COLUMN-YPF grab won't fix Argentina's energy woes-Campbell

Mon Apr 16, 2012 1:48pm EDT

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By Robert Campbell

NEW YORK, April 16 (Reuters) - Argentina's planned takeover of oil and gas company YPF is a desperation move aimed at boosting investment in oil and gas production while avoiding policy shifts that might have otherwise made the sector more attractive to private capital.

The country's oil and gas reserves have tumbled in recent years as heavy-handed regulation has made the sector unattractive to many private investors.

The partial renationalization is effectively an effort to maintain those policies, including bans on exports of hydrocarbons and price controls that keep both oil and gas prices below international levels.

The 1993 privatization of YPF helped spark a boom in Argentine energy investment, culminating in Spain's Repsol making the disastrous decision to merge with the company in 1999.

The collapse of Argentina's economy in 2002 and subsequent restrictions on hydrocarbons prices turned YPF from Repsol's crown jewel into an albatross, though it still provided substantial cash flows for reinvestment elsewhere in the world.

Repsol's use of YPF as a cash cow has rankled the government and a partial selloff of the company has not helped matters.

In 2008 Repsol sold a minority stake to local investors the Petersen Group, and agreed to pay out 90 percent of YPF's net income as dividends, according to filings with securities regulators.

The large pay outs have constrained the amount of new investment YPF can undertake due to its policy of relying mainly on internally-generated cash to fund its capital expenditures.

As the biggest player in Argentina's oil and gas sector, YPF's cash and dividend policies had an overwhelming influence over the overall level of investment by the industry.

The Argentine government has for months complained about the policy and now appears set on a course of action that would, at least in the short term, boost YPF's capital expenditures.

By taking a majority stake in the company the government will be able to dictate dividend policies and direct more cash to investment.

KEEPING THE LIGHTS ON

To be sure, altering the dividend policy will free up quite a lot of cash. Dividend payments in 2011 totaled nearly 5.6 billion pesos ($1.25 billion), compared with capital expenditures of 13.64 billion pesos and net profits of 5.3 billion pesos.

But whether this will be enough to fix Argentina's energy problems is far from clear. The most pressing issue is natural gas supplies.

Domestic production shortfalls have forced the government to increase imports of liquefied natural gas (LNG) in the winter to meet demand for the fuel.

With global LNG prices surging with higher oil prices and strong spot demand from Japan following the Fukushima nuclear disaster, the fuel bill has become burdensome.

Argentina may need a record 80 cargoes of LNG in 2012 but has been struggling to find cheap supplies.

With government finances strained even as the local economy booms, curbing outlays on energy imports would go a long way to shoring up the government's balance sheet.

But YPF's proven gas reserves have been declining for years due to a lack of investment in exploration. The company's gas reserves fell more than 6 percent in 2011 to end the year at 2.36 trillion cubic feet.

Stepping up investment may boost production and add to discoveries, but at the currently low prices YPF receives for the gas produced from its existing fields, returns on the investment will be low.

That, of course, is precisely why Repsol preferred to milk the company for dividends rather than invest.

With Argentina's government still largely locked out of international financial markets, the long-term picture for YPF is one of diminishing returns and cash flow.

That in turn means this move is largely going to have an impact in the short run. A temporary boost to gas output and exploration may be achieved, but there is no sign this policy will ensure a stable basis for the local energy industry.

Moreover the takeover may well frighten off private sector investors, such as ExxonMobil and Total who have been eyeing the country's shale gas potential.

Therein lies much of the irony. Argentina counts world class shale gas reservoirs and, unique to much of Latin America, a relatively well developed infrastructure for transporting gas to market.

Little wonder YPF started touting the size of its shale resources as the huge capital expenditures, estimated at between $5 and $8 billion a year that would be needed to develop these fields.

Given attractive returns, YPF would doubtless have had few problems finding the capital, or a deep-pocketed partner able to pick up a share of the costs.

But government policy has constrained investment for the sake of keeping prices artificially low as a means of containing consumer price inflation.

As a result much of this shale bounty will probably remain in the ground. The government's dearly bought "solution" to inflation will keep getting more expensive.

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