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Energy crisis provokes Argentine YPF expropriation
BUENOS AIRES, Argentina — Less than a decade ago, Argentina was an exporter of oil and natural gas. Now the government has to spend billions of dollars to import fuel. This dramatic reversal of fortune is why Argentina, already a global financial rogue after its historic debt default, is willing to risk becoming even more of a pariah by seizing control of its leading oil company from Spanish hands, analysts say.
President Cristina Fernandez infuriated Spain, its largest foreign investor, but elated many Argentines by expropriating Repsol YPF SA’s majority stake in Argentina’s formerly state-owned YPF energy company. Only two months earlier, Repsol YPF had upped its estimate for the shale oil and gas it found in Argentina to nearly 23 billion barrels, enough to double the country’s output in a decade. But the Spanish company said it would cost US$25 billion a year to develop, and warned that Argentina would need to overhaul its energy policy to attract the necessary investment.
Instead, Fernandez simply seized the company, giving her government access to billions of dollars’ worth of cash, enough energy to answer domestic demand in the short term, and potentially even solving Argentina’s chronic money woes in the future.
She accused Repsol of draining YPF since gaining control in the 1990s, underinvesting in its oil and gas fields and failing to keep pace with the needs of Argentina's growing economy even as it paid huge dividends to shareholders. Repsol blames Argentina’s ever-changing mix of subsidies, price caps and export taxes for depressing production as the country’s demand for energy soared since 2003, when her husband, President Nestor Kirchner, came to power.
Both are partly right, says Eduardo Fernandez, an independent consultant and former fuels director in Argentina's energy ministry. The problem was a government approved practice of allowing Repsol to use profits to pay shareholder dividends rather than invest that money in the company’s future. “That led to a lack of reinvestment in utilities, little exploration and dwindling reserves, as oil fields dried up and productivity fell,” Fernandez said.
Argentine oil production plunged 22 per cent from 2000 to 2010, even as demand surged more than 40 per cent, according to data from the Argentine Oil and Gas Institute and the Energy Ministry compiled by a former energy secretary, Emilio Apud.
Argentina’s production has fallen so low that the government now spends billions of dollars a year on expensive imported fuels that it provides at a loss to companies and consumers. Cheap energy helped Argentines rebuild after a world-record debt default and devaluation in 2002 left the economy in ruins.
It makes less sense now, after nearly a decade of growth, but letting consumer energy prices rise too quickly could cause already high inflation to spiral, and provoke popular discontent in a country where pot-banging street protests have driven other presidents from office.
The energy subsidies spiked by 63 per cent in 2010 to US$5.6 billion, according to a former energy secretary, Alieto Guadagni. At the time, oil traded at about US$80 a barrel internationally. With oil now going for more than US$100 a barrel, this year's bill could be nearly US$10 billion, even as the economy cools with less demand from China and Brazil.
Fernandez squarely blamed a Repose’s lack of investment for a US$3 billion energy deficit when she announced the takeover. “The worst thing is that if we don’t do this, we’ll turn into an unsustainable country, because of its business policies and not because of a lack of resources,” she said, noting that Argentina holds the world’s third largest reserves of shale oil and gas, after China and the United States — a resource that remains entirely untapped.
“Our model is one of recovering our sovereignty,” she added, noting that the company will not be state-owned, but run as a mixed entity, able to bring in new private shareholders. But rather than raise fuel prices that are now about five times lower than in Brazil and Uruguay, her expropriation measure insists that oil companies must serve Argentines first, even if it means selling the energy they produce at a loss.
In the lead up to the nationalisation, as prospects for quick returns diminished in Argentina, Repsol YPF sought to protect its shareholders by diversifying and making long-term investments elsewhere in Latin America. Other oil companies did the same. With oil capped at US$55 a barrel in Argentina while trading above US$100 on the world market, they followed the money, Eduardo Fernandez said.
“So there’s no interest in making investments in Argentina when in other countries they’re paying in full. So Repsol went to Brazil, Trinidad and Tobago, Bolivia. All of this provoked the disinvestment,” he said. Repos President Antonio Brufau said Repsol invested billions of dollars in Argentina, and tried to head off the expropriation with promises to spend more. But by then, the Argentines were already determined to regain control. All Brufau could do in the end was demand US$10.5 billion, which he said was the market price of the shares Argentina seized.
Deputy Economy Minister Axel Keillor accused Repsol of hiding the true value of its Argentine unit, and said a thorough review of its books now that he’s in control of the company’s offices in Buenos Aires will affect whatever compensation is eventually paid.
“These morons think that the government is stupid enough to buy everything” that Repsol demands, the 40-year-old Kicillof said, sporting an open shirt and long, Elvis-like sideburns in a heated senate session this week. Latin America’s third-biggest economy hasn’t been able to tap international debt markets since its default, but has been able to manage with dollars rolling in from taxes on grains, nationalising private pension funds and the flagship airline, and by tapping central bank reserves.
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