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Figure
this out. The economy was supposed to have grown by 7.3
percent, implying unprecedented energy demands not seen
in the last 30 years. Growth needs to be fed, and when
engines churn, electricity and fuel are expended.
While
energy costs continue to skyrocket, the oil industry is
deregulated; thus, for privatized oil companies
prosperity reigned. Companies freely pass on costs. No
cash cow can be more contented. Never mind competition.
The industry is virtually cartelized.
Because
the government failed to attract integrated refiners,
competition is largely in the downstream segment. Oil
refiners are less than a handful but their economies of
scale afford unequaled advantages. For Shell and Petron,
refining costs are in pesos and, thus, exchange risks
are not the same as for those who fully import.
Moreover, the peso’s strength augurs well all around as
fewer pesos purchase more and contain foreign
denominated debts. While some advantages are traded off
as the price of Dubai Sweet increases, incremental costs
are passed on.
Downstream, retailers move like cartels. Where the
industry encounters markets with weak purchasing powers,
competition is fiercer. Thus, virtual cartelization is a
convenient counterfoil and retail competition is reduced
to raffle coupons and little red toy cars.
Everything is hunky-dory. So, why is Aramco Overseas
Co., a heavily invested long-term industry behemoth with
the incomparable advantage of dedicated oil supplies
suddenly cashing out from Petron Corp. and exiting
Gloria Arroyo’s self-proclaimed dazzling economy?
Petron
is our largest refiner with a capacity of 180,000
barrels a day. With the Philippine National Oil Corp.,
its largest shareholder, it is a robust revenue earner.
When we realize who steps into the void Aramco leaves,
the question of divestment amid claimed growth becomes
alarming.
Aramco
stated it “is divesting…because its parent company,
Saudi Aramco, is increasingly focused on a $50-billion
capital-expansion program and a series of world-scale
upstream and downstream projects in the Kingdom of Saudi
Arabia.”
Obviously, we are a speck of dirt in Aramco’s
“world-scale” sandbox. Petron’s supply deal with Aramco
is historically negligible at 1.79 percent of total
sales. Given the insignificance, even Arroyo’s fantastic
claim of unprecedented gross domestic product growth
will not be enough to keep Aramco invested. For
professional investors, her politicization of the Petron
board is an even worse dampener.
To
appreciate Aramco’s divestment impact, let us review
energy investments, focus on Arroyo’s ballyhooed
economic surge and examine capital slipping into
Aramco’s berth.
If,
under Corazon Aquino and Fidel Ramos, the economy
experienced unparalleled energy investments reflecting
trust and confidence in economic governance, the same
cannot be said of Arroyo.
Capital
investments in energy are attracted by prospective
economic growth as it seeks beachheads and anticipates
demand-and-supply crossovers. Such attracted Aramco. The
1994 globalization of Petron’s equity structure brought
in not simply expansion capital, but a dedicated tap on
the world’s richest reserves. By applying cost-effective
transfer pricing, Petron became a price buffer and a
competitive foil. Besides that, a resurrected democracy
boded well for heightened economic activity.
Unfortunately, in terms of capacities, the largest
energy investments during the Aquino-Ramos terms are
surpassed by the largest that continue to divest under
Arroyo.
The
character of the capital that enters following Arroyo’s
divestments says it all.
In the
electricity sector, when Arroyo first hocked the
Masinloc power plant, she attracted middlemen who
attempted to either leverage the sale or flip the
acquisition. Had not public outcry ensued, stronger
hands might not have eventually come in.
When
Mirant Corp. exited Chapter 11, its new owner was Pirate
Capital Llc., a juvenile, limited-life fund that
eventually resold the company. Pirate Capital’s motto
was, “Surrender the booty.” Only when Marubeni and Tokyo
Electric eventually purchased from Mirant’s overseas
platform did stronger hands take over. Meantime, in all
these, no new capacities were built.
When
private-equity funds enter vacated capital nests, they
bring in trading capital, not expansion. See the
teacher-retirement fund that bought out Bechtel-Intergen
from a base-load plant in Quezon.
Holding
periods and quick returns are central to these concerns.
Not expertise. Not greater risk. Not expansion. While
funds and financial intermediaries are valid
shareholders, when within infrastructure concerns, most
are “event-driven” and short-term. Private-equity funds
have abbreviated lifespans, extremely high hurdle rates
and impatient stakeholders. They leave before bubbles
burst.
Before
Aramco, the most embarrassing oil-industry divestment
was when Caltex dismantled its 72,000-barrel-per-day
refinery. It was one of the “Big Three” and among the
pioneers. Last year Chevron followed suit as it sold its
LPG business.
Walling
her in like the claustrophobic confines of a
constricting coffin, energy divestments debunk Arroyo’s
growth claims. They perpetuate poor infrastructure and
worsen the industry slack—evidence of her hollow
economy.
The
UK-based private-equity fund acquiring Aramco’s stake,
while rich and reputable, will not likely pump in
additional long-term expansion equity without adequate
risk protection. Private-equity funds do not do that.
Fund hurdles and tenors do not allow deep investments.
Neither does the subprime market.
Moreover, fund-revenue demands are far greater than a
technical partner’s, shorn of Aramco’s synergies,
transfer pricing and the comfort of in-house supply
contracts as against those now negotiated under
commercial arms-length terms.
Why
would the profitable and critical divest from Arroyo’s
reputedly resplendent economy? Ask any overseas Filipino
worker on the departure concourse why they’re leaving.
Ditto the answer. |
