YPF in Argentina: We’ve seen this movie

Yesterday Argentine President Cristina Fernandez de Kirchner sent a bill to the legislature to take majority control of YPF, Argentina’s biggest oil company. If you care about these things, you already know that, and if not, here’s a place to catch up. Noel Maurer and Boz have decent analysis. I wasn’t going to write about this but for once, I actually do have something to offer, as I lived through the same type of process in Venezuela, and I suspect that the Argentine nationalization will play out similarly, at least in broad strokes.

I’m no Argentina expert, and I bet I say things that piss people off for my ignorance, still, here’s a guess, likely to be wrong but what the heck:
The nationalization goes through as proposed. Argentina takes immediate managerial control over the company. There will be a time period for price negotiations, during which Repsol (the biggest holder of YPF) and Eskenazi (the second-biggest)* will demand many billions of dollars — I’m seeing on the TV that Repsol wants $10.5 billion. Argentina will offer much less, probably requiring payments to be spread over time. Argentina will make a big show of some parts of the nationalization, because as I’ve said before, even in Chile an ample majority of the public supports resource nationalism. People love stickin it to the man.

The owners will take Argentina to court, and after that, most likely, to international arbitration. The final judicial decisions won’t come down for at least four years, maybe much more — putting any payment off until at least 2016, probably much longer. Argentina will have to pay, with interest, but it won’t be CFK’s problem. She’s in office til the end of 2016.

Oil output and investment were the key issues here, but like Noel, I don’t see anyone stepping in with adequate money to really increase investment. The Chinese might loan some money (Venezuela style) or try to send their own work crews (Sudan-style) but if there’s one thing China likes, it’s stability — and that’s not on order in Argentina. Other companies? Talk to Americas Petrogas, an explorer with big chunks of Argentine shale under license. It’s lost a third of its value in two months as this whole drama has played out. It’s going to be tough for them to get money from the public markets, and the bonds and banks have been shut off since Argentina defaulted a decade ago. I could see a few of import-dependent countries investing, including China and Chile, but with heavy conditions, and not with the kind of money Argentina needs.

To be clear about the numbers involved here — developing a single field to produce shale oil could cost $17 billion, according to Americas Petrogas Managing Director Guimar Vaca Coca.

Oil & gas output will likely stagnate or fall. The government will require field operators to open the chokes and pump more than is good for the fields. They may even start making up oil output numbers the same way that they make up inflation numbers.

Politically, this reality won’t matter. Those who favour nationalization will insist that any problem is the result of a global capitalist conspiracy, boycott and hoarding. Those who oppose will have a hard time articulating Econ 101 without sounding like condescending, rich, self-interested jerks.

This whole situation may be good news for foreign investment in other hydrocarbons countries in South America, especially Colombia and Peru, but also Brazil, Bolivia and Venezuela.

*Sorry for mentioning the Eskenazi holding. It’s not affected. I had trusted the FT, which has now corrected to say the full expropriation is from Repsol. Should have been like Otto and trusted La Nacion.

28 thoughts on “YPF in Argentina: We’ve seen this movie

  1. digletnid

    Don’t discard Eskenazi yet. Confiscation, according to Constitution, should be non discriminatory, so, the weakest point of the whole law is to only confiscate REPSOL. Most likely, the approved confiscation law should contemplate to spread it to all shareholders, or it will be solved on Justice later probably in that way.

  2. Gustavo Coronel

    The Eskenazi holding might not be directly affected but it will be affected through the loss of effciency and the deterioration of YPF that is bound to follow this move.

    1. Ariel

      I think I lost a comment.
      In fact, Eskenazi won’t be affecting by anything, because, in first place, the group entered YPF without paying a peso: in a great display of ingenuity, it got all his share in advance of future profit of the company.
      OTOH, in the comment I lost in the internet, I was stating that the confiscation process, by the Constitution, should make no discrimination. Going only for REPSOL share could be seen as discriminatory, thus, is very likely that the final law actually affected all shareholders for equal, or it would be solved later in justice by the same way.

    2. Ariel

      BTW, loss of eficiency? I really doubt anybody could make it worst than REPSOL, which was inefficient (in the sense of not doing exploration or esplotation) on purpose.

  3. westslope

    Good post. Interesting links.

    Yes, I too had noticed a while back that Petrobras Argentina had been quietly selling assets.

    I wonder if your readers are aware that YPF SA is now yielding 17.2%. (The annual dividend payments correspond to 17.2% of the share price.) That is a good early indication of how much wealth has been destroyed here. Under a regime of secure property rights, YPF would be yielding less than 5%.

    It is both amusing and tragic to read the pagina12 piece. For one, the early privatization of YPF was a “loss”. For two, President Kirchner maintains that Argentina is the only Latin American country that doesn’t manage its own natural resources. Given the quantity and prices controls micro-managed by government and the resulting overall miserable performance of the sector, nothing could be further from the truth.

    Domestic and foreign investors will recall how this event went down. The Argentinians _punished_ YPF on the heels of a massive discovery–the Vaca muerte shales in Neuquén. I

    Imagine your child brings home a report card with nothing but As. Instead of offering an ice cream and dollops of praise, you get out a bull whip and almost kill the child.

    True, this ‘theft’ makes countries like Chile, Colombia, Paraguay and Peru look attractive by comparison but I reckon there will be negative reputation spillovers for all South American countries. These events simply reinforce the pre-existing reputation of Latin America as a dangerous place to invest.

    But that’s what soi-disant socialists with a neo-Marxist, populist, bordering on fascist bent do. Hurt people. Hurt their own.

  4. Tom ODonnell

    Thanks. Very useful. One thing that strikes me, besides your good point about the need to get capital to develop fracking in these fields is that it also takes technology and know-how, and that means partners who have it. As for the Chinese, they don’t yet, and are having their own struggle getting fracking off the ground in China, where they have a bonanza to tap.

    Do you have any insight into the saga that led up to this? Re: Kirchner’s complaints about Repsol not investing/developing? Is Repsol’s response that it was generally the bad environment the government maintained and because the state take got bigger and bigger, or is there a more particular/nuanced story? Did Repsol do anything stupid/strategic to contribute to the spiral at the outset?

    1. sapitosetty Post author

      I’m not all that knowledgable about it. Repsol has clearly been investing. Big oil is slow, especially these days. So I can understand Argentina’s frustration.

      Overall investment in oil & gas in Argentina isn’t low because the private sector hates Argentina, but rather because the fiscal terms in Argentina aren’t very appealing. There are price controls but no cost controls, so you could potentially invest your $10-$20 billion in an oilfield and then get hit by endless supplier cost increases while prices are frozen. That’s not appealing.

      I’m sure Repsol has made missteps, but I think in the end this is a domestic Argentina story, responding to local pressures, and not a real fight with Repsol.

      1. digletnid

        REPSOL wasn’t investing. They were researching an average of 8 wells by year, far lower than the around 100 a year the YPF averaged before privatization, IIRC.
        And now the government is investigating if they weren’t faking the numbers even for the wells they had in production.
        The only time REPSOL incremented production was in the years immediately after privatization. As you said, oil is slow, and they profited on all the wells and reserves the State researched before privatization. Once that vanished, no further serious investment was made.
        If you really want to know more about the issue, I’ll suggest you this site:

        1. ECG

          I will read with interest the link provided. However I would be surprised that oil price being what it is, and as wildly profitable as the industry is, REPSOL would simply sit on their butt. Something must be stoping the investments – if that was indeed the case.

        2. digletnid

          Hi, ECG.
          So far, the thing “stoping” in reality was that there were better places to invest (as always happen). I suggest you to look at the numbers the shareholders received in concept of profit, against investment.
          REPSOL had the contractual obligation as to commit to development of wells and reserves in the provinces to keep the thing running, but they failed to do that. Instead, they relocated the benefits from the already explored and producing areas to other parts of the world, without even complimenting the bare minimum of investment to keep those contracts.
          So, they could’ve been at least trying to find new wells, but they weren’t even faking the intention of doing it. One thing is the natural decline of a non-renewable resource, another is the production decline for not exploring or developing the available sites, which was the case. They could have invested and found nothing, but they never really tried, as to justify their contractual obligations.

      2. Dr. Faustus

        Sorry, but I was taken aback by this comment:

        “This whole situation may be good news for foreign investment in other hydrocarbons countries in South America, especially Colombia and Peru, but also Brazil, Bolivia and Venezuela.”

        Bolivia? Venezuela? How? …Why?

        Westslopes comments on the matter were, in my opinion, much more to the point…

        “True, this ‘theft’ makes countries like Chile, Colombia, Paraguay and Peru look attractive by comparison but I reckon there will be negative reputation spillovers for all South American countries. These events simply reinforce the pre-existing reputation of Latin America as a dangerous place to invest.”

        1. sapitosetty Post author

          We’ll see. Repsol can’t just pull out of the countries where it does business and start over investing in, what would you suggest, Nigeria, or maybe the Falklands? Repsol has significant investments in Venezuela, Bolivia, Colombia, Peru, even Cuba. Repsol needs to show reserves growth to its shareholders. It’s going to keep investing where it can.

          It really bothers me that people who are pro-nationalization get so stuck in their ideology that they refuse to see the downside, and people who oppose such policies get so stuck that they refuse to acknowledge that it will have some positive effect somewhere.

  5. westslope

    che digletnid,

    Did you know that large multinational oil companies can spend billions in exploration and development expenditures per year and still watch their production decline year over year? Oil is a non-renewable resource though many seem to not know that.

    Thanks for the link. I went there and experienced difficulty trying to read the characters on the home page. Perhaps you could short-cut us to the relevant documents concerning the management of oil and natural gas in Argentina. Please.

    Are you familiar with General Roca in the upper valley of the Rio Nego? I once spend some time visiting friends where were ex-guerrilla. Montenoros and on self-proclaimed Maoist. This was during guerra sucia when large numbers of [innocent] Argentinians were regularly disappearing. In fact, specific disappearances were the breakfast table conversation material.

    I recall these radical friends and acquaintances expressing admiration for Scandinavian social democracies but admitting that they were not sufficiently advanced as people to adopt that kind of regime.

    But maybe Argentinians know more about managing fossil fuel resources than let’s say Norwegians. Do you think it would be a good idea for a delegation of Peronistas to travel to Norway and tell the Norwegians how they are mismanaging oil & natural gas riches? After all North Sea oil production has been declining. Perhaps Statoil should be managed directly by cabinet?

    1. digletnid

      Despite all your insulting remarks (advanced as people? That is a XIX century racist concept), the point relevant isn’t the declining reserves, but the actual lack of investing to find new ones.
      As I’ve stated, the number is clear: average researching on new wells were 8 by year, from the start of the concession (the property of the oil is of the provinces, not REPSOL). That doesn’t match the billionaire number you suppose (I’m being generous with your take, as it seems you have no idea on the real number that was invested (a number that, anyway, came from the non-renewable resource itself benefits, not any external investment). The numbers also states that the benefit taken from Argentina went to investments on Africa and elsewhere.
      What Norwegians do with their oil is their business, not us, nor we are making any suggestion o asseveration on what is better for them, as you do with YPF.

  6. Noel Maurer

    Westslope: that isn’t right about the yield. Yields are hard to interpret, but a P/E ratio below five for oil and mining companies happens all the time. In order to rise to 20 the company would need to be literally sitting on a gold mine. In the literal sense of literal, and one that nobody knew about before.

    I doubt that there will be much contagion. Fifteen years ago, yes, but not now. Talk to fund managers about Brazil: they’re starry-eyed. I’d bet against that.

    I am not, of course, defending Argentine policy. I am no friend of the oil companies, and I have favored expropriations in the past — I hate to say it, but Algeria did the right thing in 1971, and Ecuador would have a case today — but this one seems pretty dumb.

  7. westslope

    From google finance: Div/yield 1.68/23.80

    The second number is the percentage yield.

    Noel: If you don’t agree with an annual dividend payout of 1.677 per share, then what number would you use?

    In any event, look at the chart of YPF SA. While at it, look at the chart of the various juniors exploring for oil in Argentina. For more, read the words of Fred Kozak at Canaccord Capital. That is the cost of capital going up.

  8. westslope

    che digletnid:

    Why are you concerned aobut the amount invested? Should you not be concerned about results? Should not be concerned about the future cost of capital and expertise?

    The problem with markets is that they are forward looking.

    So, you don’t care about Norway. I find peronista policies remind me of US Republicans. like Americans, I guess Argentinians place a lot of value on cheap energy.

    Perhaps you could explain why Argentina’s cheap energy policy is not anti-ecological? (Let alone an economic disaster.)

    And please show us the precedent. What other country has adopted Argentinian-style policies and flourished?

    1. digletnid

      So, you says that one can expect results without investments? Interesting reasoning.
      You have several ways of getting bad results, the two relevant here being: you invest at risk and finds nothing, or you don’t invest at all and finds, well, nothing also. REPSOL choose the second one, despite contractual obligations to make a determined minimum investment in each province.
      Now you see why investments are something you should be concerned about.
      Unless you really lives in an universe when you can effectively get results without investment. We don’t live in the same universe then.
      Capital and expertise? From REPSOL? Are you kidding me? REPSOL wasn’t any real international player until they profited effectively from the expertise (and capital, in the way of already discovered reserves) from YPF at the moment they bought it. In fact, the proposed law, that I presume you hadn’t the time to read, establishes clearly that there will be juridical and operative continuity on management, being the State responsible of the 51% voting power as shareholder in the directory. No loss there, then.
      I never mentioned ecological issues (though they were raised in the inform to the Senate, I suppose you hadn’t the time to check also, were REPSOL was accused, and for that will be investigated, on creating serious environmental issues that went unreported).
      I have no idea on the relevance of other countries adopting any related policies. No country, nor situation, is the same as any other. So far, we are making fairly good, in regional terms, and more than good, in relation to our recent past, in almost all aspects of economy. Opinions may vary, but you know what you gringos say about opinions.
      Anyway, time will tell if it works. Now, I have to keep working and I doubt I’ll answer further comments here.
      Best regards.

      1. sapitosetty Post author

        Digletnid – You make a lot of good arguments, but the part about exploration strikes me as a bit confused. I mean, Repsol found nothing, except for the shale oil they announced in November, which was probably the most important hydrocarbon discovery in the Americas in years. Other than that, squat.

  9. westslope

    digletnid: Well I am sorry you are not returning. setty is also a big fan of the Broken Window Theory of Economic Value. Value is measured by adding up costs. Massively negative social returns are seen as a positive.

    I notice that you failed to answer my question about a precedent that suggests Argentina is on the right track. Maybe setty can furnish an historical precedent?

    John Gapper has an excellent op-ed on this sitatuation in the Financial Times:

    Argentina’s oil raid can only end badly. http://www.ft.com/intl/cms/s/0/ecfb241c-889d-11e1-a526-00144feab49a.html#axzz1sUqYGZfl

    The timing of this state-sponsored theft is horrible. Argentina should have waited until the Vaca Muerta shales were actually developed.

    Self-loathing is the only way I can describe this move to re-nationalize YPF SA. The incompetence is mind-boggling.

    1. sapitosetty Post author

      Westslope, I don’t know what you’re talking about with this Broken Window theory etc. Are you being opaque on purpose?

      As far as the timing, I totally agree. I don’t understand kicking out a company that’s on the verge of a massive investment program. It looks to me like it’s responding to domestic politics, and not to serious oil issues.

      1. westslope

        The Broken Window Theory of Economic Value. Assume you own your house. Break all the windows and replace them. See all the ‘economic value’ you just created? Just think of all the ‘stimulation’. However, unless you stole the money to buy those windows from somebody else, you are now less wealthy.

        When you setty propose that we measure the performance of an oil company _costs_ such as investments, you are appealing to the Broken Window Theory of Economic Value. I don’t know the exact origins but I think it came about as a response to some of the more radical manifestations of Keynesian economics such as those who call for on-going deficit spending to continuously stimulate the economy.

        At the end of day, wealth is what should matter. Whether that wealth is easily monetized or not, easy to measure or not, it doesn’t matter. In the end wealth does matter even if incompetent populist governments choose to ignore it.

        In the national accounts, public sector output is usually estimated by adding up costs. That is done because of the measurement issues brought about by the absence of well functioning markets for public services that are for the most part available to the public for free.

        In the oil sector, there are plenty of ways to measure output and gauge created wealth: net cash flow, earnings, dividends, return on capital, finding and development costs per barrel, etc.

        Incidentally, one of the smaller Canadian juniors lost an exploration license just recently in Argentina too. The governments didn’t just pick on YPF SA.

        The COST of capital and foreign expertise in Argentina just went up and the in the end Argentinians will be less wealthy.

        Happier? Hard to say.

  10. Ariel

    Analyst, so says Brufau. I’ve not seen actual source on how he made this numbers (because the point isn’t investment on YPF in 2011, but specifically on Argentina from 1992 until now). If those numbers are true, which I don’t know, because “truth” can be very irrelevant (for instance, those could be correct numbers, but not referent to Argentina), them are a small part of a partial picture from an entire movie.
    OTOH, Kicillof, the speaker from the Government, said that REPSOL masked 9 billion of actual debt as investment, thus the very basis of the Brufau’s numbers may be at stake.
    So, sapitosetty, you better research a bit on from where the data comes before assuming it is an objective, unbiased “fact”, or, even if it is, if such fact is relevant to the whole issue.
    BTW, I came back because I was checking the site I’ve recommended earlier, and I just spotted a very relevant document, from january, on this very issue: “Why the State should buy YPF?”, from January 2012.

    Click to access 010212_fb_arg.pdf

    Now, I leave for good. Have to work.
    Best regards.

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