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.