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Argentina pays price for asset grab nationalisation

The past 12 months show that nationalisation of YPF has been disastrous for both the company and the country

The political theatre was everything Cristina Fernández de Kirchner could have hoped for. Standing under a smiling portrait of Eva Peron in April last year, the Argentine president announced she was nationalising 51% of Repsol's majority stake in YPF. The company, Argentina's largest, had been privatised in the 1990s as part of the country's neoliberal economic reforms. Fernández was taking it back in the name of the Argentine people. Repsol's Spanish executives, who were locked out of YPF's headquarters as Fernández, hinting at the countries' colonial past, accused them of "plundering" the company, were forced to beat a path back to Madrid. Jubilant crowds celebrated in the streets, waving YPF flags.

A year later, the reality of the YPF nationalisation is sinking in and there is little to cheer about. The nationalisation may have been canny politics. But it has not helped address Argentina's energy woes.

Fernández repeatedly blamed under-investment from Repsol-controlled YPF and other foreign investors for Argentina's declining domestic oil and gas production. In the 2000s Argentina flipped from a net oil and gas exporter to a net importer, and an increasingly costly fuel import bill has strained the country's finances. Having a national energy champion, Fernández argued, would help lead the country back to self-sufficiency.

But oil and gas production continues to decline and the fuel-import bill continues to rise. Oil output fell 4% from 584,000 barrels a day (b/d) in 2011 to 560,000 b/d in 2012, according to Argentine government data. And the slide has continued into 2013, with output averaging just 483,000 b/d in the first quarter of the year after flooding shut in a significant amount of production. Natural gas production has also continued to drop, falling from 45.5 billion cubic metres (cm) in 2011 to 44.1bn cm in 2012. Significant year-on-year declines were again seen in the early months of this year.

Buying the fuel to replace this lost output is getting expensive. Fernández complained of a $9.4bn import bill in 2011, but the cost of imports rose to nearly $10.3bn in 2012 and will almost certainly rise again this year. Flooding knocked out part of YPF's La Plata refinery and the company has said it will have to spend an extra $400m importing fuel to make up for the lost production. Analysts say that Argentina may have to pay as much as $15bn for energy imports this year, though a fall in international crude prices could provide some relief. Rising fuel imports have helped drain the country's central bank reserves, which are now less than $40 billion, their lowest level in more than six years.

The nationalisation has also left YPF in a weakened position.  Fernández put Miguel Galuccio, a widely respected former Schlumberger executive, in charge of the newly nationalised company. Galuccio is a capable chief executive with a deep knowledge of the industry. He has done about as well as could be expected. But he was dealt a difficult hand by the government.

In line with the government's expectations, YPF stepped up investment in 2012. Spending rose by 25% to 16.49bn pesos ($3.19bn), but it has little to show for it so far. Oil production ticked up by 2.2% to 227,400 b/d. But natural gas and natural gas liquids output were both down, and overall production fell slightly from 488,000 barrels of oil equivalent a day (boe/d) to 485,000 boe/d. Although the company nearly doubled the number of active drilling rigs it deployed over the course of the year, these yielded new reserves that were a full quarter smaller than in 2011.

YPF's net income fell 12.2% from 4.4bn pesos to 3.9bn pesos. Had the government not allowed domestic oil prices to rise from an average of $59.50 a barrel in 2011 to $70/b in 2012, the company's profits would have slipped further.

The value of YPF's New York-listed shares have plummeted by nearly 70% since the start of 2012, when rumours of the nationalisation surfaced, falling from as much as $39.27 a share to $12.55 a share on 22 April.

Ultimately, the country's energy fortunes will turn on its ability to develop the huge Vaca Muerta shale. Argentina's mature oil- and gasfields have peaked and are in irreversible decline. That is why the country's energy production is declining, not underinvestment. But the Vaca Muerta shale has offered a potential lifeline for the industry.

An analysis from Ryder Scott carried out for Repsol found that just a third of the shale play held nearly 23bn boe, about three quarters of which is thought to be liquids-rich, similar to the Eagle Ford and Bakken shales in the US. Repsol said before the nationalisation that the Vaca Muerta could return Argentina to energy self-sufficiency within a decade.

As word got out about the vast potential of the Vaca Muerta shale, it was for a time in 2011 the hottest play outside the US. Shell, ExxonMobil, Total and a host of other international players grabbed piled into the play. Repsol has said that it signed at least 15 memoranda of understanding (MoUs) to invest in Vaca Muerta with international companies such as Chevron, Statoil, ConocoPhillips, Anadarko and Sinopec. Some of these MoUs were about to become full-fledged deals before the YPF nationalisation.

But foreign investor interest in Argentina's shale patch has run dry. YPF has signed MoUs with Chevron and the Argentine company Bridas, but neither deal has been finalised. A year of investor road shows and high-level delegations from YPF and the government to the US, Europe, China and beyond touting essentially the same development plan laid out by Repsol has yielded nothing. YPF can lead development of Vaca Muerta, but it needs foreign technology and investment to do so. Galuccio admitted in March that YPF would have to scale back its shale drilling plans in 2013.

The government clearly underestimated the disastrous affect the nationalisation would have on investor interest in the country. The energy ministry's own forecasts paint a bleak picture for the future of the industry. Oil production is forecast to fall from 552,000 b/d in 2013 to 470,000 b/d in 2016, a decline of 15%. Gas output is facing an even steeper fall, with production forecast to drop from 39.7bn cm in 2013 to 31.3bn cm.

The government could yet rekindle investor interest.  A first step would be to negotiate a settlement with Repsol. The industry has learned to live with resource nationalism, and there are plenty of examples of countries that have continued to attract foreign investment after sticky expropriations. But foreign investors have been taken aback by the Argentine government's unwillingness to talk with Repsol about compensation for its YPF stake. The Spanish company's threat of legal action against companies that sign joint agreements with YPF also appears to have scared off some investors.  

A widely-cited report surfaced in the Argentine press in March that a deal with Repsol was on the table and the sides were close to an agreement. That deal, according to the reports, would see Repsol and YPF create a Vaca Muerta-focused joint venture company, with the value of acreage injected into the new company constituting repayment to Repsol for its stake in YPF. The reports added that Repsol chief executive Antonio Brufau had been left out of the talks, and he would not be allowed to play a role in the new company.

The idea that a multi-billion dollar deal could be negotiated without the knowledge or consent of the company's chief executive is ridiculous. Repsol rubbished the premise of the reported deal and said no such negotiations had taken place. It added, though, that it still preferred a negotiated settlement with the government over a protracted international arbitration process.

Although Repsol and its investors are unlikely to ever accept the kind of deal that surfaced in the newspapers, the rumours may at least show that the penny has dropped for the government. For the sake of its energy sector and economy, Argentina must settle the Repsol YPF issue and begin restoring some credibility. 

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