The Argentine government’s sudden, hit-and-run expropriation of the majority foreign-owned stake in energy giant Repsol YPF SA is a response to everything from the global economic crisis and particularly how Europe has handled it to the attempt to reinvent a state that puts the public’s immediate interests first.
Spain, of course, is furious. It was Repsol YPF SA’s largest investor and had recently hedged its bets on 23 billion barrels of shale oil and gas discovered in Argentina. However, it also accompanied that revelation with a warning to the government that it would need to reform its energy policy. That was two months ago, and reform it did, so to speak.
On 16 April, Argentine President Cristina Fernandez announced that the state would take over the energy giant’s foreign shares. She seized the company unceremoniously in order to fill state coffers to deal with domestic energy demands and cash flow problems.
Fernandez accuses Repsol of underinvesting and ignoring Argentina’s economic needs. True enough, to some extent: Repsol is guilty of paying huge dividends to its shareholders rather than reinvesting in the oil and gas sector, which in turn allowed oil and gas fields to dry up and productivity to fall accordingly. More broadly, she finds Repsol to blame for the fact that Argentina, once an exporter of oil and gas, is now an importer.
Strengthening her argument is the fact that Argentina is home to the third largest reserves of shale oil and gas in the world and those resources remain untapped. "The worst thing is that if we don't do this, we'll turn into an unsustainable country, because of its business policies and not because of a lack of resources," Fernandez said.
Repsol’s story is a different one, and also very true. According to the company, Argentina’s incoherent, arbitrary and fluid energy policies are to blame for the country’s energy woes.
Fernandez also stressed that the state takeover does not necessarily mean that the company intends to be fully state-owned, or that other private entities will not be allowed to step in. Though the move has clearly put Argentina’s interests before those of the stakeholder, the implications for future investments are ominous and send an uncertain message to future investors.
Argentina’s neighbors are the most likely to get on board for new investments, with Fernandez having ensured them that their own energy interests in the country will not be targeted or expropriated. Brazil, for one, remains undaunted and may even see its market share for Petrobras in Argentina increase.
Energy is a critical issue in Argentina – one that can make or break a presidency - and the decline of YPF since 2004 had to be dealt with. Argentina’s economic growth over the past year has been accompanied by a sharp rise in energy consumption and this has happened against the backdrop of sharp declines in oil and natural gas production, particularly in 2010.
Imports had to make up the difference, an unacceptable situation for the administration.
Europe was very much on Argentina’s mind as it expropriated Repsol’s YPF shares.
“Arguments for free use of foreign reserves, nationalization of the commanding heights of the economy, or a deepening of import controls – the three most important initiatives of this year in Argentina, which together combine to make the country the most economically heterodox in the G-20 – have made unremitting references to the plight of Europe and the harm of austerity,” writes Evan Briscoe in opendemocracy.net.
Briscoe contends that there are two sources of “potent symbolism” at stake in regards to the YPF nationalization: “economics for the people and the reinvention of a public-interest state”. The bottom line, he writes, is that it is easy enough to predict the dangerous implications of the expropriation move, but it is equally important to examine why the government has embraced such “counter-productive” policies. Regardless, “Argentina is drawing its own conclusions from the west’s unrepentant disrepute.”
Where does that leave Spain? Well, nowhere, exactly. Furthermore, Repsol will not see any payment for its loss until the issue is decided by an international court, which is likely to take years. With little other recourse, Repsol is lashing out instead at other potential investors that could take its place. On 22 April, Repsol threatened legal action against any company that attempts to invest in YPF, which could include Brazil’s Petrobras, Chevron, Exxon and ConocoPhillips, all of which have been approached by Argentina’s Planning Ministry. Also on 22 April, Spain's Foreign Ministry called on its European neighbors and allies to take steps against Argentina to enforce full compensation for the YPF takeover.
By Jen Alic of Oilprice.com
Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.