Bloomberg News

Argentina Seizes 51% of Oil Producer YPF to Stem Imports

April 17, 2012

The Repsol-YPF oil refinery is seen in Plaza Huincul, Neuquen province, Patagonia. Photographer: Diego Giudice/Bloomberg

The Repsol-YPF oil refinery is seen in Plaza Huincul, Neuquen province, Patagonia. Photographer: Diego Giudice/Bloomberg

Argentina’s seizure of YPF SA (YPFD) threatens to take the country further away from its goal of energy self-sufficiency as investors weigh the increased risk of expropriation in South America’s second-biggest economy.

President Cristina Fernandez de Kirchner named Planning Minister Julio De Vido to head the oil company with immediate effect and is sending a bill to Congress to take a 51 percent stake after oil imports doubled. Argentina, which wants to produce enough crude to match consumption, risks becoming “unviable” as a country because of the surge in imports, Fernandez said yesterday.

The seizure of the stake from Madrid-based Repsol YPF SA (REP) comes after more than two months of government pressure on YPF because of slumping production. The country could double output within a decade after the discovery of shale oil fields in the south that will cost $25 billion a year to develop and which will require YPF to find partners to help share costs.

“I don’t see any upside, especially because this happened at a time when there was growing interest in the potential of unconventional resources,” Daniel Kerner, an analyst at political risk research firm Eurasia Group, said yesterday in a telephone interview. “This is going to make it very hard to attract the investment because you not only changed the rules of the game but took over the assets of the main company.”

Repsol plunged as much as 9 percent in Madrid, the biggest drop in more than three years, and closed at 16.42 euros, down 6.1 percent. YPF fell as much as 11 percent to 103 pesos in Buenos Aires.

Repsol Chief Executive Officer Antonio Brufau said Argentina aimed to take over YPF cheaply. The expropriation is a way to cover up the social and economic crisis Argentina is suffering, he said at a press conference in Madrid today.

Falling Reserves

“If Argentina thinks their resources won’t decline, they are wrong,” Brufau told journalists. “They will.”

The country’s oil reserves fell about 18 percent between 1998 and 2010, according to the Argentine Oil and Gas Institute. Price caps on oil exports also made investments less attractive.

Repsol is responsible for about 54 percent of the country’s decline in reserves and production since buying YPF in 1998, according to a copy of the bill. The company had a “predatory attitude” toward Argentina that warranted the takeover, it said.

“It’s very difficult to reverse the situation when the problem has been going on for years,” Adrian Mayoral, an analyst and trader at Buenos Aires-based brokerage Mayoral Bursatil, said in a telephone interview yesterday from the Argentine capital. “The government doesn’t have $20 billion every year it can dedicate to exploration and production.”

‘Illegal’ Seizure

Repsol, in a regulatory filing, said the seizure is “clearly” illegal and it may seek protection under U.S. and international law.

The cost to insure against an Argentine default surged 42 basis points to 952 yesterday, the biggest jump in the world, according to data provider CMA, after Fernandez announced the government would take control of YPF.

The cost of insuring Repsol’s bonds against default soared 27 percent to the highest since January 2009, according to Bloomberg data. Its credit-default swaps rose as much as 85 basis points to 397 basis points, the biggest one-day jump since Oct. 22, 2008, and retreated to 369 basis points, up 19 percent.

YPF lost eight potential investors in South America’s biggest shale deposits after government measures made oil investments less attractive, a person familiar with the talks said in February. Companies from the U.S., Canada and Europe abandoned negotiations after the government withdrew financial incentives for producers and forced companies to repatriate export revenue, according to the person.

Vaca Muerta

The company said earlier that month that the 30,000 square kilometer Vaca Muerta formation in southern Argentina holds at least 23 billion barrels of oil equivalent, according to an external audit that surveyed about 8,000 square kilometers of the area. YPF has about 13 billion barrels in that area, the company said. Developing the entire 23 billion barrels will cost about $25 billion per year for a decade, the company said.

“The attraction of international capital to Argentina as a source of financing the enormous economic resources that this project will require in coming years is a mandatory condition for a project of such magnitude,” YPF said last week.

The boom in shale oil and gas production in recent years has placed the U.S. to the closest it has been in almost two decades to achieving energy self-sufficiency. Global energy producers from Total SA (FP) to BHP Billiton Ltd. (BHP) are investing in shale formations impervious to traditional drilling methods.

Spain to Retaliate

“Argentina’s shooting itself in the foot with such an aggressive action,” Jason Kenney, an analyst at Banco Santander SA (SAN) in Edinburgh, said yesterday in a telephone interview.

The takeover is “a hostile decision against Repsol and therefore against Spain and the Spanish government and the government will act in consequence,” Spanish Industry Minister Jose Manuel Soria told reporters yesterday in Madrid, adding that the country is working on “clear and decisive measures.”

Argentine provinces had revoked licenses on YPF oil fields over the past two months, helping drive down the company’s American depositary receipts 43 percent this year. Compensation for the seizure will be determined by the Argentine National Appraisal Tribunal, according to Fernandez.

“The $64,000 question as far as Repsol investors are concerned is what price the government might pay for the stake,” Neill Morton, an oil industry analyst at Berenberg Bank in London, said in a telephone interview. “The fear for Repsol investors is the view that the government hasn’t got the money, so they will lowball them.”

Seizures

The nationalization of YPF comes after Fernandez seized about $24 billion from private pension funds, nationalized Aerolineas Argentinas SA and fined economists who question official inflation reports. This year, she tightened foreign- exchange controls and limited company dividends in a bid to stem capital flight.

“If this policy of asset-stripping, of no production, of no exploration, were to continue we would turn into an unviable country and not for lack of resources,” Fernandez said.

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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