Energy crisis provokes Argentine YPF expropriation

By Luis Andres Henao

Associated Press

Published: Sunday, April 22 2012 12:00 a.m. MDT

People walk past signs reading in Spanish "YPF, 100 percent public" in Buenos Aires, Argentina, Thursday April 19, 2012. Argentina's government showed no signs of backing down Thursday from expropriating a Spanish company's controlling stake in YPF, Argentina's formerly state-owned energy company, shrugging off international condemnation while finding overwhelming support for the plan in congress.

Natacha Pisarenko, Associated Press

BUENOS AIRES, Argentina — Less than a decade ago, Argentina was an exporter of oil and natural gas. Now the government has to spend billions of dollars to import fuel.

This dramatic reversal of fortune is why Argentina, already a global financial rogue after its historic debt default, is willing to risk becoming even more of a pariah by seizing control of its leading oil company from Spanish hands, analysts say. President Cristina Fernandez infuriated Spain, its largest foreign investor, but elated many Argentines by expropriating Repsol YPF SA's majority stake in Argentina's formerly state-owned YPF energy company.

Only two months earlier, Repsol YPF had upped its estimate for the shale oil and gas it found in Argentina to nearly 23 billion barrels, enough to double the country's output in a decade .But the Spanish company said it would cost $25 billion a year to develop, and warned that Argentina would need to overhaul its energy policy to attract the necessary investment.

Instead, Fernandez simply seized the company, giving her government access to billions of dollars' worth of cash, enough energy to answer domestic demand in the short term, and potentially even solving Argentina's chronic money woes in the future.

She accused Repos of draining YPF since gaining control in the 1990s, underinvesting in its oil and gas fields and failing to keep pace with the needs of Argentina's growing economy even as it paid huge dividends to shareholders.

Repos blames Argentina's ever-changing mix of subsidies, price caps and export taxes for depressing production as the country's demand for energy soared since 2003, when her husband, President Nestor Kirchner, came to power.

Both are partly right, says Eduardo Fernandez, an independent consultant and former fuels director in Argentina's energy ministry.

The problem was a government approved practice of allowing Repos to use profits to pay shareholder dividends rather than invest that money in the company's future. "That led to a lack of reinvestment in utilities, little exploration and dwindling reserves, as oil fields dried up and productivity fell," Fernandez said.

Argentine oil production plunged 22 percent from 2000 to 2010, even as demand surged more than 40 percent, according to data from the Argentine Oil and Gas Institute and the Energy Ministry compiled by a former energy secretary, Emilio Apud.

Argentina's production has fallen so low that the government now spends billions of dollars a year on expensive imported fuels that it provides at a loss to companies and consumers.

Cheap energy helped Argentines rebuild after a world-record debt default and devaluation in 2002 left the economy in ruins. It makes less sense now, after nearly a decade of growth, but letting consumer energy prices rise too quickly could cause already high inflation to spiral, and provoke popular discontent in a country where pot-banging street protests have driven other presidents from office.

The energy subsidies spiked by 63 percent in 2010 to $5.6 billion, according to a former energy secretary, Alieto Guadagni. At the time, oil traded at about $80 a barrel internationally. With oil now going for more than $100 a barrel, this year's bill could be nearly $10 billion, even as the economy cools with less demand from China and Brazil.

Fernandez squarely blamed a Repose's lack of investment for a $3 billion energy deficit when she announced the takeover.

"The worst thing is that if we don't do this, we'll turn into an unsustainable country, because of its business policies and not because of a lack of resources," she said, noting that Argentina holds the world's third largest reserves of shale oil and gas, after China and the United States — a resource that remains entirely untapped.

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