Argentina Takes Over YPF Energy
Company
Via Stratfor with comments from
Geopolitical Analysis and Monitoring
SUMMARY
ARGENTINE President
Cristina Fernandez de Kirchner announced April 16 that she will send
a bill to Congress authorizing the expropriation of a majority stake
in YPF, a subsidiary of SPANISH energy company REPSOL. This will give
the government greater flexibility in managing the oil and gas sector, but
presents a number of serious challenges -- including the fact that this process
has made outside investors even more wary of investing in ARGENTINA.
GEOPOLITICAL ANALYSIS AND
MONITORING COMMENT: Outside investors might be wary of investing in
Argentina but since demand for natural resource will continue to increase, so
will the search for new investment opportunities. In view of these facts
Argentina will most likely not fall short of finding outside investors in the
long run. Such assumptions usually are politically motivated with the “help” of
lobbyists.
See: http://www.investmentu.com/2011/October/shale-gas-boom-in-argentina.html
ANALYSIS
Under the new law, the
federal government will hold 26.01 percent of the company while the provincial
governments in oil-producing areas will split 24.99 percent, giving ARGENTINA a
51 percent majority stake. The decision is in line with recent leaked reports
that the government would declare a majority stake in YPF and settles a month’s
long dispute between YPF and the government.
ONE OF THE GOVERNMENT'S KEY GOALS HAS BEEN TO
STOP YPF'S PRACTICE OF REMITTING 90 PERCENT OF ITS PROFITS AS
DIVIDENDS TO STOCKHOLDERS
Currently, REPSOL owns
57.43 percent, ARGENTINA'S Eskenazi family (through the Petersen Group) owns
25.46 percent, several private groups own 17.09 percent in publicly traded
stock, and the ARGENTINE government owns 0.02 percent plus a "golden"
share that gives it a veto on board decisions. According to Fernandez, the
government plans to take its entire 51 percent from REPSOL. In its recent
dispute with REPSOL, one of the government's key goals has been to
stop YPF's practice of remitting 90 percent of its profits as
dividends to stockholders and instead invest that money into new
production. With both oil and natural gas production declining, the government
spent $9 billion on fuel imports alone in 2011 to maintain sufficient
supply of subsidized fuel for ARGENTINA'S populace. Given the rampant decline
of the industry and the strong potential for oil and natural gas production in
the country's favorable geology, more investment could be the sector's ticket
to success.
GEOPOLITICAL ANALYSIS AND
MONITORING COMMENT: When ARGENTINA was the “Sunny boy” of the IMF
under President Menem, who unquestionably followed IMF doctrine of privatizing
state assets, ARGENTINA lost, among other assets, large pieces of land to
foreign entities, thus loosing access to natural resources and revenues, which,
among other issues, led to the countries default. At that time or as a matter
of fact even nowadays no one seems to blame Menem and his government for
literally selling out the country, simply because he had the support of
influential lobbyists in key industries and corporations, because he did what
he was told to do by these entities.
In view of these facts, ARGENTINA’S goal of stopping YPF's
practice of remitting 90 percent of its profits as dividends to stockholders
instead of investing that money into new production in the country’s favorable
geology only seems legitimate.
ARGENTINA ALSO POSSESSES
SUBSTANTIAL UNCONVENTIONAL ENERGY RESERVES -- BOTH PROVEN AND
ESTIMATED
However, there are
serious questions about whether the government has the capacity to
rapidly or efficiently increase production. The struggle between YPF and the
government has been bitter and, as a consequence, the provincial
governments have revoked not only YPF concessions but also BRAZILIAN and CANADIAN
concessions. YPF is the major player in ARGENTINA'S oil
and natural gas sector, and likely has the ability to increase
production in conventional deposits of oil and natural gas. ARGENTINA also
possesses substantial unconventional reserves -- both proven and
estimated -- which will require foreign capital investment
and advanced outside technical expertise.
Energy companies typically have a high tolerance
for volatility, and with unconventional oil and natural gas basins
bringing ARGENTINA'S possible reserves to more than 25 billion barrels of
oil and more than 22 trillion cubic meters (777 trillion cubic feet) of natural
gas, the country has the potential to be a highly lucrative
investment.
Knowing this, the
ARGENTINE government is likely to maintain a highly interventionist policy in
the energy sector, putting any investment at a high risk of
regulatory disruption. However, if the government offers
favorable terms, the short-term gains could make partnering with YPF profitable
-- even under government management.
THE GOVERNMENT HAS ALSO RECENTLY LOOSENED
FINANCING OPTIONS BY MAKING CENTRAL BANK RESERVES AVAILABLE FOR LENDING TO
"PRODUCTIVE" PROJECTS.
FINANCING FOR THE OIL AND GAS SECTOR MAY THUS
BE MADE AVAILABLE FROM DOMESTIC SOURCES WITHOUT HAVING TO TURN TO RISK-AVERSE
INTERNATIONAL LENDERS.
Aside from the
overarching regulatory environment, the expropriation
will directly affect the operations of YPF. ARGENTINE
Planning Minister Julio de Vido, a longtime ally of Fernandez and her deceased
husband Nestor, and recently appointed Political Economy Secretary Axel
Kicillof will be in charge of managing the transition of YPF from REPSOL to the
government. De Vido and Kicillof will be charged with ensuring the company's
loyalty to the federal government. As we have seen with a number of recent
moves in the political inner circle, those close to Fernandez
can expect to find influential places in the new YPF. This process
will be critical for YPF's future. If YPF follows the path of VENEZUELAN
state-owned energy company Petroleos de VENEZUELA -- where technocrats were all
replaced with government loyalists, radically decreasing the company's
efficiency -- the prognosis is poor for YPF's ability to increase
production.
Finally, there will be
serious pressure on YPF to transfer resources to the provincial and federal
governments, since government at every level in ARGENTINA is
suffering from serious budget shortfalls, and the country's isolation from
international lending markets reduces its flexibility in funding social
programs. Rising energy costs have exacerbated this overarching challenge,
but increasing energy production will not completely solve it. In the
medium- to long-term outlook for YPF, the company likely will be required to
supply an increasing percentage of government budgetary needs.
GEOPOLITICAL ANALYSIS AND
MONITORING GENERAL COMMENT:
Since
ARGENTINA’S default in 2001 and subsequent isolations from international
financial markets, financial institutions, the geo political “powerhouses” have
been predicting ARGENTINES economic downfall, for not following the eco
political doctrines implemented by the World Bank, IMF and International
Financial Institutions. Contrary to doomsday scenarios portrayed by these
entities, ARGENTINA has managed to achieve economic growth and social security.
Being excluded from the international lending markets so far has not showcased
advert effects on Argentines economy.
MANY SPANISH ENTERPRISES HAVE SURVIVED THE CRISIS BECAUSE OF THEIR
LATIN AMERICAN SUBSIDIARIES HAVING OFFSET THEIR POOR PERFORMANCE IN SPAIN
Like, SPAIN'S biggest banks, SANTANDER
and BBVA, that so far have survived the crisis because profits in LATIN AMERICA
have offset their poor performance in SPAIN,( Half of SANTANDER'S profits come
from its LATIN AMERICAN operations, compared to one-third for BBVA.)REPSOL,
like SANTANDER and BBVA, relies heavily on its LATIN AMRICAN operations which
generate the larger portion of its profits. In view of these facts it becomes
clear that REPSOL with the help of the Spanish government will try everything
in its power to challenge the takeover.
RENOWNED ARGENTINE ECONOMIST JOSE LUIS ESPERT
SEES NO IMMINENT DANGER TO ARGENTINES ECONOMIC GROWTH
In the long run Argentina
will face no international eco - political consequences because of the YPF
takeover other than corporate media attacks and saber rattling from Spain, the
World Bank and IMF, but without effect since Argentina is already excluded from
the International Financial System, much to the annoyance of these entities for
they have no tools to intervene! Due to its vast amount of natural resources
and increasing foreign demand, the country will sustain economic growth even if
staying expelled from International Financial Institutions.
Renowned Argentine
Economist Jose Luis Espert stated
during an Economic Forum recently held at a prominent German Enterprise, based
in Buenos Aires, that Argentina has enough funds to sustain its budget needs
and that export revenues of agricultural commodities, will continue to grow, thus
there is no real danger for Argentines economy to stagnate, even if demand from
Asia will drop slightly. Predicted short-term budget shortfalls will not affect
long-term strategies.
Furthermore one should
not forget that the mining industry in Argentina is rapidly expanding, drawing international
investor’s attention despite the government’s politics of protectionism. The
same applies for Shale Oil extraction; even if the extraction process is
expensive, projected revenues will draw investment, despite political hurdles,
because in the long run it is a highly profitable investment.
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