Aggressive nationalization of large profitable companies seemed to be a thing of the past until Monday, when Argentina seized control of YPF, the former Argentine oil and gas monopoly, from Repsol, Spain’s own former oil and gas monopoly. Top executives were forced out of YPF’s headquarters in Buenos Aires as Argentine President Cristina Fernández de Kirchner announced that the government would take over 51 percent of YPF’s shares, a move that Repsol declared “manifestly unlawful and gravely discriminatory.”
The saga recalls the age of the oil shocks in the 1970s, when Saudi Arabia nationalized Saudi Aramco and other countries did the same with the Western companies that controlled the oil industry. More recently, BP was forced to abandon some of its operations in Russia, and Venezuela has made nationalization of its energy assets a priority over the last few years—but nationalization of large-scale assets owned by foreigners had generally declined.
As in the ’70s and ’80s, the Spain-Argentina battle has all the elements of a good spy novel: former colonial powers versus striving politicians, accusations of corruption on one side and of profiteering on the other—and struggles for control over new sources of energy, in this case, shale oil and biofuels.
And, as in the past, the company is likely to be the loser. Madrid has promised “consequences” for Argentina, though its options are limited. In recent weeks, however, as negotiations failed—even the king of Spain was involved, reportedly placing a direct phone call to Kirchner—it emerged in the Spanish press that Spain might enforce an obscure regulation written by its predecessor Socialist government that would effectively block the imports of soy-made Argentine biofuel. The new policy would eliminate biofuel imports from outside of the European Union, but its impact would be measured in hundreds of millions of dollars—not insignificant, but just a fraction of the losses of the YPF nationalization for Repsol.
The Spanish company, which is amongst the twenty largest oil firms in the world, faces a tough future without YPF. Most of Repsol’s reserves lie in Argentina, and that country’s importance for the company has only grown, particularly since the United States and the European Union banned investment in Iran and the civil war in Libya interrupted oil production in that country. Without YPF, Repsol could lose more than 50 percent of its reserves and be reduced to little more than a huge network of gas stations and a few refineries. The company is currently valued at around $30 billion in the stock market, of which between 20 percent and 40 percent comes from its ownership of YPF, according to sector analysts.
The fact that Spain is considering retaliation in the field of biofuels is just a sign of the new energy market, since the dispute that has ended up triggering the nationalization has its roots in a gigantic unconventional oil field in Argentina—Vaca Muerta—and in the growing importance of shale gas.
Repsol found Vaca Muerta (“Dead Cow”) last year and, at first, it estimated it contained 927 million barrels of oil equivalent. Two months ago, that figure increased to nearly 23 billion. For the Argentine government, that was the straw that broke the camel’s back. Buenos Aires had been accusing Repsol of not investing in the country’s oil reserves, forcing Argentina to spend $3 billion on oil and gas imports in a struggling economy.
Argentina’s arguments are clear. Since Repsol bought YPF in 1999, until 2010, oil and gas production declined by 12 percent and 2.3 percent, respectively, according to estimates by Barclays Capital quoted by The Wall Street Journal. Financial Times has given even more extreme numbers, based on the government of Argentina’s estimates—a drop of 30 percent in oil output since 1999 and of 9 percent in natural gas since 2006. Those numbers are shocking, particularly for gas, given that the Energy Information Administration has estimated that Argentina could rank third in the world for shale gas reserves, behind the United States and China.
From that perspective, it is clear that Repsol is not investing. But the company argues that regulatory burdens (and, some in Spain suggest, corruption) have curbed its plans of expansion. Repsol’s advocates also say that Argentina’s rapid growth in the last decade—due to a good extent to the export of transgenic soy to China—has made its energy demand grow dramatically. Sources from Repsol told El Mundo that the $1 billion it has invested in the Mississippi Lime play was as much to obtain “know-how” on unconventional oil as for the resource itself, presumably in order to apply it in Vaca Muerta.
Repsol—and its main backer, the Spanish government, no matter which political party is in power—also argues that it has been already “milked” by the Kirchner family. In 2007, under heavy pressure from then Argentina’s President Néstor Kirchner, Cristina’s husband until his death in 2010, Repsol agreed to sell a minority stake in YPF to a company controlled by Argentine businessman Enrique Eskenazi. The sale was made through a complex process. Repsol promised that YPF would pay dividends. In exchange, Eskenazi would use the promise of those dividends to get loans from international banks to finance the purchase of shares. In Argentina and Spain there are rumors that the Kirchner family and its associates were behind Eskenazi, but this has never been proven. The Eskenazi family, which broke ties with the Kirchners, now risks default on more than $2 billion in debt on YPF.
Repsol had bought YPF (whose acronym translates from Spanish to State Oil Deposits) in 1999. At the time, it was a perfect match. Repsol, like most Spanish multinationals, was a former monopoly privatized in the ’80s and ’90s that wanted to expand its activities beyond the domestic market, a goal that had the Spanish government’s support. YPF had been privatized eight years before, but it had suffered from mismanagement and allegations of corruption. Nonetheless, the ‘loss’ of YPF—a company that had the Argentine flag in its logo—was a blow for Argentina, particularly at a time when many of the national companies had been sold to foreign investors, most of them Spanish.
It was, to some extent, a case of state capitalism—on both sides. Now, with the arrival of new sources of energy, and a wave of leftwing politics in Latin America, the “honeymoon” has ended. The blow could not come at a worse time for Spain, a country that is now in a situation not very different from Argentina’s 12 years ago, with an overvalued currency, a broken financial sector and rampant unemployment. The YPF nationalization is one more nail in Spain’s economic coffin. On the other hand, it may scare away any foreign investment in Argentina’s promising energy sector.