What Powers Argentina?
What is Argentina's main national asset? An asset whose use would have the best potential to help its society alleviate the sufferings of the less fortunate? But, an asset, which has the potential to be smothered by heavy government control.
The company, known in the west as YPF (Yacimientos Petroliferos Fiscales or Fiscal Petroleum Fields), was founded in 1922.It was the world's first state owned oil company - its assets being used for state purposes and ostensibly for the good of the people of Argentina.It was an early leader - being the world's first vertically integrated firm - in owning the fields, exploration, extraction, storing, refining, marketing and selling of oil and gas.
With the problems that state controlled oil companies face in remaining technologically innovative ...
- 1925 - YPF's first refinery opened and was world's tenth largest
- 1928 - Mosconi government lowers oil prices to help develop Argentina's interior
- 1946 - President Juan Peron orders the previously wasted flared gas from the oil wells to be used - leading to the creation of the world's longest gas pipeline from an area near Bolivia
- 1953 - oil consumption in Argentina explodes with imported oil going from 40 to 60%
- 1958 - President Frondizi fosters cooperation with foreign oil companies to increase YPF's oil extraction.This begins the governments foresight in fostering success in energy independence.
- 1973 - Peron's return to power led to a bloating of YPF's payroll and subsequent decline in profits
- 1976 - after the military took control of Argentina YPF was again streamlined and brought back to profitability
- 1981 - YPF is at its operational nadir due to mismanagement
- Between 1991 and 1995 - President Menem began a privatization of the firm and successive CEO's greatly streamlined operations and brought YPF to be the 365th largest firm in the world
- 1998 - production peaks at 308 million barrels
- 1999 - Repsol takes control of YPF
- 2007 - Eskenazi family takes 15% of the firm for a zero outlay - Repsol was responding to public pressure over what the Argentines saw as a national asset
- 2011 - Vaca Muerta field is discovered - an unconventional field thought to hold a billion barrels of oil equivalent
- 2012 - on April 16 the President of Argentina, Cristina Fernández de Kirchner, sent Congress a bill aimed at recovering YPF S.A. for the Argentine state, claiming 51% of the assets of the company to be of public interest and subject to expropriation
The Spanish company Repsol took a chance in buying an oil company outright, in a less developed country, instead of investing in smaller scale projects with a minority interest.
I was curious if the current government of Argentina is resurrecting the ghosts of Peronist Argentina by expropriating the YPF assets of Repsol.
The problem which occurs in one of perceptions. International firms interested in investing in Argentina have many goals in the modern world - but the utmost goal is to generate a return for their owners.If the risk reward is deemed to be hostile - the investment won't be made.
The government of Argentina has another view of the situation.Argentina had stipulated that Repsol/YPF implement investment and social inclusion policies which were not met.Repsol's argument is that the investments would have been uneconomic in the current environment.
I asked, Washington D.C. based, Argentine Minister Eduardo Tempone to reassure investors from the United States that their investments would be safe in the Republic of Argentina.He put me in touch with the Economic and Commercial Seccion (ECC) who provided me a few answers.
How did the interests of Repsol differ from the goals of Argentina?
"Even though the Argentine Government implemented incentive programs to promote oil and gas exploration and production, the required increases in investments ... for the preservation of the basis of the economic growth model with social inclusion established in 2003 were not made. Thus, it was necessary for the company to return to the control of the State."
ECC continued, "While many private companies, both foreign and domestic, expanded their investments, and thus their production levels, there was a progressive slowdown of YPF-Repsol S.A.’s hydrocarbon output in Argentina.In 1997, YPF accounted for 42% of oil production, while in 2011, YPF-Repsol accounted for 34%."
What were the societal consequences of reduced oil production from YPF?
"YPF- Repsol’s actions in Argentina resulted in a sharp decline in fuel self-sufficiency, and as a result, there was an ever-increasing need to import fuel. This in turn lead to greater external vulnerability and had an impact on the socially inclusive growth policies in place since 2003, which among other things fostered a drop in the unemployment rate from 24.7% in 2002 to 6.7% at present (for the economically active population).Policies pursued by YPF-Repsol meant that for the first time in 17 years Argentina registered a trade deficit in fuel, which in 2011 amounted to US$ 3,029 million.”
Minister Tempone provided me this quote from President Kirchner, "“How did they obtain so much profit?” Very simple, they segmented the market. How did they do this? In the case of gasoline, with the oil they took out of the country, they refined 80 percent of it for premium [gas], and the population paid for the most expensive gas, and premium products, due to JP1, which is a very expensive fuel for aircraft, and all premium [gas], as this is what was profitable. But we had to import diesel and fuel oil to maintain our agricultural and livestock production, and maintain all electricity generation in Argentina. That is the key: they segmented the market and what they extracted, they destined exclusively for premium [products] , and the rest, well, the rest was taken abroad”.
How will the expropriation affect the investment climate in Argentina?
President Cristina Fernandez de Kirchner has indicated the following:“Regarding every Argentine company with foreign shareholders, rest assured that if they promote our country’s growth – as done by the vast majority– we will continue working closely with them, as we did in the case of the automotive industry when we had to help General Motors (company with U.S. shareholders).”
I can see the logic of Argentina's argument and President Kirchner's recent reassurances to foreign investors.Argentina has so much promise and is blessed with abundant natural resources, highly educated and friendly people, and a highly developed infrastructure.I hope that the government of President Kirchner can walk the fine line of perception - between a welcoming investing climate and one where too much regulation would have a risk/reward equation tipping out of its favor.
www.wikipedia.org - April 19, 2012