Bloomberg News

Argentina as No Claims-Nation Revealed in Repsol Losses: Energy

May 14, 2012

Repsol said after the April 16 expropriation of a 51 percent stake of its YPF unit that it’s seeking $10.5 billion in compensation. Photographer: Angel Navarrete/Bloomberg

Repsol said after the April 16 expropriation of a 51 percent stake of its YPF unit that it’s seeking $10.5 billion in compensation. Photographer: Angel Navarrete/Bloomberg

Repsol YPF SA (REP), the Spanish oil explorer seeking $10.5 billion from Argentina for seizing its assets, will line up behind companies from Exxon Mobil Corp. to Unisys Corp. (UIS:US) yet to be repaid by the most-sued nation on earth.

There are 26 cases pending against Argentina, more than any other country, at the World Bank’s International Centre for Settlement of Investment Disputes in Washington, the principal arbitration court for claims against sovereign countries. So far, it has refused to pay any of the tribunal’s judgments, according to a Bank of America (BAC:US) Merrill Lynch economists’ report.

The prospects of compensation are dim for Madrid-based Repsol, the worst-performing oil stock this year, because of Argentina’s resistance to pay existing judgments and because Repsol’s case will be behind those of hedge funds, utilities and energy companies already pursuing reimbursement for currency devaluations, nationalizations and rate freezes after Argentina’s $95 billion default a decade ago.

“You end up in a conga line of people holding unsatisfied claims, and that’s not a good place to be,” Michael Nolan, a partner in the Washington office of international law firm Milbank, Tweed, Hadley & McCloy, said in a phone interview.

Repsol said after the April 16 expropriation of a 51 percent stake of its YPF unit that it’s seeking $10.5 billion in compensation. The company is planning to file for arbitration and will defend its shareholders rights, spokesman Kristian Rix said in a telephone interview on May 10 without specifying where the company would pursue its claim for compensation.

Repsol shares fell to a three-year low in Madrid on April 23 after the newspaper La Nacion reported that Argentina would seek to pay Repsol nothing for its majority stake in YPF SA (YPFD), seized by President Cristina Fernandez de Kirchner last month.

Local Appraisal Ordered

Fernandez said on April 16 that compensation for the seizure will be determined by Argentina’s National Appraisal Tribunal, the government-chartered tribunal established in 1944 to help determine the value of contested goods involving companies or government agencies.

“It’s not just that they will try to not pay Repsol anything,” said Arturo Porzecanski, an international finance professor at American University in Washington. “Even if they agree to pay something or are required to pay something, the likely scenario is that they will drag it out for as long as possible with appeals and annulments and reviews.”

The South American nation fights arbitration judgments, concerned that any payment could increase its overall liability and expose it to damages worth hundreds of billions of dollars, Eric David Kasenetz wrote in the George Washington International Law Review in 2010.

“They don’t mind spending hundreds of millions of dollars on the best lawyers just to buy time,” Porzecanski said in a telephone interview.

Government Goal

Cases seen by the World Bank’s panel, known by its initials ICSID, can typically last four years or longer, said Abby Cohen Smutny, a partner with White & Case in Washington.

It is “safe to assume” that Repsol will be exploring its options under bilateral investment treaties to bring an arbitration case against Argentina that could be filed at the ICSID, Smutny said.

In an effort to enforce existing arbitration judgments, the U.S. in March suspended Argentina’s participation in a trade program that allows certain goods from developing countries to be imported duty-free. That was because of its refusal to pay $300 million of ICSID arbitration awards to U.S. firms Azurix Corp., a Houston-based wastewater service company, and Blue Ridge Investments LLC.

Active on the Hill

“They are really encountering problems in Washington now,” Carolyn Lamm, a partner with White & Case in Washington, said in a phone interview from Istanbul. “Many of the judgment creditors are very active on the Hill. I don’t think that they will ultimately escape payment obligations.”

Venezuela, which has the second-most number of cases before the ICSID after Argentina, requested to leave the arbitration court on Jan. 24 as demands pile up from abroad for compensation following a decade of nationalizations under President Hugo Chavez, who said on Jan. 8 that Venezuela would not accept any rulings from the court.

Chavez’s government has negotiated compensation for some nationalized assets with steelmaker Ternium SA (TX:US) and settled out of the ICSID with Mexican cement maker Cemex SAB for $600 million, about half of what the company was seeking in arbitration, for seizing its local unit in 2008.

“It’s much easier to deal with Chavez. He has actually paid fair compensation to those he expropriated and has honored all of his country’s debts,” said Porzecanski. “His attitude has been much more respectful of international treaties and even domestic law than that of the Kirchners,” he said, referring also to Fernandez’s deceased husband and former Argentine president, Nestor Kirchner.

Enforcement Mechanisms

ICSID awards are enforceable in all 158 countries that are signatories to the ICSID convention, said Lamm. Argentina faces current pending cases from companies including AES Corp. (AES:US), Total SA (FP) and EDF International SA, according to the ICSID. Since taking office in December 2007, Fernandez has taken over Aerolineas Argentinas SA and seized $24 billion in private pension funds.

“If Argentina loses most, or even a good portion, of the claims pending in the ICSID, Argentina likely will face damages amounting to tens, possibly hundreds, of billions of dollars,” Kasenetz wrote in the law review paper.

The ICSID’s ‘enforcement mechanisms are strong and most effective with respect to assets that the country holds abroad that may already be subject to existing judgments, said Nolan. Arbitration courts use a rule to value expropriated assets based on the amount the company was worth before the nationalization was announced, said Lamm.

“Sooner or later, Argentina is going to have to deal with its obligations if it ever wants to go to international capital markets again,” she said. “Argentina will fight about every comma, repeatedly, because it prolongs judgment day.”

Shale Play

Repsol’s threat to sue any company that invests in YPF following the seizure is unlikely to deter investment in the Vaca Muerta field that contains more then 20 billion barrels of oil equivalent, said Daniel Kerner, a Buenos Aires-based analyst at the Eurasia Group.

“If they are unable to attract any investment whatsoever, then they may change their strategy. If anything, they will offer better terms to other companies rather than pay compensation,” Kerner said in a telephone interview.

Exxon Mobil Corp. (XOM:US) is seeking guarantees from Argentina for its joint venture with YPF to develop the Vaca Muerta field, newspaper Clarin reported on May 11. The negotiations are being watched by Chevron Corp. (CVX:US) and Total SA, which may also be interested in joint ventures with YPF, the Buenos Aires-based newspaper reported.

“The thinking that they have is that companies will come anyways, and the interest is very strong,” said Kerner. “Companies are trying to find ways to come in. I think the government may have a point.”

Repsol fell 2.3 percent to 13.72 euros today in Madrid. YPF SA fell 7 percent to 83.00 pesos at 12:14 p.m. today in Buenos Aires.

To contact the reporter on this story: Nathan Crooks in Caracas at ncrooks@bloomberg.net

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


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