Why resource nationalism makes sense for Kirchner and YPF
Though there are mixed opinions on the nationalisation, there is some sense in the decision
How do you solve a problem like Cristina? Repsol, facing the loss of its shares in YPF to the Argentine government, is justifiably enraged. Billions of dollars that could have been secured by selling its controlling stake in YPF to Chinese investors have gone up in smoke. Its position in Argentina’s 23 billion-barrel Vaca Muerta field, one of the world’s most promising shale discoveries, is gone for good.
Cristina Fernández de Kirchner’s decision to renationalise YPF makes cold political sense. The country’s hydrocarbons deficit is soaring, and it’s easier to blame foreign investors – especially one responsible for almost half of the country’s production – for the mess rather than fix it. A solution would involve a loosening of price controls, which have been in place since the economic crisis at the turn of the century, to encourage more drilling. But that would lift retail prices and annoy voters.
And YPF sailed close to the wind. For months, the government has said it should be re-investing cash into new fields, not spending it on generous dividend payouts.
Meanwhile, Fernández’s popularity has been sinking, along with Argentines’ spending power and the country’s economic well-being. The Spanish firm was a convenient scapegoat. Local opinion supports the nationalisation.
The affair is viewed differently outside Argentina. Some countries in the region, such as Chile and Mexico, a Repsol shareholder, vociferously denounced the move. European media have rallied behind the firm. Spain said Argentina’s president was turning her country into a “pariah state”.
Repsol’s share price has taken a hit – and so will its profits, about a fifth of which came out of Argentina. It’s unlikely to get market value for its YPF stake when an Argentine court decides the price. In retaliation, Repsol has threatened to sue any companies that invest in the renationalised YPF or its assets.
For Argentina and its energy sector, analysts are almost unanimous in saying the expropriation is bad news. Spending in Vaca Muerta will stall, they say. Investors will shun a country with demonstrably higher political risk. Argentina’s hopes of converting its swelling shale oil and gas reserves into domestic riches and, possibly, lucrative exports will wither. That’s what happens when countries play fast and loose with foreign firms, say Repsol’s supporters: the foreign firms go elsewhere.
Back in the real world
Yet that isn’t borne out by events during the past decade. The sorry truth is that petro-nationalism tends to work. Almost all of the world’s biggest oil-producing countries tightly restrict access to their upstreams. Many of them are thriving.
Venezuela may be an exception: its oil output has been sliding ever since Hugo Chávez reversed the country’s apertura. But that decline has as much to do with the thousands of state-company oil workers sacked in 2002 as it does with his petro-nationalist agenda. Caracas’s expropriation of ExxonMobil’s Cerro Negro assets in 2007 has not stopped other multinationals from investing in Venezuela. And a lesson for Repsol: arbitration, years in the making, has left the US company recouping a fraction of the $10bn it originally claimed in compensation.
Nor has Brazil’s decision to put its upstream back in state hands wrecked the fortunes of state-controlled Petrobras (a possible future partner with YPF) or hindered investment in its vast pre-salt upstream. Petrobras remains one of the world’s most admired companies – alongside Norway’s state-controlled Statoil and Saudi Arabia’s Aramco (fully nationalised in 1980). The UK and Canada, which both in recent years angered investors by revising their upstream regimes mid-contract, show that G-8 countries can take their own arbitrary decisions for domestic political reasons.
Argentina cannot hope to repeat the successes of Saudi Arabia or Brazil. But Vaca Muerta and other large shale discoveries still give it clout, and will continue to attract other investors. For oil companies in search of new resources, the lure of big deposits often trumps righteous rhetoric about the rule of law or the sanctity of contracts.
That is the other lesson of the wave of petro-nationalism in the past decade. The most obvious example is Russia, where the arch petro-nationalist, Vladimir Putin, will soon resume the presidency. Back in 2004, the Kremlin’s sham auction of Nefteyugansk, a 1m barrel a day Siberian producer, confirmed the naked expropriation of Yukos’s main asset and its transfer to the state oil company, Rosneft. The sale, dubbed the “scam of the year” by Andrei Illarionov, one of Putin’s economic advisors at the time, capped the destruction of Russia’s largest oil company, whose chief executive was, by then, in prison.
Two years later, state-controlled Gazprom muscled Shell out of its controlling stake in the Sakhalin II liquefied natural gas project, in Russia’s far east. Mammoth fines that were to be levied against Shell for alleged environmental abuses at Sakhalin mysteriously disappeared once the company handed Sakhalin’s keys over to Gazprom.
If all of that feels like history now, it’s because the West’s oil firms are helping to make it so. On 17 April, ExxonMobil signed a wide-ranging deal with Rosneft, giving the US supermajor access to offshore blocks in Russia’s Kara and Black seas – and an entrée for the Russian company to some of ExxonMobil’s North American acreage. The US firm secures the strategic agreement that BP sought, and lost, last year. Rosneft secured an audience on Wall Street and some much-treasured American kudos.
Never mind that Rosneft is a company built on what Yukos shareholders consider to be stolen assets. Igor Sechin, Russia’s deputy prime minister and the man thought to be behind the Yukos affair, said the new deal with ExxonMobil was an opportunity to “throw skeletons out of the closet”. Yukos’s shareholders disagree, and continue to pursue a legal case to claw back some of the value they lost thanks to the Kremlin’s destruction of their company. Some of them wish to hold up ExxonMobil’s deal until the issue is settled.
Yet, as Repsol could soon find out, the moral high ground does not hold much oil. Resource nationalists do. Repsol’s competitors may sympathise with the Spanish firm’s plight, but Vaca Muerta’s trove will be making their eyes water, too. Big oil finds are not easy to come by these days and if Repsol’s demise in Argentina presents an opportunity, they’ll pounce.
For all the huff and puff of the majors when things don’t go their way, they still go back for more. That’s why the petro-bullies, from Moscow to Buenos Aires, keep getting away with it.