place does not provide a basis for control; there is no standard set of simple reports with key information for periodic submission to management and for keeping informed other departments with which coordination LS needed. In order to eliminate these remaining deficiencies and complement the on-going work on accounting systems, CEPE is in the process of selecting consultants to provide assistance in developing 'and installing and integrated and computerized financial planning/control and management information system. The program has been budgeted at 55 man-months (about US$825,OOO) over a 3-year period, to be financed out of the Public Sector Management loan (No. 2516-EC). Internal Audit 12. CEPE' 5 internal audit department is staffed with 55 auditors .(35 in Quito and 20 in Guayaquil), and reports to CEPE's Board, although administratively it depends from the Contraloria. The department's functions are defined by law and encompass not only the examination of CEPE's accounts but also a continuous review of the implementation of established policies, systems and procedures. However, until its reorganization in late 1985, the department's activities had been concentrated on carrying out special assignments, particularly regarding marketing activities. With the recent hiring of experienced staff from the Contraloria, the department haa now adopted a more systemat ic approach based on a compl,ete annual audit progr. . for 1986, which it has so far followed thoroughly External Audit 13. By law, the Contraloria is responsible for the independent audit of CEPE's accounts. Historically these annual audits. although appropriate in their scope, have been subject to excessive delays (up to two years). due partly to CEPE's own accounting and control weaknesses and partly to the Contral~riafs insufficient staff resources. CEPE's annual financial statements were last audited by the Contraloria in 1982, The auditors' opinion was qualified, essentially on account of CEPE's problems in accounting and cont~qls which were still unresolved at the time. SAR-ECUADOR (nbm) l~E EMPRESA COLOMBIANA DE PETROLEOS (ECOPETROL) BacKsround aDd ~ope of Activities 1. The ..,..e.a CoLombiana de E'etroLeos (ECOP!1'ROL) was created in- 1948' and began operaeions in 1951 when che De Mares concession and the Barranca ~ermeja refinery reverted to the state from the !ropical Oil Company (Ezzon) at thpend of a lO-year conce.sion. ECOPETROL's present statute. were pubLl_aeQ i~ ~4Du.ry L970 under Decree 062. It is a scaLe-uwn.U corporation. directly involved. or associateG with private companie., in the ezploration of some 6.8 aillioD ha. and it ha. performed geololical and ,eoP9y.ical studies over a further 20 million ha. In 1982, ECOP!TKOL' ··ale. were about 5% of Colombia's CKP and the e.istinl ,asoline ezcise tas provided about 8% of total Government taz revenue. , 2. In 1985 ECOPETROL's fi~lds account for about 46% of Colombia's overall production; in addition, ECOP!TlOL has a 60% share (includinl a Government share of 20%) in the association contracts which account for ll% of Colombia's production. All domestic production from oil companies (under aSlociation and concession contracts) is .old to !COP!TlOL a. toni a. Colombia is a net importer. !COPETaOL controls all the country's refinery capacity of about 220,000 BD and about 65% of the total national oil and gas transportation sy.tea, which comprise. about 7,700 km of pipeline·· !COP!TIOL i. the sale e.porter of hydrocarbon products from Colombia. 3. !COp!TIQL has intere.ts in a number of companies whose principal activities raDle from e.ploitation and development .of oil ~ields to tran.portation and distribution of products and petrochemic;.ali. !COP!TIOL also ow. intere.ts iD coal .(49% of" CAllBOCOL] t electrical ~tilities and financial corporations. At present, the total amount of its subsidiary iDterests accounts for l2% of ECOP!TIOL'. net worth. OrsaDization, Manase.ent and Staff 4. ECOP!TIOL is ,ovemed by a five-man board, chaired by the Minister of Mines and !aerIY, aDd appointed directly by the President of Colombia. The directors custo..rily are person. with ezperience in industry and co...rce. The board .ets every weelr. and is Ir.ept well informed. The board has broad powers concemiDI all a.,.cts of ECOP!TIOL's operation and ha. delelated I. adequately to 1CO'!TIOL's'chief ..ecutive · .. 5. a e : p ' to the board is !COP!TI.OL chief e.ecutive (pre'tdent), wao is also "illced by tbe Pre.ident of Colombia. Auistinl him are five vice presid . t re,poD.ible for "ploration, production and manufacturinlt enlineerinl and projects, finance, and administration. ECOP!1'ROL's 6. As of December 31, 1983, !COPETROL's staff numbered 8.000 of who. 2,SOO were technic.l supervisory staff. !COPETROL has no difficulties recruitin. c.-,etent professional and support staff, largely because overall salaries an. benefits paid are considered co be among the best of public enterprise. i. Colombi.. After 10 years of service, employees enjoy free educ.tion for their children right through university, medical tre.tment for all family members, interest free lo.ns, subsidized food .nd an excellent retirement pl.n. Turnover of st.ff is low. Around 1980, when s.laries in the oil industry abroad rose rapidly, ECOPETROL lost some qu.lified personnel, but at the present time s.laries paid by ECOPETROL are competitive. Professional salaries are .djusted annually by · gener.l .nd · merit increase and are .pproved by the president. Hon-profession.l staff s.l.ries are fixed by negotiations every two ye.rs with the union, which is strong and well org.nized, but with which ECOPETROL's man.gement h.s been .ble to de.l effectively. 7. !COP!TaOL h.s · ye.rly training budget of about US$7S0,000 excluding the s.l.ries of employees while in tr.lnlng; it .lso excludes the tr.ining provided by contr.ctors .nd suppliers under construction contr.cts .nd equipment purch.se orders. ECOP!TROL:h.s three kinds of st.ff tr.ining, within !COP!TROL, within Colombia .nd abro.d; e.ch one of its nine operation.l districts designs and implements its tr.ining program under the guidance of a company-wide training coordin.tor wbo resides in Bogot., and who is also directly in ch.rge of training of personnel assigned to the Bogot · · re.. Tr.ining activities cover technical, fin.nci.l and man.geri.l, personnel and skilled cr.fts. In 1983 e.ch employee went on average on two tr.ining assignments of .11 types and durations; about 230 a.signments were abro.d. Budgets, Procurement, Accounts, Audits and Insur.nce 8. Ceneral: ECOPETROL's budgeting, accountina and administration procedure. are those u.ed by the major oil comp.nies whose concessions reverted to the st.te and have been modified only in the interest of stand.rdiz.tion and to meet the needs of a state-owned comp.ny. In general, the.e procedure· ·re .dequate with the main weaknesses being in the .rran....nt. for estern.l aUdit. Its financial records are well kept and up-to-d.te, and the co.ting/budgeting system reasonably well maint.inect. 9. ~tl: !COP!TIOL'. planning dep.rtment prepares, on an ~ual basis. fi . I' financial projections .nd work progr"'l as well al each ye.r's b - aeports on oper.ting investment budget performance .re prepared. bycCfIItNCer and are sent to all dep.rtl'llents and operatin, l.lDits on a monthly and quarterly b·· is respectively. The budget is prepared in deta.il with explan.tions of the b.sic assumptions used. Of the 1980 to 1983 investment budgets only 80% w.s carried out due to delays and optimistic budgets. However, ECOPETaOL has taken adequ.te steps co strengthen its v~auning and bud.etinl system. 10. Dele,ation: In spite of bo.rd .pprov.l of the annu.l budget, investment. over C$30 million or US$4S0,000 mu.t a··in be approved by the bo.rd and any company indebtedness above US$SOO,OOO au.t be authorized by the Government. Witb the bo.rd meetin, at le·· t once. week and with GOC's recolnition of the import.nce of ECOP!TROL to the econo~, it .ppe.rs th.t ehere are no ~due deLays. Further, ~foreseen capital expenditures, if sufficiently urlent, can be treated as "emergencies" and presented to th. board after the fact. Adequate spending authority is delelated dow to division chiefa (C$250,OOO '}r U5$5,000 in foreiln exchange). 11. Procurement: ECOfETROL's procurement is lenerally done through biddinl invitations sent to leadinl national and international companies (particularly those established in Colombia), and wbich bave been prequalified and put on rosters. This is a practice inherited by !COP!TROL from the private oil companies. The procedures are well supe~vised and are quiCk and efficient. 12. Accounts: !COP!TROL's accountin, system reflects the various system. used by the major foreign oil -CDmpanie.. Electronic data process in, is widely ~sed to monitor income and expenditures alainst budlet. aalance she_ts and income statements do not show individual "COlt centers" but the income and COlts fro. these centers can be retrieved from the computer when required, althoulh this is not done systematically. The accounts and ..terial codin, systems are lood and handled proficient-l:y. 13. Internal Audit: There are no internal audit procedures in !COP!TROL wbich can be considered truly "independent". !:Iow.ver, there is an "internal control" IrOup of 50 accountants wbo report directly to the vice prelident, Pinance. This ,roup bas a yearly work pro,ram wbich is kept secret and includes reviews of its mana,ement systams and procedures. 14. External Audit: ay law, the external audit of !COP!TROL's accounts is carried out throulh the Office of the Comptroller Caneral of the lepublic of Colombia by Deans of a Special Fiscal Auditin, ream alsigned to ECOP!TlOL. Although the-scope of this audit is thorough and detailed, the focus is GOre on compliance with the taw than the certification that ECOP!TlOL's financial st.tements accurately reflect its financial performance. 15. Insurance: ECOP!TROL carries adequate insurance on its major facilities and equipment in operation alainst all major hazards, such as fire, destruction, etc. Insurance against haz.rds of transportation, and delivery of goods is relularly .rr.nled. Financial Pe!#ormance 16. EcoiIrIoL's finances are complex essentially because of ECOPETROL's varied scope of activities, and the exisling legal/contractual framework governing petroleum exploration and pr04uction in Colombia. ECOPEtROL', revenues orilinate from the domestic sale of oil products and natural las, and the export of fuel oil and middle distillates. On the expenses side, ECOP!TROL purchases the full output of oil and gas produced in Colombia by priv.te oil companies. Until recently, ECOPETROL imports crude oil (to make up ·for the shortfall in domesttc crude production) and lasoline (to optimize its financial returns). Lastly, ECOP!TlOL produces natural gas and crude oil, which is processed tOlether with the domestically-purchased and the imported crude in its two major refineries. 17. Th. ,~ice. and volume. of eCOPETROL'. operations which are heavily affectinl ita financial performance are larlely aeterminea by forces external to ECOPETROL. The price. at which eCOPETROL sells oil proaucts ana natural gas are Government-regulated. The prices at which it purchases domestic crude oil ana natural gas from the foreign companies are based on the concession and association agreements, where a distinction i. made between old o~ basic oil, incremental oil and new oil, and an adjustment is made for crude quality. 11 The prices at which it exports fuel oil, and imports crude oil and gasoline are fixed by the international market. The volume of domestic sales are determined by market forces and the volume of imports is a function of the domestic sales and domestic production, which is to some extent determined by foreign operators within th~ !ramework of the association and concession contracts. 18. Within this framework, ECOPETROL operates in a financially and economically relponsible manner, al all investment decilionl are taken followinl a careful economic allellment of all alternatives. ECOPETROL is financially autonomoul, althoulh it received in 1980 a US$lOO million equity contribution from the Government. In lublequent years, prices received by ECOPETROL were lufficient to cove~ ope~atinl COlts and a realonable part of investment COltS. ECOPETROL il virtgally exempt from income taxel. However, throulh lalel taxes on laloline productl, the Cove~nment collected in 1982 C$lS.7 billion (US$240_million), or about 8% of total Government tax revenue. Until recently, ECOPETROL was a net user of foreign exchange due to (i) net imports of petroleum, (ii) payment of 75% of local purchases of oil in foreign exchange, and (iii) imports of capital goods, equal to about 60% of ECOPETROL's investments. II Old oil: oil dilcovered before 1976, and orilinatinl from the natural depletion of the fieldl (1983 price: US$5-7/bbl). Incremental oil: Oil dilcove~ed before 1976, and orilinating from additioaal iavelt..ntl in the fieldl (1983 price: US$15-17/Bbl). Mew oil: oil dilcovered after 1976 (1983 price: US$25-10/Bbl) (para. 2.09). Pas I: Pe r f 0 r'III&IlC e 19. The financial results for the last four follows: 1/ years can be summarized as Table 3.1 rncome Statements (US$ /lillian) !.!!!: ll!!! - 1981 - 1982 - 1983 Revenue. Domestic Sales 922 1,173 1,390 1,368 !.xport Sales 313 334 347 440 Total ae"enues 1 ,235 1,507 1,737 1,808 EZi!enses Dollestic Purchases 218 289 444 536 Illports 113 679 712 601 Direct Ezpen.es 56 .1.1 280 333 346 Depreciation 84 79 88 U8 Total !zpense. l,oh 1,327 1,577 1,601 CroSI 'Income ' 164- 180 1"60 207 Interest 88 93 77 . 60 !zchanle Lo..es 81 77 93 LJ7 Net Inco.e ---rs) --ro ~10) --ro - !.xchaDle rate (mid-year) 47.46 55.00 64.68 79.53 a/ Net of a Covernment sub.idy of lISt167 million. As the above table indicates, in the period 1980-1983. ECOPETROL made a small profit overall. !COP!TIOL'. official account. overstata revenue., a. tho.e includ.e rabate. liven to electric utilities purcha.inl natural la.; the rebate. are included in the operatinl espen.e.. !COP!TIOL'. revenue. and. expen.e. in this report have been stated. net of rebata·· 6.. OQIP ~~. --~ .... .. , ... ,' 1.......... · ..J~~:" .... ",\:I;> , -- " I II "f '\I ,., -. dS· ~- I I ~ I, / , .., \ " ( ' L ~ .. ~ \ '\ lRAZIL. ~- - -j ..... GuFi", . . . . Ollli... - - ,..,... COf'C_ Fu"". Oil p Gat --..: Oilfltoadur:ts - "fi_,.. ... 1 ,..,__ ........ ....-,.. .", , PETROLEOS DEL PERU (PETROPERU) BackaroUlild 1. The national oil coapany. Petroleos del Peru (PETROPERU). wal estab lished :. Decre ....Law 17753 on July 24. 1969. followina nationalization. in October 1968. of the production and reflnlna operations of IPe. At the lame time. PITROPERU absorbed the production operations of the Empresa Petrolera Flscal (EPF). a state-owned oil company with production operations in the northern Peruvian coastal res ion near the acrease of IPe. and assumed respon sibl1ity for aanaae..nt and adalnlstratlon of IPe's production and reflning operatlona. In 1973. PETROPERU acqulred flve other ...11 companles whlch had been prlvately owned. ~ a result of these acqulsltions, PETROPERU now accounts for 22% of Peru's crude 011 production. 100% of reflcery capaclty. and 98% of the marketlns of petroleua products. PETROPERU was siven Itatus equivalent to a prlvate corporatlon by Leaislative Decree 43 of Harch 4. 1981. This latter actlon ,ave PETROPERU somewhat greater Independence from the Government than In the past In soae speciflc actlvlties -- e.a·· In the ..tter of salary levels and procureaent procedures -- thus permittlng PETROPERU to avoid personnel problems '_nd procedural delays, Nevertheless, PETROPERU is still very dependent on Government policies in the petroleum sector which affect the company significantly. OperaUons 2. PETRQPEIU ls the official entlty for conductlng all Government actl vities In the hydrocarbon sector. IncludlnS exploration. productlon, reflning, and aartetlna of all perroleum products. as well as actlvities related to plpellne tranaportatlon of crude 011. fertl1izer production. and petrocheml cals. PErlOPERU, through a subsidlary. also has a ...11 fleet of petroleua tankers used to transport crude 011 and petroleua products between the Peruvtan coastal ports as well as for river transport in the Peruvian Amazon reston. 3. PETROPEIU produced on the averaae 42.000 BD in 1981. Its reflning operationa coapria. stx refineries whlch have an overall capaclty of approxl ..tel, 178,400 80. PETlOPERU has a network of storaae depots and retail out lets throuahout tba country. Except 111 the case of lubrlcants. PETROPERU il the sol. . .rketer of petroleum products in the country. The other aajor petroleum facillty owned by PETROPERU is the 856-ka Trans-Andean plpeline. organiz." . 4. iIr.c~!IU is aoverned by a Board of Dlrectors conslatina of nine ae. bers. The ChaIrman of the Board is the company's hiahest rankina official. Three ..abera of the Board are appointed by the Minis try of Energy and Mines. three by the Miniatry of !conoay. Finance and Comaerce. one meaber represents the Armed Forces, and the reaainina two aeabers represent P!TROPERU's prof.s sional and vorklna-level ..ployee·· in accordance with Peru's industrial legislation requirements. None of the managers.of the key operating departments, including the General Manager, is represented on the Board. 5. tbe Board has re.pon.ibility for approving all policy . .tter. related to per.oaul ad.aaini.trat~on. general .alary increa.e., inve.ta.nt d.ci.ions, and bud.ete ·. H.v.rthel.s., the Gov.rnm.nt'. policy d.ci.ion. conc.rning the p.trol.ua ··ctor (pric·· , tax·· , etc.) have a direct iap.ct on PETIOPE&U'. fin.nce. which .rill limit. the comp.ny' · ·utonoay in an important v.y. 6. Th. Chairm.n )f PETROPERU'. Bo.rd is the comp.ny'. chi.f .x.cutiv., a~though he has d.legac.d ·.number of r·· pon.ibiliti·· to the Vic. Chairman .nd conc~ntr.L ·· on vull~y ·· tt.r.. The Gen.r.l Mar~ger, who r.port. to the Vic. Chairman .nd work. in collabor.tion vith the k.y operation.l man.s.r, of the exploration-production, r.fining, .nd engine.ring dep.rtment., h·· r ··pon sibility for day-to-day op.ration.l matter·· Th. authority of the G.n.ral Hanag.r i. r.l.tiv.ly limit.d, hov.v.r, .nd m.ny matt.r· ·uch ·· minor op.r. tion.l inv··ea.nt d.ci.ion· · r~ r.f.rr.d dir.ctly to the Bo.rd. The field offices have limited authori~y and routine operational matters are frequently submitted to Lima for approval. The general lack of managerial authority within PETROPERU and Government regulation of procurement, salaries, and travel contribute to the weak institutional situation of the company. 7. PETROPERU is not relieved by'the Government of the financial and heavy administrative burdens it now bears directly on behalf of the State. Adoption of an institutional arrangement, which would leave to the Government, instead of PETROPERU, the role of clearinghouse for taxes and subsidies. could put PETROPERU on a sound financial base rapidly and permit evaluation of its "real" financial performance. St.ffing, KanaBec.nt and Sal.ri·· 8. Th. number of PETROPERU .mploy··· tot.l· ·bout 8,700, of vhich 1,800 are prof··sionals. Approximat.ly 1,400 of PETROPERU' ·· t.ff work .t the c.n-' tral h··dquart.rs in Lima; the bulk of it. . .ploy····r. loc.t.d in PETROPERU'. field offic·· , the mo.t iaport.nt of vhich .r. in T.l.r· ·nd Iquitos. Th. Talara installation employs approximately 4,200 persons and the Iquitos office approximately 900. 9. PETROPERU's senior .x.cutiv.s are generally competent and have extensive .xp.ri.nc. in the petroleum industry in Peru. The company's middle management, how.ver, have b··n weak.n.d by the numerous technical and administrative staff over the past several years. These losses have been primarily due to salary difficulties within the company sinc. 1976. when there was a resurgence of world petroleum activity by private companies which provid.d alternative sourc.s of employment for PETROPERU's experienced operat~p.rsonn.l. Th. exploration and production department in Lima. alone. 14lt .lmost 50% of its technical staff in 1978. 10. l~ 1980. the Gov.rnment .dopt.d · ·eri·· of ....ur···i ··d ., improv ing the salary .tructur. of .11 . .jor public ··ctor ent.rpri···· including PETROPERU. In particul.r, .uch ent.rprl··· v.r. fr··d from .al.ry c.iling. which had ··v.rely limic.d cheir abilit7 to rai·· coap.n.ation to comp.titiv. l.vel.. Thi· ·ction p.rmitt.d PETROPERU co .uthorlz· · ·erie. of .al.ry incre······ccompanied by addlClonal ben~fit ···tarcing in Harch 1980. Pro fessionals employed in PETROPERU had salaries comparable to those of Peruvians employed by private petroleum companies in the country and the manpower drain to the latter oil companies in P.ru had almost ceased. AeeountlQf and Auditins 11. PlTIOPEIU·. account ins and budgetins systems have long been inade quate a. they v.re the re.ult of an effort to standardize procedures inher ited fro. IPC, EPr. and other companies absorbed by PETROPERU, rather than to develop eodern financial and ..nagement Information system. now prevaIlIng In the indU8try. PEtROPERU'. Internal audit departm~nt, under .the dlre:tion of a Chief Internal AudItor. reports directly to the company's Board of Directors and i. subject to audit review by the GovernmeDt's Office of the Comptroller and Auditor General of Peru. 12. With a view to addressing the problems described above, two additional studies were carried out by PEIROPERU. The first, undertaken by Price Waterhouse & Company, was aimed at modernizing PETROPERU's overall accounting, budgeting, and internal auditing procedures. The second study, initiated in August 1981 by a Peruvian auditing firm associated with Price Waterhouse in Peru, was aimed at helping PETROPERU carry our an in-depth study of its fixed assets, including a much-needed physical inventory and book reconciliation, and assets revaluation and depreciation procedures. These studies were completed and PETROPERU has already taken steps to implement the consultant's recommendations. Insurance 13. P!TROPERU carrie. adequate comprehensive insurance on all its facili tie. and equipment against fire, blowout., damage, earthquake. and theft. In.uranee agreement. are entered into directly by PETROPERU. either with foreign in.uranee eompanie. or local in.uranee eompanie. rein.ured by foreign in.uranee eompanie·· PETROPERU: FINANCIAL SUMMARY (1976-1981) (in billions of current solea) 1916 1911 1918 1919 1980 1981 Operating Revenue. 40.0 19.4 131.sJJ 336.l!I 342.8 558.2 Net incoce 0.8 0.1 2.4 6.9 0.7 capital expendi ture. 21.9 15.7 9.8 9.2 17.6 58.5 SWIIIIlarized Balance Sheet AlseU Net fixed asset. 75.0 154.0 241.6 249.8 318.4 408.3 Long-tera receivabl, fro. Governaent .1 0.1 59.6 70.8 76.1 61.0 Other a ..ets 1.2 I.! 7.9 13.0 18.9 32.5 Current ..scts 12.!l 11:.1 !!.:! 1!2:.2. .ill..:! .ill.:! Total .... u 106.3 230.5 408.7 613.6 552.0 721.0 Eguitl ' Li~bilities Equity 11.1 19.4 29.2 41.7 116.31.1 152.6 Long-tere debt 54.3 122.0 248.7 243.5 277.7 293.9 Other liabilities 2.8 2.4 6.6 10.3 10.3 14.5 Current liabilities 1l.:l !!.:L .ill.:.! 312.1 147.7 lli:.Q. Total equity & liabilities 106.3 230.5 408.7 613.6 552.0 721.0 Ratios CurreDt ratio 0.80 0.87 0.80 0.90 0.94 0.84 Total debt/equity 89/11 9119 93/1 92/8 79/21 79/21 Source: PETROPERU 11 Includ4il S/S6.6 and 5/98.3 billion in 1978 and 1979. respectively. paid by tbe""'raaent to cocpensate for lubsidized s.les in the dGcestic ..rue';" l/ Corrospondlna .ostly to eedlu.-tera debt incurred by PETROPERU to cover crude oil icports in 1975-78. which is assumed by the Government. 11 lDcreas. due to Governaent's equity infusion. , .~. PERU CONTRACT AREAS OF PETROLEUM OPERATJONS t 23 . ~ I :IQuolos' -"-.'., ',. ~'. r:. II: ..,.... ,.' . 25 o , 24 I ~~r-!: .' I i Z'2 5 I 27 . ~ ./ ' l:.:....'J------1 ..."... 5· B R I ...; l 32 '; r-~......o....-... T.uiillo i \ \, -\ Z·I.~ .....:.:. \ '. \ ItI'O"'fH.~ .- 0 '-'=== MilES 0 100 z-n \, 34 ' . Z·J2 \ Z-14 . .-., ., .,0 36 37 \_._ ,/,/ !A<;IFIC 41 39 40 o CEAIV .IuoIi"o 43 44 Coloo '-r--_o. Z-21 limo Z-'l3 THE SIX VICE P-RESIDENT OPTION CHIEF EXECUTIVE OFFICER -' Corporate legal PlaQning . I I I I I GROUP GROUP GROUP GROUP. GROUP GROUP VI CE PRES WENT VI CE PRES IDENT VICE PRESIDENT VI CE PRES IOENT VI CE PRES WENT VI CE PRES WENT Explorat ion & Industrial Operations Finance & Human Resources Marketi ng Administration Production Production Services · Exploration · 10 Plants · Domestic · Engineering · Financial Plan · Training ning & Treasury · Export · logi stics · Human Resources · Development · Accounti ng · Operations · Supply & Transport · Systems & Information · Contracts · Administration YACIMIENTOS PETROLIFEROS FISCALES BOLIVIANOS (YPFB) A. Organization and Management Background and Scope of Activitie. 1. YPFI va. incorporated in December 1936 a. a Itate oil company co cake over ebe nationalized Bolivian al.et. of Standard Oil of Nev Jersey, Inc. (nov !zzon). On September 19, 1969, tbe Bolivian .ublidiary of Culf Oil Cor poration vas nationalized (C~lf va. compenlated) and YPFS alsumed che admin istration of all ie. as.ets. 'YPFS i. relponsible for hydrocarbon exploration, production, transportation. pipeline construccion and operation, refininl and distribution as well al imports and expores. YPFS has been enlalinl in operations coneraces vich foreiln oil companiel. YPFS is experienced in all phales of the oil indu.ery from esploraeion eo drillinl' ,produce ion and refininl· . 2. In conjunction wieb ehe Ca. Pipeline Project financed by ehe Bank. IDS and NYSClF (Nev York Staee Common aetirement Fund), YPFB eleablished in 1971 a. a department che Santa Crus Divilion wbich operate. ebe ex-Culf field. of Colpa. Caranda. aio Crande, and a fully owned sub.idary, YAlOC, wbich operate. the Santa Cruz-Argeneina gal pipeline. In October 1985, Government decided eo reorlanize YPFS to (a) make its operation. more effi eiene, (b) limie che scope for Bolivia's naeional oil company's activities, (c) expand the role of the private .ector in boeb up.eream and downstream operation., aDd (d) ultimately increa.e production of and revenues from petroleum. Orlanization and StaffiDI 3. YPFI'. CbairBaD of the Board i. tbe Pre.idenc of the compaDY. In addicion, ehe aepre.encatlve of the Miai.try of !aeray and Hydrocarbons, che Miniscrie. of Pl&aninl. 'inance, and Defen.e, YPPB'. Ceneral Manaler, and a delelate of YPPI'. workforce are repre.ented on the Board. All Board members, except YPfl·. labor repr··eatative, are appointed by the Pre.ideat of Bolivia. 4. tbe General Manaler of YPfl i. ehe chief esecutive officer. Belov ~im il an ...i.taat Ceneral Kaaaler who supervise. ebree departments: !xplorati~ Production (production and development in all YPFB fields excepc the es-Cull propertie.) and Industrial (refininl and pipelinel, except for che lal pipeline to Arlentina). Marketinl, Finance, Ceneral Servicel, ~ateriall, and Contract Nelotiation. report directly to cbe Ceneral ~analer of YP~9, as well as YPFI'I Santa Crus Divilion and YAIOC. 5. As of April 30, 1985, the staff numbered about 8,299, of whom 525 were professional., Including 380 engineers and seolosists. As of February 28, 1986, this had been reduced to 7,640 and the new administration ls determined to further reduce staffina In YPFB. YPFB'. personnel grew at an average annual rate of about 10% between 1979 and 1985, but YPFB at the same time lost many of Its most experienced engineerl and geololiltl. Several department heads have been removed In the last several years, while others have left to work eith.r for private oil companies in Bolivia or in neighborinl countries a. devaluation. of the Bolivian peso eroded their .alarie.. In order to redrell the 10·· of skilled technical staff, it is nece.sary for YPFS to maintain .alarie. of the experienced engineers and geologi.t. at levels competitive with thOle offered for these speciali.t. within and out.ide Bolivia. It is al.o required that political interference in YPFS'. per.onnel management be reduced to strengthen its character a. a commercial corpo ration. Accounting, Auditing and Insurance 6. YPFS's budgeting and accounting system is adequate and complies with standard industry practices. YPFB has a computerized sy.tem to monitor income and expenditures in each of its main profit and cost centers. The accounts and material coding systems are good and the accounting and materials depart ment staff make good use of the.e systems. YPFS's decentralized units, YASOC and the Santa Cruz Division, maintain separate accounting and control depart ments. Their accounting procedures were inherited from Culf and are effi cient. YABOC and Santa Cruz Division submit monthly financial report. to YPFS's headquarters and their yearly budgets are approved by their Executive Committee which i. composed of the manaa.r of the unit, the head of YPFB Planning Department, and the VPFB Ceneral Manager. 7. YPFB'. Internal Audit Unit i. composed of 22 professionals and reports directly~o the General Manager. A confidential plan of action i. approved by th. General Hanager at the beginninl of the y.ar, and on. or tvo auditinl visits yearly, in accordance with the relative importanc. of the cost/profit centers, are scheduled. The Unit audits all departm.nts and cost/profit centers in YPFB except the Materials Departm.nt which hal its own internal auditor. YPFS's external auditinl is currently done by Telleria; Ormachea & Troche, independent auditors as.ociated with Deloitte Haskin. & Sells. 8. YPFB carries ad.quat. comprehensive insurance on its major faciliti.s and equipment in operation aaainst all major hazards. Insurance aaainst hazards of acquisition, transportation, and delivery of goods is reaularly arranled. In .arl, 1986, the Sank b.lan as.iscinl YPFS in reviewinl its insurance arranleDeDt. with a view to r.duce in.urance COSts. YPFB ae.tructurin. 9. Th. . . . Bolivian Government pursu.s the policy to reduce the rol. of the public s~r in the econo., and to incr.... that of private enterprises, and to make t-' public sector companies more efficient. With YPPS beina the most important public s.ctor company in Bolivia, the Government is reviewing its operation., investment program and scope of activities to focu. YPPS more clearly and to make it more efficient. A diagnostic review of YPFS's organi zation with alternative model. to reorganize the company was carried out by A.D. Little in November 1985 followed up by a more comprehensive study by Booz-Allen. This vork i. financed by UNOP with the Bank Group a. Executina Agency. B. Financial Performance Put Financial Performance 10., Altboulh VPFB's fiaancial statement. indicaee .atilfactory per formance and pOlition, the biah-inflation environaent and the lack of a clearly defined policy of reevaluation of allet. affect the al.e··meat of asset. and liabilitie·· in particular lonl-ter.. YPPS'. liquidity pOlition hal beea affected by a severe shortale of foreiln ezchan.e (while local currency i. available) and difficultie. in collectinl it. receivable. from la· .sport. to Ar.entina. ¥bich. in principle, would all be payable in foreiln exchange but are settled partly in kind. YPFB's income statements are high lighted below:iI ypj:: e - l=i"4"C;41 I'di<:!tol"s (\"S5 million) 1979 1980 1981 1982 1983 1984 1985 Ext:lOt'1' S.'e. I~.a 245.1 3"1.2 359.7 401 ·.3 380.7 251.2 Oc:IN.1'!c Sa'., 107.9 IS8.9 303.6 98.9 153.7 146 ·.3 277.5 roUI ~veftu.' 25T.7 m:o 6«.i m:6 555.0 m:o m:6 Operating Co,ts 80.4 120.1 18! .1 136.6 180.0 249,.3 201.7 Depree i at Ion 58.1 59.7 65.5 55.4 34.0 30.9 50.6 Intere,t 34.a 35.5 33.6 24.6 23.7 I 1· I 12.3 Non..()cerltll'lg Income 10.4 3.0 6.7 75.1 30.0 80.6 4.5 r4X." Rcya'ti.s 84.8 '28.1 ill.:! 221.1 189.5 2 1 4.3 158.6 ~et IncOllle ii"7O T376 !49./5 T670 "i":i"Q7j i'Oi7O i09.O Cas" 33.7 40.2 69.5 14.7 21.5 73.0 67.7 Receivables 49.9 75,3 98,6 257.0 357. I 273.6 272 .7 1 n"entor i ·· 95.1 101,2 131.7 148,7 '69.9 228.2 181,4 I=ixct ~ . ~ ......~ \tI()GIi4NOt ?-- / ........ I l J - '~ I' W ell \ I ~ POIO~I ~~t l . UIIAI \ J '~~~'I,~~) I · '''.IA PARAGUAY r I~::::- " "/ . 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