BUENOS AIRES Argentine President Cristina Fernandez unveiled plans on Monday to seize control of leading energy company YPF, drawing swift warnings from key trade partners and risking the country's further economic isolation.
YPF (YPFD.BA), controlled by Spain's Repsol (REP.MC), has been under intense pressure from Fernandez's center-left government to boost production, and its share price has plunged due to months of speculation about a state takeover.
Until recently, YPF had a harmonious relationship with Fernandez, whose increasingly interventionist and off-beat policies infuriate critics. She praised YPF when it found massive resources of shale oil and natural gas in late 2010.
However, a surging fuel import bill has pushed a widening energy shortfall to the top of her agenda at a time of worsening state finances in Latin America's No. 3 economy.
Fernandez said the government would ask Congress, which she controls, to approve a bill to expropriate a controlling 51 percent stake in the company by seizing shares held exclusively by Repsol, saying energy was a "vital resource."
"If this policy continues - draining fields dry, no exploration and practically no investment - the country will end up having no viable future, not because of a lack of resources but because of business policies," she said.
YPF's market value is $10.6 billion, although an Argentine tribunal will be responsible for valuing the company as part of the takeover. Central bank reserves or state pension funds could be used for compensation, analysts say.
Fernandez, who still wears the black of mourning 18 months after the death of her husband and predecessor as president, Nestor Kirchner, stunned investors in 2008 when she nationalized private pension funds at the height of the global financial crisis.
She has also renationalized the country's flagship airline, Aerolineas Argentinas.
Such measures are popular with ordinary Argentines, many of whom blame free-market policies such as the privatizations of the 1990s for the devastating economic crisis and subsequent debt default of 2001/02.
Her announcement of the YPF takeover plan, however, drew strongly worded warnings from Spain, Mexico and the European Union, a key market for Argentina's soymeal exports.
Spain vowed "clear and strong" measures over what it called a hostile decision, while the EU's executive European Commission warned that an expropriation would send a very negative signal to investors.
Mexico's President Felipe Calderon said Fernandez's plan would damage chances for future foreign investment in Argentina and hurt YPF's controlling shareholder, Spain's Repsol, in which Mexico's state oil monopoly Pemex holds a 10-percent stake.
The U.S. State Department said it was following developments.
Repsol described Argentina's move as "clearly unlawful and seriously discriminatory" and said it would take legal action.
But Fernandez dismissed the risk of reprisals.
"This president isn't going to respond to any threats ... because I represent the Argentine people. I'm the head of state, not a thug," she said.
Venezuela, where socialist President Hugo Chavez has nationalized almost all the OPEC member's giant oil industry during his 13 years in power, applauded her move.
"Venezuela rejects the threats and attempts at intimidation from Europe ... and calls on all the sisterly nations of the continent to accompany Argentina in the exercise of its sovereign rights," its Foreign Ministry said in a statement.
Fernandez's row with YPF comes as her administration heaps pressure on Britain over oil exploration off the disputed Falkland Islands, over which Argentina claims sovereignty.
A decade after staging the biggest sovereign debt default in history, Argentina has yet to return to global credit markets, and economic analysts said seizing control of YPF might make it even harder for the country to get fresh financing.
"YPF's expropriation does little to improve the already poor investment climate," said Ignacio Labaqui, local analyst for New York-based consultancy Global Medley Advisors.
Under the terms of the bill, the government would hold 51 percent of the expropriated shares and the rest would be held by the country's energy-producing provinces.
All of the shares targeted by the government belong to Repsol, which owns 57 percent of YPF. Repsol's Argentine partner, the Eskenazi family's Grupo Petersen, will not be affected. Petersen owns a 25.5 percent stake in YPF.
Fernandez said she had also passed a decree giving the government immediate administrative control of the company.
Speculation over a takeover has been weighing on Argentine asset prices for weeks, meaning Monday's news had been factored in by many investors. Still, U.S.-listed YPF shares (YPF.N) fell 11 percent before trading was suspended in New York and Buenos Aires.
The spread between the yield on benchmark Argentine bonds and comparable U.S. Treasuries widened after the announcement but was up just 2 basis points at 948 basis points at 2100 GMT, according to the JPMorgan Emerging Markets Bond Index, in line with the rest of the index.
Energy analysts say the government's heavy-handed approach is unlikely to resolve Argentina's energy time-bomb despite the discovery of the huge shale oil and gas resources.
"In the short term, I don't think this will solve anything. It doesn't mean that YPF's going to start producing more starting tomorrow," Argentine analyst Eduardo Fernandez said.
Argentina's hydrocarbons output has been in decline for years at a time of strong demand from industry and consumers.
Crude production fell 5.9 percent and natural gas output slipped 3.4 percent last year as power demand rose 5.1 percent, according to the latest figures from the Argentine Institute of Petroleum and Gas.
YPF's proven reserves of crude and natural gas - which do not include the new shale finds - fell 15 percent and 31 percent respectively between 2007 and 2010.
Massive, long-term investment will be required to bring the shale resources on stream, and the spiraling cost of fuel imports prompted Fernandez to seek a swifter resolution to the country's growing energy deficit.
Imports of fuels such as liquefied natural gas and diesel doubled last year to about $9.4 billion, playing a major part in eroding the president's cherished trade surplus.
Bolstering foreign currency stocks is especially important for Fernandez because she uses them to service the public debt, freeing up more spending for the welfare programs that helped her win a landslide re-election late last year.
(Additional reporting by Karina Grazina, Juliana Castilla and Hugh Bronstein in Buenos Aires, Andres Gonzalez in Madrid, John Crawley in Washington, and Daniel Wallis in Caracas; Writing by Helen Popper; Editing by Dale Hudson and Lisa Shumaker)