POLINARES is a project designed to help identify the main global challenges
relating to competition for access to resources, and to propose new approaches to
collaborative solutions
POLINARES working paper n. 47
April 2012
Case 3: Global value chains, state
ownership and natural resources
By Armando Rungi, FEEM
The project is funded under Socio‐economic Sciences & Humanities grant agreement no. 224516 and is led by the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP) at the University of Dundee and includes the following partners: University of Dundee, Clingendael International Energy Programme, Bundesanstalt fur Geowissenschaften und Rohstoffe, Centre National de la Recherche Scientifique, ENERDATA, Raw Materials Group, University of Westminster, Fondazione Eni Enrico Mattei, Gulf Research Centre Foundation, The Hague Centre for Strategic Studies, Fraunhofer Institute for Systems and Innovation Research, Osrodek Studiow Wschodnich. POLINARES
D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
Case 3: Global value chains, state ownership and natural resources
Armando Rungi
FEEM
Abstract
Exploiting a unique dataset of 146,459 companies active worldwide in the extractive sector (coal, oil,
gas, raw materials and supporting activities) grouped by 3,686 domestic and/or multinational
corporations, I first explore the different investment strategy by type of property (national and
international companies) and then the patterns of capital productivity as a proxy for the viability of the
investment, at home and abroad. What I find is a strong duality of investment behavior by
international and national companies, with the first more likely to relocate in upstream activities and
the latter in downstream activities such as refining, transportation and distribution. Moreover, when
looking at capital productivity, state-owned affiliates in 2001-2010 seem to be more productive,
especially when they invest in their country of origin, with the exception of energy companies whose
investment abroad is on average more productive than investment in the origin country. Finally, an
overall positive time trend for investment performance is detected from estimations which is probably
linked to the commodity boom of the last decade.
Introduction
The new surge of trade in natural resources during the last decade can be ascribed to the more general
phenomenon of the internationalization of production as a result of the third wave of economic
globalization begun in 1990s, that has seen both an increased demand from newly-industrialized
countries and the development of complex global value chains for which production of final goods
takes place across national borders (Gordon, Mataloni and Slaughter, 2005; Baldwin and Martin,
1999).
In the context of an increasingly internationalization of production through global value chains,
energy and raw materials are used more than ever as the first intermediate input in the production of
final goods by networks of firms that are engaged across national borders with different stages of
processing before reaching the final consumer. From the extraction of the raw materials to the sale of a
final product, a division of labor occurs according to a combination of countries' comparative
advantages and firms' competitive advantages. Networks of firms are organized either as multinational
enterprises, exchanging intermediates on an intra-firm basis, or as independent firms linked by buyersupplier contracts, exchanging intermediates through arm's length international trade.
As in other economic activities, multinational enterprises in extractive industries rely on some kind of
competitive advantages when they expand internationally (Dunning, 1993, Dunning and Lundan
2008), but in the case of the extractive sector we can identify some peculiarities (UNCTAD, 2007) for
drivers and determinants linked to companies' ownership advantages due to privileged access to
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
capital, technology, superior organization and management governance of several parts of the value
chain.
Historically, since the independence of former colonies after the Second World War and the
emergence of the Organization of the Petroleum Exporting Countries (OPEC), many governments in
developing economies chose to nationalize their extractive industries and many state-owned
enterprises have first gained control nationally in resource-abundant economies, then they have begun
also to expand internationally, especially in the last decade (UNCTAD, 2007), challenging the
involvement of private multinational enterprises that hitherto had been dominant.
In this paper I exploit a unique dataset of 146,459 companies active in the extractive sector worldwide
in the period 2001-2010, grouped by 3,686 domestic and/or multinational corporations, to first identify
different investment strategies by type of property (state-owned or private) and then the determinants
of capital productivity as a proxy for the profitability of the investment.
The paper is organized as follows. In Section 2 I draw some stylized facts on global value chains in the
extractive sector. In Section 3 I introduce a dataset for corporations in the extractive sector. In Section
4 I sketch the estimations strategies and discuss results, while in Section 5 I introduce Gazprom
corporation and its value chain as a representative case study. Finally, Section 6 concludes.
Global value chains and natural resources
A firm that looks onto foreign markets is nowadays at the center of a Global Value Chain (Coe et al.,
2008) and it has to decide whether to conduct an international activity in-house (internalization) or to
entrust the same activity to another firm (externalization), which is a typical "make or buy" decision
based on both features of the production process and on the economic environment of the foreign
country. In the first case we would observe a Foreign Direct Investment (FDI) and trade of goods and
services is conducted intra-firm, under the direct control of a Multinational Enterprise that emerges as
a network of firms linked by proprietary linkages. In the second case, a network of independent firms
emerges as linked by non-equity linkages and trade is conducted arm's length. Looking at global trade
volumes, and including also natural resources, WTO (2008) estimated that trade in intermediates, i.e.
trade whose end-user is generally a firm and not a final consumer, has increased two times faster than
trade in final goods for the last three decades and Miroudot et al. (2009) estimate that in general
intermediate inputs represent 56% of goods' and 73% of services' trade among developed economies,
with even higher shares for emerging markets. In terms of global GDP, Multinational Enterprises have
reached a historical high of 11% in 2009 (UNCTAD, 2010). In Table 1 I report the evolution of total
Foreign Direct Investment stocks by host countries, first considering the overall category of developed
and developing economies and then isolating among them the major producers of natural resources,
distinguished in energy and raw materials. Unfortunately, detailed data on FDI in the extractive sector
by host country and for such a long time series are not available and we have here to assume that the
bulk of foreign activities hosted in major exporters of natural resources takes place in the extractive
sector.
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
Table 1: Foreign Direct Investment (stocks) by categories of host countries. Source: own elaboration from
UNCTAD FDI database
1990-1999
2000-2005
2006-2010
(%)
(%)
(%)
All countries
Developed economies
74.88
75.76
69.48
Developing economies excl. China
22.37
20.15
24.79
2.75
4.09
5.73
100.00
100.00
100.00
Developed
0.54
0.55
0.77
Developing
1.83
2.60
4.55
Total
2.37
3.15
5.32
Developed
0.62
0.40
0.37
Developing
1.60
1.40
1.27
Total
2.22
1.80
1.64
China
Total
Major exporters of oil and gas
Major exporters of raw materials
As we can observe in Table 1, developing economies (including China) have reached a 30% of global
FDI with an increasing trend from the beginning of 90s. In general, the weight of FDI in major
exporters of natural resources represents only about 7% of the total, but we have a different trend for
producers of oil and gas and for producers of raw materials. The share on the total has almost doubled
with respect to the 1990s in the former case, while it is slightly less in the case of raw materials.
The relative decline of the extractive sector in the twentieth century has been due to its slower growth
compared with internationalization of activities in manufacturing and services. However, in absolute
terms, FDI in energy and raw materials continued to grow increasing fourfold from 1990 to 2008, after
a sudden stop at the outburst of the worldwide financial crisis, to resume again at the end of 2009.
Indeed, FDI flows in 2010 are estimated at 254 billion dollars (UNCTAD, 2011) and with
Netherlands, the United Kingdom and the United states still the largest home countries of investing
companies, even though new players coming from newly-industrialized economies are gaining
importance on the international scene. For example, in 2010, Repsol activities in Brazil were
purchased by China's Sinopec Group for 7 billion dollars and the Carabobo block in Venezuela was
purchased by an Indian group of investors for 4.8 billion dollars. Already in 2003 and 2004, the
mining industry accounted for respectively 48% and 33% of China's FDI outflows, while oil and gas
accounted for 19% of the overseas acquisitions by Indian multinational enterprises (UNCTAD, 2007).
Corporations in the extractive sector: a sample
In order to build a dataset of Multinational and Domestic Corporations (or Business Groups) operating
in the extractive sector, including the complete network of their activities worldwide, I first had to
define what a Corporation is and where the boundary of control on domestic and foreign subsidiaries
stops. Indeed, if the intuitive notion of a Multinational Corporation, and hence its definition, is rather
straightforward, the definition of the boundary of activities on which the MNC exercises control is
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
more problematic. Following Dunning and Lundan (2008), a Multinational Corporation is "an
enterprise that controls value-added activities in more than one country". More precisely, we can detail
the definition as follows: a Multinational Corporation is a group of at least two firms in two different
countries that are linked by a proprietary relationship . This clarification involves at least four different
elements that are worth to be noted: a) firms belonging to a group are separate legal entities; b) they
are located in different countries; b) there is a certain amount of stake that links each firm to the other ;
c) the proprietary relationship is assumed to imply control, hence a coordinated economic activity. The
legal separation leaves out, on one side, firms that simply relocate some functions in another country
(marketing offices or commercial departments, for example), while on the other side an inter-firm
(intra-group) linkage defined by stakes leaves out business alliances, i.e. independent firms that
coordinate part of their activities through business agreements (for example airline alliances, see
Hennart (1991)).
In this context, a definitive notion of control is at least problematic because it depends on the interplay
among stakeholders and it should ideally be assessed case by case. Here we will follow the approach
of a 25.01% majority which is the threshold above which in many countries the communication of
control is mandatory1 . A representative MNC can be depicted as in Figure 1 with its own hierarchical
structure, where shaded nodes are firms belonging to the MNC once defining the control threshold and
white nodes are firms external to the MNC that could however be linked through minority
participations that do not exert influence on the management. At level 0 we have the headquarter of
the MNC, whereas at different levels of distance from the headquarter we have affiliates located in the
home economy or in host economies.
Figure 1: The hierarchical structure of a MNC, source: Altomonte and Rungi (2011)
The source of my data is Orbis by Bureau Van Dijk that reports financial accounts and ownership
linkages for more than 80 million companies operating worldwide. What I eventually obtain, once
adopting the definition of control and of MNC as above, is a dataset of 3886 headquarters of
Multinational Corporations involved in the extractive sector with a total of 146,459 affiliates
1
Following this rule joint ventures, whose control is shared equally, are considered as affiliates of all the legal
entities owning a stake above 25.01%.
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
worldwide. Conventionally, we will take the country where the headquarter is located as the home
economy of the Multinational Corporation and the countries where affiliates are located as host
economies. Applying our routine to the original database by Bureau Van Dijk, we include only
headquarters that operates in the extractive sector according to NACE rev. 2 nomenclature. In Table 2
I report the sample coverage of headquarters and affiliates by 2-digit industries of the extractive sector.
A more detailed disaggregation is however possible once taking into account 4-digit industries and I
will exploit once introducing estimation strategies.
Table 2: Coverage of the sample: headquarters and affiliates, own elaboration on the basis of Orbis by
Bureau Van Dijk
NACE
Denomination
rev.
2
section
5 Mining of coal and lignite
6 Extraction of crude petroleum and
gas
7 Mining of metal ores
8 Other mining and quarrying
9 Mining support service activities
Total
N.
N.
headquarters affiliates
269
15,030
878
16,015
698
11,807
1094
62,856
947
40,751
3886
146,459
For a comprehensive study of the investment strategies of Corporations operating in the extractive
sector, we have also included information about affiliates operating in every other industry, whether
extractive, manufacturing or service. That has allowed us to build a variable for the empirical analysis
that catches the verticalization strategy (FDI in the same extractive sector) or the diversification
strategy (FDI in industries different from the extractive) of the Corporation as a whole.
At first sight, from our data, we can say that Corporations operating in the extractive sector have rather
complex hierarchical structures, with a mean number of affiliates around 40, while Corporations
operating in manufacturing industries, for example, have on average only 4 affiliates Moreover, the
size distribution (by affiliates) of the extractive Corporations, as in other industries, is rather skewed
since the median number of affiliates is usually much larger than the average, meaning that there are
many Corporations with very complex structures and maximum number of affiliates above 1000, but
also few small corporations with only one or two affiliates. The average complexity of the hierarchical
structure seems however to be peculiar of the extractive sector, with no correspondence in the
manufacturing and services industries, where very complex Corporations are the exception and not the
rule. In Table 3 and Table 4 I report the geographic coverage of the extractive sample, first of
headquarters and then of affiliates.
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
Table 3: Geography of Corporations' headquarters
Home economy
N. headquarters
OECD
2623
of which:
EU 27
960
US
628
emerging economies
1263
of which:
Russia
791
China
63
Africa
38
Middle East
34
Table 4: Geography of extractive affiliates
Host economy
OECD
N. affiliates
83,399
of which:
EU 27
27,174
US
38,872
emerging economies
88,057
of which:
Russia
16,165
China
13,774
Africa
3,890
Middle East
761
South America
17,081
The majority of headquarters is located in advanced economies, while the affiliates are equally
distributed among advanced and developing economies. Among emerging economies, Russia is both
an important hosting country for affiliates and also the home economy for many headquarters.
However, when looking at relative shares of revenues, Russian output accounts for 13.55% of the total
and China for 11%, while affiliates located in the European Union catch almost the 39% of the total
extractive market.
In Figure 2 I plot trends of state ownership in energy and raw materials industries in the period 20012010. State-owned energy production is increasing through time and it reaches almost 30% of the total
in 2006 and 2009. State-owned production in raw materials is less concentrated but however
increasing, reaching a 17.23% share of the total market in 2006.
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
Figure 2: State ownership and share of revenues in 2001-2010, own elaboration on Orbis by Bureau Van
Dijk
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Energy
Raw materials
Energy trend
Raw materials trend
Empirical strategy and results
In order to verify if and how investment strategies are differently correlated by type of property, I have
performed a probit estimation where the dependent variable is a bynary variable called
specific
for each investment operation i and year t. Two possible outcomes are therefore possible for the
investment strategy: the investment is made by an International Corporation (
) or the
2
investment is made by a National Corporation (
). Hence, a set Xit of independent variables is
identified to influence the outcome so that:
where the vector β measures the influence of the independent variables on the outcome of
internationalization of the investment. The reference model is hence:
As dependent variables I have included controls for what kind of vertical strategy they have been
engaged in until the decision of the investment:
is the number of already established coaffiliates in the same extractive sector at time t,
is the number of already established
2
Extending the definition adopted by the US Energy Information Administration (EIA) only for oil companies, I
define here a National Corporation (NC) operating in the extractive industry as a corporation fully or in the
majority owned by a national government (above 25.01%, see paragraph 3).
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
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co-affiliates in downstream industries at time t. Further, I am able to control specifically for the size
of the newly-founded (domestic of foreign) affiliate in terms of fixed assets (
), for its capital
productivity (
, calculated as the ratio of profit on total fixed assets), for the investment's
capital intensity (
, calculated as the ratio of fixed assets on employment) and its financial
constraint (
). Time fixed effects are included in the estimation strategy ( ) for the entire
period of analysis, from 2001 to 2010, in order to control for time-specific shocks that can determine
the final outcome. Results are reported in Table 5, separately for investment in raw materials and
energy.
Table 5: Investment strategy along the value chain
Raw materials
Probit (I)
Dependent variable:
Investment
by
Corporations=1
Energy
Probit (II)
International
Upstream
-118***
-.116***
(.017)
(.019)
Downstream
-120*
.104*
(.067)
(.058)
company size
.127***
.071**
(.035)
(.032)
.108*
.274***
log of capital productivity
(.058)
(.044)
.038
.143***
(.040)
(.036)
-.004**
.009***
(.002)
(.002)
-2.815***
-3.193***
(.211)
(.304)
8,363
2,180
Time fixed effects
Yes
Yes
Pseudo R-squared
.2186
.2519
-238.97
-301.35
133.72
202.95
capital intensity
financial constraint
Constant
Observations
Log likelihood
LR chi-2
*,**,*** stand respectively for significance at 90%, 95% and 99%. Standard errors are robust to heteroskedasticity
A first duality emerges for both raw materials and energy investment operations between International
and National Corporations: the former are less likely to concentrate their efforts in the verticalization
of their supply chain through investment in upstream activities if confronted with NC. We have a
lower probability that IC invest in upstream activities, whether they operate in the raw materials
industry or in the energy industry. This result is consistent with several studies (see for example World
Bank, 2011) that showed how National Corporations in the oil sector are increasingly gaining upon
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minerals; identification & assessment of major future risks for tension and conflict
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Dissemination Level: PU
traditional so-called Supermajors in the production and exploitation of national reserves. In this case
we can confirm a similar trend for the whole extractive sector, including raw materials.
On the other hand, a difference emerges between investment in raw materials and energy when
considering the position in downstream activities: in the first case NC invest less than IC in sectors
different from their core extractive activity, while international energy companies are more able to
relocate in secondary activities such as refining, transport or distribution. The raw materials industry is
becoming more dominated by state-owned National Corporation in all stages of the production
process, while the energy industry is becoming polarized by NC more and more involved in
downstream activities and IC are actively gaining ground in production and exploitation of their own
reserves.
We already know, however, that the majority of revenues in the industry is privately owned (Figure 2),
notwithstanding a positive trend for state-owned companies. Also, the increase of investment
operations by National Corporations is not fully reflected in a comparable increasing trend of stateowned revenues in the same period. Indeed, if we look at the results regarding investment size and at
its profitability in Table 5, we observe that operations by International Corporations are on average
bigger and more productive, i.e. they provide a higher share or revenues with respect to the ones by
National Corporations. From this point of view, we can conclude that even if NCs are investing in a
larger number of activities, ICs are concentrating on activities with a higher value added, where also a
higher level of initial investment is required as showed by the coefficient of capital intensity.
As for the financial solidity of the investment, affiliates to NCs extracting raw materials seem to be
more solvent than affiliates to ICs in the same sector, while the opposite is true in the case of energy
affiliates.
A case study: Gazprom's value chain
Production
The corporation is vertically integrated with 1,479 affiliates3 (1,286 in Russia and 193 abroad)
engaged in six business segments of gas and oil (geological exploration, production, transportation,
storage, processing and marketing), electric power and heat energy production and distribution (13,1%
of total revenues), and finance activities.
Gazprom is a state-owned monopolistic incumbent on Russian gas market controlling 78% of national
production and it is the only authorized supplier of natural gas on the domestic market. Local
industrial barriers to entry are exceptionally high not only due to scale economies of extraction and
research and development costs, but also because national regulatory environment is particularly
restrictive for new potential domestic and foreign players.
The company sells over 262.5 billion cubic meters of its natural gas (52.7% of total production) in
Russia, 67.7 billion cubic meters of gas in other former Soviet Union countries (13.6% of production)
and 167.6 billion cubic meters in other foreign countries (33.7% of production).
3
Data on affiliates are elaborated on the basis of the Ownership Database by Bureau Van Djik, as from
paragraph 3, while the source for more detailed data about reserves, production and other stages of the value
chain is Datamonitor
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
Figure 3: Geography of gas sales (volumes, billion cubic meters), source: DataMonitor
other
foreign
countries
34%
Russian
Federation
53%
other FSU
countries
13%
Reserves
In 2010 the corporation registered natural gas reserves of 33.1 trillion cubic meters (tcm) and 3.0
billion tons of oil and condensate, with respectively a yearly increase of 547.7 billion cubic meters
(bcm) and 115.5 billion cubic meters after geologic exploration. Domestically, Gazprom accounts for
78% of natural gas production in 2010, with its 508.6 billion cubic meters. Over 90% of gas reserves
are concentrated in only 14 largest fields4.
Transportation and storage
Considering all trunk pipelines, compressor stations and underground gas storage facilities (USGF),
Gazprom owns the world's largest gas long-distance transportation system of natural gas to consumers
both in Russia and abroad, which measured 161.7 thousand km only in terms of trunk pipelines in
2010. The network average distance covered was 2,592 kilometers to Russian consumers and 3,262
km for foreign consumers. The corporation has 215 compressor stations for gas transportation while
the installed capacity of the company's 3,659 gas pumping units was 42,100 megawatts (MW).
Storage capacity on aggregate has been of 65.4 billion cubic meters in 2010 thanks to 25 underground
gas storage facilities (UGSF).
Refining and manufacturing
The corporation refining activities are owned by GazpromNeft, a branch with several subaffiliates that
can also rely on processing agreements signed with various external contractors for the outsourcing of
the refining process. At the end of 2010, aggregate hydrocarbon processing and refining capacity
comprised 52.5 billion cubic meters of natural gas and 75.4 million tons of oil and gas condensate.
Other activities: electricity and heat generation
The corporation controls several affiliates involved in electricity and heat generation: Mosenergo
(11,900 MW), OGK-2 (8,707 MW), OGK-6 (9,162 MW), Kaunasskaya teplofikatsionnaya
elektrostantsiya in Lithuania (170 MW), OAO TGK-1 (6,266 MW). For its total generating capacity,
Gazprom can be considered the third territorial generating company in Russia.
4
Urengoyskoye, Yamburgskoye, Zapolyarnoye, Medvezhye, Komsomolskoye, Yamsoveyskoye,
Orenburgskoye, Astrakhanskoye, YuzhnoRusskoye, Bovanenkovskoye, Kharasaveyskoye, Shtokmanovskoye,
Severo-Kamennomysskoye and Kamennomysskoye.
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minerals; identification & assessment of major future risks for tension and conflict
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Other activities: banking and finance
In order to develop an internal capital market to sustain its investment strategies, the corporation owns
116 affiliates at home and 19 affiliates abroad (Netherlands, UK, USA, Switzerland, Lithuania,
Belarus) registered as banking or finance activities for a total of over 512 million RUB in 2010.
Profitability along the value chain
To measure profitability by stage of the value chain we aggregate affiliates' EBIT (Earnings Before
Interest and Taxes) by four main activities in the period 2001-2010: extraction (oil & gas, production
and exploration); refining and manufacturing; transportation, sales and other services (including
distribution); banking and finance. EBIT is converted in Russian rubles when the affiliates are located
abroad5.
In Figure 4 we report the relative importance (in % on total) of the main activities in terms of
profitability in time series. From the beginning of the period, downstream activities were the most
profitable, covering more than 73% of corporation’s EBIT. Notwithstanding a certain degree of
volatility along the period, with the minimum in 2010 at 53.2%, services such as transportation,
distribution and marketing represented always the main source of profits within the vertical corporate
value chain. On average, however, the extractive activities accounted for about 30% of total profits
throughout the period and it is always the second source of Gazprom's profits, while refining and
manufacturing gave back a mere 6% on average. Group-level profits in banking and finance activities
have been relatively low, deriving mainly from investment in the real estate industry in Russia and
consisting essentially of credit supporting activities to energy core activities when located abroad.
Figure 4: Profitability (EBIT) by stage of the value chain (2001-2010), own elaboration on Bureau Van
Dijk's data
100%
1.0
1.8
0.8
0.3
0.9
1.5
1.3
60.4
68.9
68.0
61.2
58.8
59.5
2.2
2.8
4.6
11.1
25.8
29.5
35.1
2003
2004
2005
6.5
3.1
2.9
61.0
60.7
53.2
10.5
4.7
7.5
28.6
28.7
27.8
28.8
2006
2007
2008
2009
80%
60%
73.4
40%
20%
3.3
4.4
21.2
34.6
5.8
38.1
0%
2001
2002
extraction
refining & manufacturing
transportation, sales & other services
banking and finance
2010
However, Gazprom seems to rely too much on exporting activities to cover losses registered on the
national market. Indeed, while data are available on volumes as in Figure 3, the corporation doesn't
provide disclosure of a more detailed geographical composition of revenues. We can however infer a
5
Exchange rate registered at balance sheet’s closing date for each foreign affiliate.
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duality of performance on national and international markets, first looking at the evolution of natural
gas prices and then assessing the entity of single affiliates' losses by sector of activities from our data.
Figure 5: Domestic and international price evolution of natural gas in Russia, own elaboration, source
IEA (2011)
800
600
400
0
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
200
Russian natural gas price ( $ per 1000 cubic meters)
on international markets
domestic industrial consumer
In Figure 5, we can observe an important gap between the evolution of natural gas prices on
international markets, volatile but strictly increasing, and the ten-year trend of prices for industrial
consumers. Even if the latter has more than doubled since September 2001, on international markets
the figure in September 2001 has been fourfold. Several studies (for example Ahrend, 2004) had
already underlined the high incidence of energy-related subsidies on the domestic market, a
phenomenon already present in early 1990s from the beginning of transition to market, and the
relevance it has in terms of fiscal and macroeconomic consequences. Essentially, Russia had the
possibility for delaying industrial reforms, both in the extractive sector and in other resource-intensive
industries, thanks to abundance of energy and raw materials and a state management of natural
resources. Energy-dependent CSI countries were quickly forced to import at prices not different from
those of world markets and the increasing trend of these latest, as we can see from Figure 5, allowed a
further postponement of industrial restructuring, covering losses in home activities with revenues
raised abroad. Indeed, especially in trasport and distribution activities, more than 185 Russian
affiliates belonging to the corporation were at loss even at the end of 2010 for a total of over 12
million RUB. The most profitable activity is also the most problematic on home markets because the
government regulates wholesale prices which Gazprom applies to the major portion of domestic sales,
tariffs for trunk pipeline transportation services provided to independent producers, tariffs for
transportation services via gas distribution networks, and charges for procurement and sale services, as
well as retail prices for gas. In addition, despite the recent liberalization, the state is still regulating part
of electricity tariffs, which account for a relatively high source of profits for Gazprom secondary
activities.
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Figure 6: Activities at loss in home affiliates by stage of the value chain (th. RUB), own elaboration on
Bureau Van Djik’s data
transportation, sales and other services
refining & manufacturing
extractive
finance
-14000 -12000 -10000 -8000
-6000
-4000
-2000
0
The problem however seems to be in the reallocation of resources within the group, since besides
activities at losses, highly liquid affiliates are present at the same time, with cash flows not reinvested
in the industrial restructuring of less profitable segments. In Figure 7 we report the (weighted) average
liquidity ratios6 of affiliates in both upstream and downstream core activities, observing that they have
substantially increased throughout the period following the trend dictated by the commodity boom
since 2003, with an exceptional increase in 2007 confirmed also in 2008 and 2009. Reduced demand
expectations after the recent world financial crisis affecting energy consuming countries could have a
role in explaining such a level of frozen liquidity: the company is probably adopting a "wait and see"
investment strategy, looking forward to better future prospects.
Figure 7: Liquidity ratio along the value chain, 2001-2010. Own elaboration, source: Bureau Van Dijk's
database
3
2.5
2
1.5
1
0.5
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
extractive
refining & manufacturing
transportation, sales & other services
Conclusions
The last decade has seen a new surge of both trade and foreign direct investment in natural resources.
A phenomenon that is linked both to the emergence of newly industrialized countries that demand
energy and raw materials as intermediate inputs and a boost to the creation of global value chains
6
Liquidity ratio is calculated as: (Current Assets - Nominal Value of Stocks)/ Current Liabilities. The ratio is
affiliate-specific and weighted by its share of group's revenues before aggregation by step of the value chain.
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across national borders, with networks of firms increasingly engaged in several stages of production
according to location comparative advantages and firm-specific competitive advantages.
The availability of microdata on ownership type and location of worldwide affiliates has allowed us to
explore the different investment strategies along the value chains by corporations of the extractive
industry (raw materials, energy and coal) and their patterns of investment performance. What we
found was that International Corporations, both in energy and raw materials industries, are more able
to relocate in downstream activities such as refining, manufacturing, transport and distribution, while
on the other hand National Corporations are more able to position themselves in upstream activities.
However, downstream activities still represent the stages of the production process where most of the
value added is raised. Indeed, while the role of state-owned National Corporations increased relatively
in the last decade in terms of revenues share on the industry total, investment operations by
International Corporations are on average bigger and more profitable, i.e. they still provide a higher
share of revenues with respect to the ones by National Corporations. These results are robust also after
controlling for the commodities boom of the period 2003-2008.
As an interesting case of National Corporation operating in the energy industry, Gazprom shows a
duality of performance of investment at home and abroad, in downstream and upstream activities,
already observed from aggregate data in the empirical strategy. Notwithstanding its vertical integration
from extraction to distribution and its acquisitions abroad in the latest years, the corporation's
profitability is still located in downstream activities, whether at home or abroad, where most of the
rents are raised. At the same time, some domestic affiliates involved in the transportation, storage and
sales of natural gas still operate at loss reflecting the dual pricing of the gas market, where domestic
industrial consumers enjoy a lower price if confronted with foreign consumers and the extra-profits
gained abroad are used by the corporation to cover non-profitable branches on the domestic market.
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D3.1: Analysis of current & recent practices & strategies of key actors in oil, gas &
minerals; identification & assessment of major future risks for tension and conflict
Grant Agreement: 224516
Dissemination Level: PU
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