Author Journal / Current Affairs / Journal

Fuel For Thought: Argentina Nationalise YPF after Energy Crisis

Jill Hedges.

YPF

After weeks of speculation, on April 16 President Cristina Fernandez de Kirchner abruptly announced the expropriation of 51% of YPF (English: Fiscal Petroleum Fields), the former state oil and gas company now controlled by Spanish Repsol. YPF, the world’s first state oil company, was privatised in the 1990s by then President Carlos Menem (with the enthusiastic support of Fernandez de Kirchner and her husband, then governor of the oil-producing province of Santa Cruz) but, like many of Menem’s privatisations, the move later became unpopular and the company has been blamed for too little investment in oil and gas and the resulting fall in supply. There may be some justice to this, although falling investment across the sector also reflects the Kirchner governments’ policy (since 2003) of freezing domestic oil and gas prices and limiting exports. Unconfirmed reports that Repsol was negotiating the sale of YPF to Chinese Sinopec behind closed doors may also be used to justify the seizure.

Fernandez de Kirchner’s announcement was popular domestically, and even the opposition Radical and Socialist parties – who opposed the original privatisation – have supported the expropriation. However, the move has caused outrage in Spain and elsewhere, with both Madrid and the EU warning of retaliatory measures and Repsol promising legal action.

In the short term, any retaliatory measures are likely to have limited effect: past international legal cases against the Argentine government have not been satisfactorily resolved, and, with Spain accounting for only around 3% of Argentine exports, even a total ban would not bite hard.  And other Spanish companies heavily invested in Argentina, such as Telefonica and the banks Santander and BBVA, are hardly likely to pull out given the profitability for them of the Argentine market (at least so far) and the weakness of their own domestic market in Spain. Moreover, Argentine exports of soya and other commodities to China are increasingly important and will not be affected by the Repsol row, giving Argentina a cushion it had not enjoyed in the past.

In the longer term, however, the move looks likely to cause heavy damage. The original privatisation of YPF has been widely questioned, and the reacquisition of a significant stake in the company by the state – perhaps creating a mixed-capital company along the lines of Brazilian Petrobras – would on the face of it make sense, given the strategic nature of the hydrocarbons sector. But the unilateral announcement of expropriation, and the rejection thus far of negotiations with Repsol, will send a harsh message to foreign investors already wary of Argentina’s uneven record in this area.  Argentina’s huge unconventional gas reserves (it is estimated to have the third largest shale gas reserves in the world) are attractive but extremely expensive and technically challenging to exploit.  The state lacks the resources to do so alone, and the likelihood of attracting other investors to participate now looks remote. (Argentina’s own remoteness from other global gas markets in itself makes it a less attractive investment than some other resources.) This will raise jitters among investors in other sectors, who may find changes in their tax or other regulations in order to try to finance the shortfall. Failure to find the funds to boost output is likely to see oil and gas shortages worsen in the medium term.

The Argentine economy is already isolated internationally – with some debt still in default since the 2001-02 crisis, it has no access to international financial markets, and erratic and often investor-unfriendly policy-making kept foreign direct investment to a modest 2.3 billion dollars last year. Thus the YPF move may not have an immediate impact on the domestic economy. But the spectre of increasingly irrational and ill-advised policy-making, encouraged by small and vocal factions whose influence with the president is rising, will scare off both domestic and foreign investment needed to keep growth on track. As the effects begin to bite, the president’s popularity is likely to see a sharp fall – just as Menem’s privatisation programme went from being seen as the economy’s saviour to anathema as it went off the rails, so the reversal of those policies may be perceived if this strategy too fails. ■

Jill Hedges is the author of Argentina: A Modern History, has been Senior Editor for Latin America at Oxford Analytica since 2001 and was formerly Editorial Manager of business information service Esmerk Argentina.

Image courtesy of bobfranklin.

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