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Problem: Argentina has destroyed its chances of not only regaining energy self-sufficiency but also of developing its significant hydrocarbon resources due to the nationalization of YPF-Repsol.

Significance:

The nationalization of YPF-Repsol offers a case study to examine the effects of discrete state interference on investment in the energy sector against a backdrop of poor investment conditions. While Argentina has been self-sufficient in energy and a net exporter of oil for much of its history, extrapolating current consumption and production trends suggests that Argentina will be a net importer in the coming years by a large margin, as presented in Figure 1.[1] Both the 2008-2016 Cristina Fernandez de Kirchner (CFK) and Macri administrations (2016 – ) have sought to reverse these trends and exploit significant oil and gas reserves, particularly in the Neuquén Basin. As Macri has confirmed that the nationalization of YPF-Repsol will not be reversed, examining developments in the country after the nationalization serves to highlight overall market reactions and policy options for returning Argentina to energy self-sufficiency.

This analysis will argue that the nationalization itself of YPF-Repsol does not preclude Argentina regaining energy self-sufficiency; systemic aboveground risk and the progress of pro-market reforms will determine whether Argentina will be able to encourage sufficient investment. The nationalization did not result in lower levels of investment as would have been expected. However, the expropriation is a manifestation of the long-running centralization of control over the energy sector that has created volatility in the market. Private actors require certainty to invest in capital-intensive energy projects with long timelines. The risk inherent in Argentina’s bond default, unreliable data, inflation, capital controls, and politicized oil and gas pricing system create uncertainty and remain the underlying causes of underinvestment. Argentina’s success in mitigating these aspects of the overall economy will determine the pace of investment in energy, and thereby the pace of production growth for self-sufficiency.

Analysis:

The nationalization of YPF-Repsol as a discrete event has not precluded Argentina’s return to energy self-sufficiency as private investment has continued to flow into the country. Thus, Argentina’s energy independence will depend on the underlying structural issues. State intervention in the energy sector and economy at large has created uncertainty over state action and poor macroeconomic conditions for investment. Examining both state interference and the corresponding impact on market conditions is critical in determining Argentina’s energy future.

The Nationalization of YPF-Repsol

The Argentinian government moved to expropriate the controlling share of Spanish Repsol in YPF through the Ley de Soberanía Hidrocarburífera, promulgated in 2012. Ostensibly, the purpose of the nationalization, as stated by CFK herself, was to secure state control over energy resources in the public interest and ensure investment in production, rather than dividends.[2] Despite the rhetoric, nationalized YPF entered into joint ventures with both Chevron and Dow Chemical, as well as Petronas, Gazprom, and Sinopec, to develop separate concessions in Neuquén.[3] Private spending in Argentina’s energy sector actually increased in 2012 and 2013 as presented in Figure 2. In total, YPF and Chevron have invested $2.5 billion USD since 2012.

Given the calls for state-led development of energy, the government may have been expected to consolidate control and eject private participants. Typical state-led development involves PSAs or service contracts, rather than outright concessions or joint ventures. The joint ventures, and the speed with which they were reached, are a tacit affirmation that the government needs private involvement in developing the resources, particularly in terms of technology transfers, human capital, and infrastructure. The opacity of the contract terms has led to federal judicial injunctions to release the terms to ascertain whether or not the contracts are in the public interest, as established in the Ley de Soberanía Hidrocarburífera.[4] The private sector’s willingness to invest suggest that it does not accept government rhetoric at prima facie, potentially encouraged by the quality and quantity of reserves. In the context of worldwide E&P, Argentina provides an attractive return to investment, relative to aboveground risk. While other factors in the country can discourage investment, the nationalization itself of YPF-Repsol has had minimal impact on investment in the energy sector and therefore has not precluded its chances at self-sufficiency.

State Interference  

The Argentinian government, both at the federal and provincial levels, has established long-running precedents for interference in the economy, and particularly in the energy sector, to promote self-sufficiency. Since the 2000-2001 economic crisis, the government has imposed price controls on domestic energy, both for producers and consumers, and tried to supply the domestic market by regulating exports. Decree 1277, issued in July 2012, further centralized power by establishing a commission to promote self-sufficiency, which retained the power amend private investment budgets and cancel contracts or fine companies for noncompliance.[5] After oil and gas licensure was devolved to the provinces in November 2006, the Neuquén province itself has abrogated contracts with YPF-Repsol and Petrobras as a result of unsatisfactory development. In such an environment, private firms found Argentina unprofitable in the 2000s and decreased investment, leading to the current low levels of production.

Despite the federal and provincial governments’ desire to promote energy self-sufficiency and encourage private investment, the constant interference in the market introduces volatility that discourages the investment necessary to attain self-sufficiency. Although companies can adapt to some economic and financial volatility, capricious political risk cannot be modelled in long-term investments. The Macri government appears to be genuinely focused on reforming and alleviating market concerns as it courts $20 billion USD of investment in the country.[6] As Macri signals stability to the market and settles the long-running dispute over Argentina’s 2002 default and permits a necessary currency devaluation, investor confidence is improving, leading to lower debt yields and capital costs. Argentina can regain self-sufficiency by maintaining these trends.

Economic Conditions for Investment

State interference in the economy, beyond the direct expropriations, has created economic conditions that are unattractive to investment. Energy price controls and regulation intended to promote self-sufficiency have discouraged upstream investment and boosted overall energy consumption. Energy exports were limited to 20% of production, exports to some neighboring countries were made illegal,[7] and remaining production was to be sold under a price regime. Taken together, investment in Argentinian E&P was unattractive. Following the 2014 oil price collapse, the CFK and Macri governments decided to retain price controls, currently at $67.5/bbl,[8] in order to encourage investment. Perversely, the subsidy to produces introduces some volatility as its retention is uncertain amid Macri’s move to cut subsidies from the federal budget. From the demand side, nominal prices for electricity and gas remain near their 2002 rates, despite high inflation, widening the gap between production and consumption.

On the macroeconomic side, high inflation and exchange rate fluctuations, as well as capital controls, have undermined the rationale for investment as firms cannot be assured of USD cash flows. Figure 3 portrays inflation figures for Argentina, which average 17% between 2000 and 2014. During the CFK years, capital controls and a currency peg were implemented to prevent a devaluation, despite inflation, as shown in Figure 4. The Macri government is seeking to return macroeconomic stability to the country to encourage investment. The administration devalued the currency to control inflation and improve business sentiment, in addition to overhauling statistical agencies and returning the country to the capital markets. Private and foreign investors presently view the reforms as genuine, and Macri’s ability to maintain the momentum of reforms will determine the pace of investment and growth in production to achieve self-sufficiency.

Conclusion

The nationalization of YPF-Repsol, by itself, has not precluded Argentina’s chances of regaining energy self-sufficiency. Following the nationalization, foreign investment in the country continued to flow in and major joint ventures were reached to exploit resources in the Neuquén Basin. The reforms of Argentina’s volatile and capricious investment environment will determine whether or not the country can achieve energy independence. The CFK administration has overseen conditions that eroded investment, leading to production declines, turning Argentina into a net importer. Despite the uncertainty, the resource base has still been attractive enough to draw foreign investment. Reforms addressing the volatile conditions will be critical in bringing the necessary capital to enable production growth in the attractive Vaca Muerta play.

Appendix

Figure 1

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Source: BP Statistical Review 2015 Data – Forecasts extrapolated using 2010-2014 CAGRs

Figure 2

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Source: World Bank Development Indicators

 

Figure 3

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Source: World Bank Development Indicators

Figure 4

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Source: Yahoo Finance ARS/USD 2001-2016

 

[1] BP Statistical Review of World Energy June 2015. (London: BP, 2015).

[2] Cristina Fernandez de Kirchner “Discurso del Proyecto de Ley de Expropriacion de YPF.” 17 April 2012.

“Ahí están exactamente, en la distribución de dividendos y en la no inversión, las claves de por qué hoy tenemos que estar haciendo esta importación que también va a ser muy fuerte este año”

[3] Scott Weeden. “Argentina Goes Against the Grain by Increasing Spending.” E&P. August 2015.

[4]La jueza ordenó que YPF entregue el contrato completo con Chevron.” Infobae. March 2016

[5] David Mares. Political Economy of Shale Gas in Argentina. (Cambridge, MA: Belfer Center 2013).

[6] Mauricio Macri. Interview with Bloomberg. 22 January 2016

[7] David Mares. Political Economy of Shale Gas in Argentina. (Cambridge, MA: Belfer Center 2013).

[8]Argentina Cuts Wellhead Prices” ArgusMedia. 6 January 2016.

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