A slippery Argentinian oil raid

Argentina's seizure of a majority stake in its largest oil company is the biggest act of resource nationalism the world has seen in a while, but it's foolhardy, badly timed and won't address the country's problems.

FT.com

Sometimes the most obvious and tempting strategy is the stupidest. That applies to Argentina’s decision to seize a majority share in YPF, its biggest oil company, from Repsol, the Spanish energy group.

It is obvious because Latin American countries have often expropriated the assets of foreign companies, ever since Bolivia did so to Standard Oil in 1937. It is tempting for President Cristina Fernndez because oil is expensive, confidence in her erratic government is low and Repsol is a soft target.

But it is stupid because Fernndez has her tactics wrong. The best time to squeeze foreign companies is when the hard work of investment and exploration is over and a state-owned oil company can reap the benefits. It is not when your country has deep fiscal problems, no access to international capital markets and a looming investment challenge.

Solving Argentina’s energy problems would be difficult for any company, let alone "the most badly run enterprise in the history of the world”, as Francisco Monaldi, a professor at IESA, the Venezuelan business school, describes YPF before the state-owned company was privatised in 1992. It managed to lose money, a perverse achievement for an oil company.

YPF is no doubt in better shape after 13 years, many of them vexed, under the ownership of Repsol. But it and the Argentine government must now develop its huge shale gas discovery at Vaca Muerta (Dead Cow) without a western oil major to provide capital, technology and someone to blame.

Many are as scandalised by Fernndez’s coup, as if she invented the idea of seizing mineral resources. Antonio Brufau, Repsol’s chairman, warned on Tuesday that "these acts will not go unpunished”, while Felipe Caldern, Mexico’s president, said that "no one in their right mind is going to invest in a country that expropriates investments”.

The problem – as Argentina knows – is that both statements are probably false. Argentina’s chances of being punished, as opposed to hurting itself, are slim – the worst it is likely to suffer is an adverse financial ruling by an international arbitration panel. Meanwhile, the world is stuffed with investors and companies that repeatedly pile back into such places.

This is the biggest act of resource nationalism for a while, but there was a wave of interventions between 2003 and 2008. In Russia, Yukos was seized and Gazprom took a majority stake in the Sakhalin II gas project from Royal Dutch Shell. In Latin America, international contracts were reneged on by Argentina, Bolivia and Ecuador, and Venezuela took control of the Orinoco oil belt.

Group of Seven countries have also rewritten contracts by force majeure – the UK did so with the tax on North Sea oil in 2005 and Canada’s Alberta province raised its take of oil sands revenues in 2009. That is not as bad as seizing companies, but it involves changing the rules long after the wells are sunk.

Governments strike deals with companies when the price of oil is low and the cost of exploration high and then tear them up when the expensive work has been done and the yield rises. "These agreements are supposed to last for 30 years but they rarely do,” says Louis Wells, a Harvard professor who has served as an expert in arbitration cases.

In the long run, they also tend to get away with it, after paying compensation. ExxonMobil and ConocoPhillips resisted Venezuela’s Orinoco raid but others such as Total, BP and Chevron acceded to its wishes. Eni, the Italian company, demanded compensation but went back into a deal with PDVSA, the state-owned company, in 2010.

Argentina’s problem is that its own seizure is extreme, badly timed and unlikely to address Fernndez’s complaint – that Repsol was failing to invest enough in her country. She wanted it to stop taking 90 per cent of YPF’s earnings in the form of dividends and reinvest the money in oil production.

This ignores some salient facts. One is that Argentina’s fields were discovered in 1907 and, like mature fields in the US and elsewhere, are slowly running out of oil. A company can upgrade its extraction techniques – as YPF has been doing – but cannot alter time and geology.

Since Nstor Kirchner, Fernndez’s late husband, gained power in 2003, Argentina has also turned itself into an unattractive place for an oil company to invest. It has capped domestic fuel prices and held the wholesale price it pays to YPF below the global level – an incentive for Repsol to invest in more promising and less interfering places, such as Brazil.

The Kirchners were a driving force in the dividend policy – Repsol lent money to Petersen Energia, which is controlled by the Eskenazi family, to acquire a 25 per cent stake in YPF when the Eskenazis were close to Kirchner. The dividend was needed for Petersen to repay the loan but Fernndez has now fallen out with the Eskenazis.

Kicking Repsol out solves none of its self-inflicted problems and damages the chances of investment flowing to where it is now needed – the Vaca Muerta discovery, which could be the third-largest gas shale reserve in the world. That will demand capital and technology, and Argentina now lacks both.

In the long run, Argentina may get another outsider to fill the gap it has just created – perhaps a Chinese company such as Sinopec, with which Repsol was negotiating a deal before Fernndez struck. But the price that any multinational will demand to compensate for the political risk will be high.

If a country is going to indulge in resource nationalism, it should at least act rationally. Fernndez has not.

Copyright The Financial Times Limited 2012.

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