The partial privatization of Petroperú won’t necessarily be a success, experts warn.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue 

Peru's energy minister, Jorge Merino, announced last month that the country is reviving plans to partially privatize state-run oil company Petroperú by selling as much as 49 percent of the company's shares on the local market. Merino said the decision was based on the example of other national oil companies that were able to grow after receiving injections of private capital. Will the plan come about? How would the partial privatization change Petroperú and the competitiveness of the country's energy-sector? How effective have similar reforms been for other state-run energy companies?

Carlos E. Paredes, director of Inteligencia Financiera in Peru: In record time, the Peruvian Congress approved a bill proposed by the president that opens the way for launching a $3.5 billion oil refinery project on the northern coast of Peru and for the partial privatization of Petroperú (up to 49 percent). If successful, Petroperú will be able to raise private capital and finance the Talara refinery project as key components of an overall reorganization and modernization plan that also contemplates incorporating best corporate governance practices. The proposed market-based scheme, which will benefit from a partial government guarantee, sounds reasonable as it is could allow the implementation of a project that will increase the country's refining capacity, reducing the degree of dependence on imports of distillates, and that should also significantly reduce air pollution. The questions that remain to be answered are whether Petroperú will be successful in raising capital and in securing the financing of the refinery project. Success clearly requires a top management team working closely with a top international financial advisor.

Emilio Zúñiga, vice president of Latin Pacific Capital S.A: The decision to partially privatize Petroperú has been made without a strategic plan to develop the company. Today, national oil companies (NOCs) around the world give priority to building a strong oil base by forming alliances with private operating partners to avoid bureaucratic problems and undue political interference. That plan does not rule out the need to invest further in the Talara Refinery in the future, but for the time being is only targeted to complying with environmental standards. I doubt a private investor will risk billions ($3.5 billion to expand capacity by 30,000 barrels per day) to become a partner in a small refinery by international standards where it will not hold a majority nor control. The failure in 2013 of Repsol to sell La Pampilla Refinery (50 percent bigger than Talara) seems to support this view. On the other hand, partially privatizing a state company through public offers adds value to the company, as the track record of Petrobras has shown. A competitive energy sector needs to have alternative sources of supply in fuels, something that already happens in Peru, and the expansion of Talara is more of the same. True, Peru faces a growing deficit in diesel, but under a free market for imports neither refinery (Talara or Repsol) has shown any interest in filling this gap. The price Petroperú may pay for spending billions on Talara is to cut its possibilities in the strategic upstream.

César Gutiérrez, director and consultant at Utilities Peru: The decision to sell shares of Petroperú, up to 49 percent, with widespread ownership of 5 percent, so that in theory any corporation in the sector could acquire as much as 44 percent, is wrong-headed. It puts Chinese state oil company China National Petroleum Corp. in an advantageous position that is very difficult to reverse. CNPC is now the main agent of the hydrocarbons market in Peru, after acquiring the operation that Brazil's Petrobras had in the country. My assertion is based on two points: today, the only provider of light crude (34° API) for  Talara, Petroperú's most important refinery, is CNPC from lots it has in the area. This gives it control of the purchase price of its crude, the main variable for obtaining profit margins at the refinery. The second point is that there will not be a private corporation in the western world that will be interested in acquiring 44 percent of a company in which the Peruvian government controls 51 percent. However, a company like state-owned CNPC would make an investment of this type to improve its bilateral position and have a strategic regional posture. Peru has not had a good experience with Chinese companies. The best example is the Shougang iron ore producer whose contribution to the country in every respect has been meager or nonexistent.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor