PETROTRIN AND PRIVATIZATION – IS THIS THE RIGHT QUESTION?

by Nazera Abdul-Haqq, Policy Coordinator, TTEITI Secretariat. 

 

Background

In Trinidad and Tobago the issue of Petrotrin’s future is a burning national issue and different interest groups have divergent perspectives on how to reform this company. The Trinidad and Tobago Extractive Industries Transparency Initiative (TTEITI) sought the diverse perspectives of these stakeholders in an attempt to answer questions related to the company’s future. The following summarizes the views of our interviewees Professor Andrew Jupiter (former Chairman of Petrotrin), Mr. Gregory McGuire (Strategy and Energy Consultant) and Mr. Ozzi Warwick (Chief Education and Research Officer, OWTU). 

 

Despite Petrotrin’s improvements in crude oil production, refinery throughput and bunkering, the company continues to be challenged by serious management-created debts, man-power issues, refinery inefficiencies, aged infrastructure and frequent oil spills. One of the recent efforts to reform the company is the government appointed Petrotrin Review Committee. While the government deliberates on the committee’s recommendations, the idea of privatizing Petrotrin has been discussed in the industry and in the wider public. Where do we go from here? Is placing Petrotrin in the hands of the private sector the solution to its woes?

 

What does the evidence say?

There is some evidence that privatization significantly improves profitability, commercial efficiency, capital investment and output (see Boukbari et. al 2005; D’Souza and Megginson et al, 1994; Dewenter and Malatesta, 2001). Private oil companies have also been found to convert reserves into output better than national oil companies and make more revenue per unit of output (Victor, 2007). Argentina (YPF), Bolivia (YFPB), Brazil (Petrobas) and Russia (State Vertically Integrated Companies) all provide examples of countries that sought to improve commercial efficiency by engaging in some form of privatization.

This type of research makes it clear that no model is perfect as studies on privatization have frequently been subject to much criticism. Furthermore, researchers have sought to refocus the discussion by stressing that national oil companies play other important roles that private companies do not. Commercial efficiency is not King. For example, Wolf (2008) argues that “…less profit does not imply that state ownership is less desirable, as national oil companies pursue other worthy causes other than profit maximization.” These non-commercial functions spread oil rents to the owners of the resources (i.e. the citizens) through fuel subsidies and by increasing local content. Under privatization, governments and citizens have even been found to lose out on large rents captured by producers and shareholders.  There are also several examples of national oil companies that have successfully reformed without selling to the private sector. The Natural Resource Governance Institute’s 2014 study shows how 11 national oil companies were able to reform their operations, by defining and financing a commercial mandate, limiting political interference in technical decisions and ensuring transparency and oversight.

 

       Gregory McGuire

What are we trying to cure?

For Mr. McGuire, high operating costs, suboptimal refinery configuration and a high debt burden were identified as the three top challenges facing the company. McGuire explained that the company’s high operating costs is due to its aged and inefficient infrastructure, as well as high labor overheads. He recalled a 2004 report that ranked Petrotrin in the last quartile of refineries by efficiency. He said “…these are legacy issues (i.e. plant inefficiency and overstaffing) meaning that they have been inherited from the past. Petrotrin’s workforce is represented by one of the strongest unions in the country. They have therefore defended the jobs of their membership, as indeed it is their right. It has been difficult to get the staffing levels down to industry standards.”

Mr. Warwick of the OWTU also acknowledges that Petrotrin has labour force issues, however his concern is that some departments are overstaffed (e.g. Human Resources and Communications) while there are vacancies in areas that can directly affect production and generate revenue. Warwick also attributed high operating costs to the company’s bloated management structure layer, which also reduces accountability and transparency. In 2011, the OWTU proposed an organizational structure to the government that involves separating land, refinery and offshore operations into three distinct bodies so that managers would be accountable for the performance of each body.

On the issue of refinery configuration, McGuire explained that for several years Petrotrin has been trying to upgrade its 100-year-old refinery so that it can extract more value from a barrel of oil. Since 1993, there have been several projects aimed at modernization that were not fruitful. He believes that poor project management hindered these efforts. “The refinery remains a bottom end refinery, with more than 50 per cent of its output being low valued residual fuel oil,” said McGuire.

Warwick sees all Petrotrin’s challenges as a spinoff of weak governance/poor management. “Low production, oil spills (etc.) occur because decisions are being taken that do not build-up the company in the long-term,” he said. Some of the management issues he raised included a lack of supervision of staff and the lack of investment in areas that will improve infrastructure and boost oil production. Nevertheless, he lauded the efforts of the current Board for its efforts to collaborate and obtain buy-in from all stakeholders, including the OWTU.

As it relates to improving the company’s asset integrity, Professor Jupiter disclosed that Petrotrin has a strategic plan to fix its assets. He said that failure to do so results in “…dollars and cents being wasted when there are spills. Each barrel should be used in refining.” He also made it clear that the environmental impact of Petrotrin’s oil spills is of great concern to the company. While the Board has prioritized assets to be repaired, Jupiter emphasized the need for greater capital expenditure on improving asset integrity.

Low oil production is another challenge raised by the interviewees. Petrotrin is the largest crude oil producer in Trinidad and Tobago. Since September 2015, the company has arrested its decline in oil production and there has been an increase since then. This was achieved even as the company operated in a low oil price environment in 2016.

   Professor Andrew Jupiter

Jupiter strongly believes that Petrotrin can increase its production in excess of 60, 000 barrels per day. Ramping up production will require Petrotrin to review the lease operator model to identify potential areas for improvement, expand the Incremental Production Service Contracts programme to develop reserves and engage in secondary recovery methods in partnership with local and foreign entrepreneurs to recover heavy oil reserves.

In relation to the lease operatorship arrangements, Warwick noted that there is a need to disaggregate the production data of these companies to ensure that high production volumes of a few companies do not mask lower production levels of the majority. Jupiter emphasized that assessing the model is so important to maintain the OWTU’s trust and to maintain industrial peace.

As expected the company’s debt burden affects its financial standing. The company is saddled with debt arising from two loans namely a US$ 750 million loan and a loan of US$ 850 million. It has however made all of its interest payments on the former and therefore has never defaulted. Its most pressing challenge is to reschedule or refinance its US$ 850 million loan due in 2019.  Jupiter recently revealed that the Board has proposed a strategy, in collaboration with the Finance Ministry, to refinance the debt. Warwick attributed the company’s indebtedness not to its ownership structure, but rather, due to the Government’s inability to make its subsidy payments on time, which puts a strain on the company’s cash flow. Data from the Ministry of Energy and Energy Industries shows that in September 2016 the government was able to clear its outstanding subsidy liabilities.

 

What is the right question?

For McGuire, partial privatization in which the government retains majority control may be the right solution. He explained that Petrotrin requires an injection of capital and major refurbishment, particularly to its refinery. He also suggested that it may be more prudent to build a new refinery and the existing refinery may be mothballed or used as a first stage processor. McGuire stated that since neither the government nor the company can finance these investments it seems sensible to engage the private sector by way of partial privatization, but the government must retain majority control. He added that partial privatization will also provide the opportunity for aligning the workforce to the requirements of the new refinery. Apart from partial privatization he identified several strategies which include rescheduling of the company’s debt and identifying a strategic partner with financing to construct a modern refinery. He also identified streamlining the workforce in line with new requirements, investing in enhanced oil recovery techniques and increasing exploration efforts on land in deeper horizons.

Jupiter cautioned that raising capital does not imply selling the company to the private sector as there are other ways to achieve this such as by increasing the company’s production. This will in turn generate revenue. Jupiter believes that total privatization will not happen because of the company’s history. Petrotrin’s early years were marked by significant foreign ownership. From 1968-1975 the Government took control of the company’s assets as foreign companies sought to shutdown their local operations in light of the challenges brought on by the Arab oil embargo and also because their assets became unprofitable. He said that “…as long as a company is not making profits they will leave and this has happened in the past. Our key challenge is to address our debt. We also have to make the correct decisions to ensure that the company is profitable.” His other short- to- medium term solutions include increasing local crude production to reduce the cost of importing crude oil for refining, completing the Ultra-Low Sulphur Diesel project to improve the quality of diesel produced (expected completion Q4 2019) and investing in improving asset integrity. In addition, improving the efficiency of the refinery to increase the market value of products and to enhancing structures to optimize manpower are also key

   Ozzi Warwick

As an ardent and vocal nationalist, it is not surprising that Warwick is completely against privatizing Petrotrin. He explained that by focusing only on the commercial piece of the picture, we are bound to miss substantial details. Petrotrin is the third largest contributor to Government energy tax revenues and paid an amount of TT$4.1 billion in tax payments in fiscal year 2014/2015. It contributes significantly to the country’s GDP and it holds the key to expanding oil production. Data from Petrotrin shows that both refinery throughput and refinery utilization increased year-to-date (September 2015 to September 2016) and Petrotrin’s Board has had several discussions with its stakeholders (including the OWTU) in which quick-win strategies have been outlined to increase production from the State-owned company.

Some stakeholders argue that the government will still benefit significantly if Petrotrin was privatized as contractual terms can always be negotiated to enable the State to receive adequate tax revenues. In response to this, Warwick emphatically stated that “…everybody is saying privatize, but nobody is stopping to think what it will mean for T&T if that happens. As it stands now, the details of production sharing contracts signed with multinationals are top secret. How would we even know that the contractual arrangement is beneficial to the country and who determines that?” He concluded “the right question has to be about improving corporate governance and implementing strategies to make the company better. It also is about how we ensure and guarantee that State enterprises are managed to the benefit of all citizens. It cannot be that the answer is to privatize goods and services that are provided by the State. This is the crux of democracy.”

 

Conclusion

The country awaits the publication of the findings and recommendations of the Petrotrin Review Committee and the subsequent consultation with stakeholders on the planned direction of the company. In the meantime, the TTEITI Steering Committee and Secretariat will continue to provide a forum for all stakeholders with competing interests to ventilate these issues and to provide civil society with independently verified information to hold both companies and government accountable.

Petrotrin belongs to the citizens of Trinidad and Tobago and much is at stake in how its future is managed. The government will be well advised to seek wide stakeholder consultation (including citizens) before it acts on the Petrotrin Review Committee’s findings and recommendations.