Argentina's impending expropriation of Repsol's Argentine subsidiary, YPF, could signal the start of a total takeover of the nation's energy industry.
Who will be hurt most? The large multi-national energy companies will, for the most part, come out relatively unscathed. They had shunned making large investments in the country due to the government's high profit take on energy projects. But the government did manage to lure in a few domestic and international energy companies through incentives, most of which were canceled earlier this year. Those companies that took the bait now stand to lose everything.
Argentina prides itself as being very European. Its sprawling capital, Buenos Aires, is known as the Paris of South America for its beautiful beaux-arts buildings and wide boulevards. But while Argentina's culture, architecture, food and language may be very European, its economy and government in the past decade has functioned more like a banana republic than a member of the European Union. From its shocking government debt default last decade to the recent $24 billion expropriation of the nation's pension funds, Argentina has gone out of its way to alienate investors, both foreign and domestic.
One area where the government has failed investors is in its energy industry. Argentina has sizable oil and natural gas reserves, enough to meet its own demand and still have more than enough to export abroad. Nevertheless, the country is a net importer of natural gas and oil products. Much of this discrepancy derives from a series of laws instituted during the default last decade when energy prices skyrocketed. The government moved to cap energy product prices and restrict the export of natural gas to appease a restless population. This made it very hard for energy companies to make a profit. When they did, the government would tax profits by 35% and take an additional 12% royalty fee on the value of oil production.
Foreign energy companies where not enthused about investing in the country and domestic energy companies, like YPF, decreased their production. From 1998 to 2011, Argentina's energy output plummeted by a third. Knowing that they needed to do something to spur production, in 2006 and 2008, the government offered pricing incentives to companies that produced oil and gas from unconventional plays, like shale. This induced many companies to start looking for new sources of oil and natural gas in the country.
But just when some companies were showing some success, the government changed tack. Since winning reelection in a landslide last year, Argentina's President, Cristina Fernandez de Kirchner, has been making life hard for the energy companies. She first ordered that domestic and foreign energy companies repatriate all the proceeds from their profits and reinvest them back into the country. In February, she abruptly canceled the incentives that had made it worthwhile to drill. Then came talk of taking the industry "back for the people."
YPF was seen as the most at risk for expropriation as it is by far the largest energy company in Argentina. YPF was privatized in the late-1990s and sold off to the public. Spain's Repsol currently owns around 57% of the company, but could be left with just 6% if the government is successful in expropriating its assets. YPF is a major part of Repsol's energy portfolio, making up 42% of its reserves.
