Argentina oil reclamation: Winners and losers

A woman holds an Argentine national flag in front of the presidential palace after Argentine President Cristina Fernandez de Kirchner announced that oil company YPF, controlled by Spain's Repsol, is subject to expropriation and that a bill being introduced would give the state a 51 percent share, in Buenos Aires on April 16, 2012. (AFP Photo / Daniel Garcia)
Is it theft on a grand scale or simply the legitimate re-nationalization of a country’s resources for the benefit of the people?

Argentina’s decision to take control of the country’s largest oil company YPF has created a schism in the international community—with winners and losers falling into place along the divide. 

YPF, Argentina’s largest oil company, was privatized in 1993 and purchased at the time by Spain’s Repsol which up until this latest move owned 57% of the company.  Claiming Repsol had not lived up to an agreement to invest in the infrastructure of the country, Argentina’s President Christina Fernandez announced her intentions of reclaiming the energy company. 

The new ownership structure would give the federal government 51% control of YPF, with the remaining 49% of the company divided amongst the energy producing governments of the country.  Repsol’s controlling interest in the company under this formula would be reduced to a paltry 6%.

Repsol is angered by the move calling it an “illegitimate and unjustifiable act.”  In recent weeks talks about the possibility of nationalization have been driving stocks for YPF down, but still a conservative estimate of the value of the company is more than $13 billion. As compensation for the nationalization of their privately held subsidiary, Repsol has asked for a sum of around $10.5 billion, but it is unlikely that the company will receive that amount if anything at all. 

Repsol may even be fined by the Argentinean government for environmental damage to the country’s interior—meaning Respol might have to pay Argentina for the government takeover. The company has also maintained that the move by President Fernandez is primarily a political one, to try and gain public support amidst a continuing energy crisis in Argentina. 

Also, under the guidance of Repsol, YPF recently discovered vast amounts of shale rock oil reserves in the Vaca Muerta basin.  This important find puts Argentina on the map as the holder of the world’s third largest shale gas reserves behind China and the United States.  Repsol believes the current nationalization movement is nothing more than an obvious grasp for control of this major discovery.  Having been set up through privatization in the 1990’s, then allowed to develop the company for 20 years; the first “loser” in this complicated and controversial process would have to be Repsol.

With Respol for all practical purposes out of the picture, YPF faces a logistical challenge in extracting energy resources from the Vaca Muerta basin.  It has been estimated that it will cost the Argentinean government around $40 billion to build the necessary infrastructure to properly extract the resources from the newly discovered shale gas reservoir.  It has also been pointed out that Argentina only has approximately $47 billion in its total financial reserves.

Since the government has responsibilities other than energy resource extraction, it is generally accepted that the country cannot mine the shale gas region without outside corporate assistance.  In this realm companies with an already established foothold in Argentina may stand to gain considerably from nationalization. 

One company in particular, China’s Sinopec, was reportedly already in talks with YPF before the nationalization venture, to aid in developing shale gas extraction technology.

Adding fuel to the fire, though still maintaining its position as Latin America’s third largest economy, Argentina’s financial situation has been quite precarious in the past decade.  In 2001 the country defaulted on its international debt obligations, but the government managed to surge out of this distress with an annual average GDP growth of 8%.  Energy demand during this time period began to surge as well, but production began to decline.

In 2011, the balance between gross import and exportation of energy resources in Argentina flip-flopped with the government bringing in more gas and oil than it was sending out.  This was not because of a lack of resources, but rather the inability to efficiently keep up with the demand.  The need to import oil and meet with the population demand was proving to be too much of a financial burden on the Argentine government.

Regaining control of her country’s energy resources has been a priority of President Fernandez for her entire term and even throughout the term of her predecessor, her late husband and former president Nestor Kirchner. 

In a statement in supporting her decision Fernandez said, “We are the only country in Latin America, and I would say in practically the entire world, that doesn't manage its own natural resources."

But while the Kirchner administration is hailing this move as an opportunity to regain sovereignty, the world community has been publicly condemning the actions. 

Spain of course has an interest in the outcome as it is home to Repsol which is at the center of the controversy.  The Spanish Foreign Minister has announced ‘forceful retaliation’ should the process continue, although he would not elaborate on what measures would be taken.  

Also, the European commission has announced support of Spain and even warned that this move would undermine investor confidence in Argentina.  Even Mexico’s President Felipe Calderon has weighed in on the topic saying Argentina ‘s act was, “not very responsible and not very rational.”

In a show of solidarity, arguably because the two countries have relatable experience in the realm of nationalization of the oil industry, Venezuela has come out in support of Argentina.  The Venezuelan Foreign Ministry said, “Venezuela puts all its technical, operational, legal and political experience of Petroleos de Venezuela at the disposition of the government of Argentina and its people to strengthen the state oil sector."  In 2001 President Hugo Chavez of Venezuela also “re-nationalized” his country’s oil industry and claimed a percentages of the profits will  be diverted to social welfare programs.  The move invoked a strike in the oil industry, an attempted coup and raised the national unemployment rate to nearly 20%.  Venezuela’s oil production also suffered as the international energy giants withdrew their technology from the region, causing a deficiency in the country’s ability to recover resources.   

Whether the people of Argentina “win” in this process remains to be seen, as critics claim it will weaken foreign interest in the country.  After all, what is the incentive for investment in Argentina when the precedent has been set that it will only be taken away from you when it becomes successful?  If there is less interest in investing in Argentina as a whole, then the country will continue to suffer and possibly plunge even deeper into a financial sinkhole. 

Also, there are bigger challenges ahead if Spain, the EU and like-minded entities follow through on their claims to bring punitive sanctions and embargoes against Argentina. However, with proper management of the world’s third largest shale gas reserves, there is a possibility that the Argentinean government can turn things around, lower energy costs for its citizens and turn a profit to provide further infrastructure gains for the country.