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John C.K. Daly

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Argentina Moves Towards Nationalizing YPF Repsol -- Good Nationalist Ploy, Bad Business

Posted: 04/24/2012 2:24 pm

Energy and nationalist politics are a volatile mix.

In the second/third world, multinational energy companies seeking new frontiers prey upon nations' inability to develop indigenous energy resources on their own, and in true capitalist buccaneering spirit and for the benefit of their shareholders, negotiate every possible advantage before beginning operations.

But such tactics are a double-edged sword, as nationalist governments can play the populist card and change the ground rules against the greedy foreign capitalist exploiters and threaten to take over a majority share in such unfair circumstances.

The latest battlefield for such tactics is Argentina, where the government of President Christina Kirchner Fernandez is moving to reclaim the YPF energy company, which was bought by Spanish energy firm Repsol in 1999 as Buenos Aires privatized national assets.

Fernandez announced last week that her government intends to introduce legislation that would expropriate a 51 percent share of YPF and Fernandez tasked the leadership of YPF to her Minister of Planning and Public Investment Julio De Vido.

Hardly surprising, the fireworks have already started, with Argentinean Deputy Economy Minister Axel Kicillof warning that the government will not pay Repsol's demand of roughly $10 billion for YPF, while Spain's Foreign Minister Jose Manuel Garcia Margallo thundered, "The government strenuously condemns the arbitrary decision by the Argentine government," adding that it "breaks the climate of cordiality and friendship that traditionally have marked relations between Argentina and Spain."

So, looking behind the scenes, what is really driving Argentina's seemingly quixotic energy policies?

On the international scene, Argentina is heating up its feud with Britain over the Falkland Islands' (known in Argentina as the Malvinas) offshore hydrocarbon resources, which companies have been investigating over the past several years.

Secondly, last year for the first time since 1994 Argentina again became a net importer of natural gas and oil, a situation hinted at when Fernandez stated that Argentina had to act to reclaim a state oil company because it is the only country in Latin America "that does not manage its natural resources. To continue with this policy of emptying and not investment, Argentina would become a non-viable country because of business policies and not because of lack of resources." Looking at the bottom line, this year Argentina's fuel import bill is set to reach $12 billion, triple the 2010 rate.

And last but not possibly least, because the Spanish economy is on the ropes as one of the weakest in the European Union. Now Repsol, which has spent the past six years rebuilding its reputation after a reserve accounting scandal, is facing the loss of one of its prime assets. In an indication of the company's hammered resources, since January Repsol's share price has plummeted 30.8 percent.

A further possible motivation behind the Argentinean government's action is the fact that, according to the U.S. Energy Information Administration, Argentina is ranked third in the world in terms of potential natural gas shale reserves, behind only the U.S. and China, with an estimated 774 trillion cubic feet (tcf) of gas reserves.

Accordingly, the Fernandez government may see its recent actions in both the Falklands and against Repsol as merely seeking to preserve the nation's assets for the maximum benefit of its citizens.

In the short term, however, it is clear that if Buenos Aires proceeds with its unilateral expropriation of Repsol's YPF stake they can effectively forget raising any foreign capital to develop those 774 tcf of shale gas reserves, much less anything offshore up to and including the waters of the Malvinas, in the unlikely event that Britain surrenders them.

But there are some hints from Buenos Aires that the YPF decision may be seen as a tad hasty, as on 17 April the Argentinean Senate postponed a scheduled discussion on the YPF appropriation legislation. Interestingly enough, it also passed for the moment on Malvinas legislation, as well.

However the issue is resolved, the action has hardly burnished Argentina's international image as a business-friendly environment, and it is safe to say that the country will find it difficult to entice foreign investment in the future into its energy sector. Which means that if the Fernandez government hopes to cut its current $12 billion fuel import bill, its recent actions have effectively left Argentina on its own to develop its energy patrimony.

Cross posted with Oilprice.com

John C.K Daly is the chief analyst at the energy news site Oilprice.com. Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European Studies, University of London.

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