Seizure of Repsol affiliate in Argentina stuns oil markets


While other nationalist governments in South America have squeezed energy companies, none is comparable to Argentina, where the government seized an affiliate of the Spanish oil company Repsol, YPF, and hinting that it would pay far less than the $10.5 billion demanded in compensation. (Natacha Pisarenko/AP)
April 26, 2012

With oil prices rising fast, nationalist governments in Venezuela, Ecuador and Bolivia have squeezed multinational energy firms over the past decade, taking a greater stake in projects and jacking up taxes and royalties.

But there has been nothing comparable to what happened in Argentina, where the government of President Cristina Fernandez de Kirchner has seized an affiliate of the Spanish oil company Repsol, expelling executives from their offices and hinting that it would pay far less than the $10.5 billion being demanded in compensation.

The seizure delighted nationalists across the region and stunned the oil market, in part because the Repsol affiliate, YPF, had recently announced that discoveries in remote Patagonia could hold 23 billion barrels in natural gas and oil. Some oil analysts said the expropriation could dry up much-needed investment in Latin America’s third-largest economy.

“I have rarely seen actions like these directed at one company,” said Francisco Monaldi, director of the IESA business school’s Energy Center in Caracas, the Venezuelan capital.

Many Argentines have an emotional link to YPF, which until its 1999 privatization had been the state energy company for decades. Fernandez said the takeover signaled the “recovery of sovereignty and the control of a fundamental instrument,” Argentina’s largest company, valued at $18 billion.

The nationalization, which the Argentine Senate approved early Thursday morning, gives the government control of 51 percent of YPF, leaving the rest to investors. Calls and e-mails seeking comment from the president’s office and the Economy and Planning ministries were not returned.

But Fernandez has said that the expropriation was necessary because a lack of investment had caused YPF’s production of oil and gas to fall, forcing Argentina to import $9.4 billion in fuel last year.

“We need to have sovereign control of our resources,” she said Tuesday. “I am absolutely certain that this is the only road possible for us.”

But interviews with a YPF official, former Argentine government energy executives and oil analysts paint a more complex picture, one that shows a systematic four-month effort against a company that had been in the government’s good graces.

‘A harassment campaign’

Until late last year, officials in Fernandez’s administration had feted the company’s progress, and Planning Minister Julio De Vido worked closely with YPF executives. Repsol’s president, Antonio Brufau, was a frequent visitor to Buenos Aires, where he often met with top economic and energy officials.

“The relations between Repsol and the Argentine government were normal and friendly, practically from the beginning of the privatization,” said Eduardo Fernandez, who was an energy official in the government headed by Nestor Kirchner, Fernandez’s husband, who died in 2010. “It was on a first-name basis. . . . There had not been complaints, formally or informally, about energy companies or YPF in particular.”

Then last year came YPF’s discovery of oil and gas deposits in Patagonia’s Neuquen province, a swath called Dead Cow, that if fully developed could make Argentina an energy heavyweight.

Soon after came recriminations from the government about YPF failing to fully pay taxes and accusations that it was funneling profits to Spain at the expense of operations in Argentina.

“And what they did, the mechanism they used to begin harassing us in earnest, was having the provinces strip us of licenses,” said Kristian Rix, a spokesman for Repsol.

YPF also had a newcomer to the company’s board meetings, Axel Kicillof, the 40-year-old vice minister of economy who had previously managed finances for several months at Aerolineas Argentinas, the money-losing state airline. He is considered a fast-rising star and had belonged to La Campora, a leftist youth movement partly led by the president’s son, Maximo Kirchner.

“He’d show up and sit in the corner not saying anything,” an official familiar with the events said, speaking on the condition of anonymity because of the difficult relations between Repsol and the government. “Others would look to him and wait for a nod of approval. He was a menacing presence in the corner.”

The developments began to trouble Brufau, a veteran deal-maker who has negotiated with the Castro brothers in Cuba and Hugo Chavez in Venezuela. He and officials in the Spanish government tried to initiate talks with Fernandez.

“It has not been possible,” he said in a news conference April 17, the day after the expropriation was announced. “The president is too busy.”

Brufau said the company had been the target of “a harassment campaign” to “provoke the fall in YPF stock price and facilitate the expropriation at a bargain price.”

A gamble during an energy crisis

The expropriation comes as Argentina faces a growing energy crisis that has seen the country become a net importer of energy when it had been a net exporter a decade ago, a trend officials linked to YPF’s performance.

Repsol has countered that it has invested $20 billion over 13 years but has been hamstrung by a mix of price controls and export taxes that has kept fuel prices far lower than those in neighboring countries. Repsol also says that other companies — among them Chevron and the Brazilian behemoth Petrobras — have recorded steeper drops in oil production since 2008 but were not singled out for expropriation.

Argentina, considered a financial pariah for a $100 billion debt default a decade ago, must attract upward of $25 billion a year in investments to develop the Neuquen discoveries, which are considered one of the world’s largest deposits of natural gas.

Roger Tissot, a Canada-based oil analyst who does consulting in Argentina, said the seizure was a gamble.

“This can make Cristina a superstar, or this could mean the end of her administration,” Tissot said. “If YPF is unable to bring in partners or reverse production declines, and the government needs to import more oil and gas, the whole thing can get very, very nasty for her.”

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