Shale Gas Wars: Argentina Fracks Repsol, Kirchner Takes YPF

4/17/2012

In a controversial move that promises to rattle markets, the government of Argentina announced the re-nationalization of YPF, a major subsidiary of Spain’s Repsol.  Cristina Fernandez de Kirchner (CFK), Argentina’s president, accused Repsol of failing to keep up with investment promises, while funneling profits out of the country via dividend payments.

Repsol, on the other hand, responded by saying they would sue Argentina at the World Bank’s arbitration court, looking to recover €8 billion.  Antonio Brufau, president of Repsol, accused the Kirchner administration of using populism to “cover up the social and economic crisis” currently faced by the South American nation, according to Spanish daily El Pais.  The Spanish oil company suggested the recent discovery of the Vaca Muerta basin, a major shale gas formation that potentially gives Argentina the third largest recoverable natural gas reserves in the world, was behind the expropriation.

CFK announced the expropriation of YPF on Monday via a bill sent to Congress titled “On Argentina’s Hydrocarbon Sovereignty.”  The bill, expected to easily clear the legislative process given Kirchner’s solid majorities, breaks down the expropriation of 51% of YPF Repsol, all of it coming from Respol’s 57% stake, leaving the Spanish company with about 6% of its former subsidiary.

Having declared “hydrocarbon self-sufficiency” to be “in the national interest,” Kirchner explained the shares will be split, 51% of those appropriated staying with the national government, the remaining 49% with oil and gas producing provincial governments.

It’s still unclear how much Repsol will get for its stake, but odds aren’t stacking up for them.  After Repsol President Brufau condemned Argentina for its “illegitimate and unjustifiable act,” the executive said they are looking to get €8 billion for their stake ($10.5 billion).  The Argentine government quickly dismissed that number, with super minister Julio De Vido and deputy finance minister Axel Kicilloff, the administration’s two top officials now in charge of YPF, rejecting Brufau’s price tag.  After determining the value of the company “internally,” the government will charge Repsol for “environmental damages,” further eroding their possible pay-out.

Behind the scenes, there are two major themes guiding this story.  First and foremost is Argentina’s energy crisis, followed closely by the discovery of massive reserves in shale rock in the Argentine mainland.

For the first time in 17 years, Argentina’s energy trade balance came in negative in 2011, Repsol’s data shows.  YPF produced 34% of the country’s oil and 23% of its natural gas last year, yet the company was forced to import (and thus invest aggressively) to make up for an important, and growing, energy shortage.

Argentina’s energy shortage isn’t a problem of reserves but of production, which in turn is causally connected to bad energy policy.  Argentina experienced an unprecedented economic expansion as it came out of the massive 2001-2 default, with GDP growing 8% per year from ’02 to ’10; energy demand, during that time, grew 5% per year.

As demand grew, production lagged due to insufficient investment in improving productivity.  In true populist fashion, the Kirchner administrations have stimulated consumption (via cheap loans for electronics, for example) and subsidized basic goods, like public transportation and energy.  Energy producers like YPF were forced to sell natural gas at capped prices, while any shortfalls had to be compensated by imports paid for by large producers, thus dis-incentivizing investment.  Natural gas prices in Argentina stood at $2.10 per million BTU, compared to $4 to $5 internationally; Bolivia, which exports a lot of nat gas to Argentina, was selling at $10 to $16, according to Repsol.

With imports climbing exponentially since 2009, the trade balance has fallen to negative $3.4 billion, which is made worse by rampant inflation (about 20% annually) and capital flight.  Dividends payments required taking even more dollars out of Argentina.

The second major issue is the Vaca Muerta basin.  With total proven reserves of about 22.8 billion barrels of oil equivalent, the Vaca Muerta basin is one of the most important discoveries of unconventional resources of the last couple of years.  According to the U.S. Energy Information Administration, Argentina ranks third in global shale gas reserves, with 774 trillion cubic feet, trailing only China and the U.S.

The government’s investment plan to develop those assets, and increase production in general, could cost up to $40 billion, according to Barclays; Argentina’s monetary reserves total $47.3 billion, according to Bloomberg.  Clearly, Argentina would have to bring international partners and expertise to actually tap the shale formations via fracking and other unconventional methods.  International service providers like Halliburton and Schlumberger, and other major integrated oil and gas companies (like Chevron, Petrobras, and Sinopec, all already active in Argentina) could benefit from the nationalization.  Rumors that Sinopec is in talks to partner with YPF already surfaced.

To call the situation contentious is to minimize it.  Clearly, there has been a blunt, unilateral move by the Argentine government and the increasingly aggressive, at least rhetorically, Kirchner administration. Cristina Kirchner, and her deceased husband and former president Nestor, were supporters of the privatization of YPF in 1992, when it was signed into law; Repsol got in years later, in 1999.  Twenty years later, the same people are trying to appropriate it, further harming Argentina’s possibilities of normalizing relations with the rest of the world and actually developing and monetizing those shale gas assets.

Forbes.com



The following paragraph is inaccurate “Cristina Kirchner, and her deceased husband and former president Nestor, were the architects of the privatization of YPF, which was sold to Repsol in 1992.”
They were not “the architects”, Nestor K. was governor of the Santa Cruz province, Cristina was elected to congress for the same province. YPF was privatized during Carlos Menem’s administration following a roadmap devised by Minister of Public Services Roberto Dromi, who in an interview defined himself as “chief privatization officer”. Even after the 1992 privatization of YPF Argentina’s government retained control of the company and oil producing provinces like Santa Cruz where minority shareholders.
It wasn’t until 1999 that YPR was sold to Repsol. Cristina and Nestor Kirchner supported the 1992 privatization of YPF but were against the sale to Repsol in 1999.

That’s a valid correction, thanks for pointing it out.
But you still cannot deny the hypocrisy of pushing to privatize the company and then coming out and saying that they wanted to “get it back” all along. It’s the same stuff when you see CFK and other Kirchneristas hating on the Menem administration, when they were completely in favor while in power down in Santa Cruz.
http://www.perfil.com/contenidos/2012/04/16/noticia_0020.html


On a separate tack, Repsol’s Feb 2012 presentation to investors clearly shows that they had no plans to invest in the upstream business in Argentina, that oil production was decreasing and that they expected local prices to raise to “import parity”. Repsol’s main exploitation and exploration plans for 2012 and the future are focused on Libia, Brasil, Peru, Alaska, Russia:
http://docsearch.derrickpetroleum.com/files/20318/Repsol_2012_Investors_Update_Presentation.pdf

Agustino Fontevecchia, Forbes Staff 1 week ago

Indeed, Repsol did reap substantial profits from its stake in YPF, lot’s of them being funneled out of the country via dividends. But, the Kirchner administration was the one that put the Eskenazi family in there, helping them secure loans that were to be paid using dividend payments, meaning it was part of their strategy.
Once again, the main problem is of consistency, of planning, of going in the right direction. In Argentina, it seems like only crisis force people to address problems (look at the train accident of the other month), and that there’s a focus on “doing” that forgets to set a path first. If you just do, how do you know you’re going in the right way?
I hope the Argentine government figures out that effectively managing an oil company is no easy thing, and that now that it’s been expropriated, they manage to do it right.
I doubt it, though, because incentives aren’t aligned correctly in this case. The government wants YPF to increase production and help the country become self-sufficient, which means the return on investment should be positive if they put money to make this happen. At the same time, they’re trying to stimulate consumption and keep basic services cheap via price controls, making it very hard to remain productive in those areas. Gas prices is definitely one of them.