By Robert Campbell
NEW YORK, April 16 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
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
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
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
But whether this will be enough to fix Argentina's energy
problems is far from clear. The most pressing issue is natural
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
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
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.