Nationalization of Oil Industry - Essay Example

Nationalization of Oil Industry Abstract The Argentinean President, Cristina Fernández de Kirchner has announced in mid 2012 that Argentina would take control of its biggest oil producer, YPF, from its Spanish owner, Repsol. This has created significant commotion in the international forum. Repsol has faced sharp losses owing to the unexpected expropriation of its Argentinean business. The amount of compensation to be paid by Argentina against its seizure of shares from the company is yet undecided. While nationalization of YPF is expected to act in favour of Kirchner financially and politically, greater concerns cloud around the future investment climate in the economy and its relationship with its largest foreign investor, Spain. The incident has also led to public protests in Spain and the Spanish government has assured its interference in any situation to protect its private entrepreneurs in foreign countries. Nationalization of local assets in Argentina might trigger retaliation from the international community and its effect might also spill over other aspects of economic activities. Table of Contents Nationalization of Oil Industry 1 Introduction 3 Justifications cited for nationalization of oil 3 Losses faced by Repsol 5 Effects on Argentina 6 Consequences of nationalization of oil in Argentina 7 Conclusion 8 Introduction Argentinean President Cristina Fernández de Kirchner has announced in April 2012 that Argentina would take control of Repsol YPF, the country’s biggest crude oil producer, by nationalizing 51 percent of the company’s shares (Gaudín, 2012). Until 1999 YPF was the largest oil company of Argentina and was owned by the government. However lack of efficient management and expertise was pulling down profits in the oil industry. As a result the government started encouraging foreign investment in the market so as to invigorate oil production. Between the years 1993 and 1999, Madrid based Repsol had acquired 100 percent of the company’s shares (Weinstein, 2012) and its name was changed from YPF to Repsol YPF. Spain is the largest foreign investor in Argentina with the European market being the largest export market to the country (Hernandez, 2012). However, the current dispute is over a slump in investment by the Spanish owner of YPF, which is leading to a droop in energy output in Argentina. Justifications cited for nationalization of oil In the home country, Buenos Aires based YPF, is considered an emblem of state pride (Economist, 2012a). Nationalization of the $18 billion worth company in 2012, would bring huge revenue to the cash-strapped government, which is a significantly beneficial aspect of the President’s decision. Hence nationalization of the country’s biggest oil company is apparently a populist move by the President. Energy officials from Brazil and the President of Uruguay have praised this action (Economist, 2012a). Ms. Fernandez has accused Repsol in terms of its failure to make enough investment in exploiting the resources of the country. YPF has declared that it has discovered an oil shale site whose estimated potential yield would be 23 billion barrels approximately (Forero, 2012). In the context of soaring cost of oil, which is damaging the country’s economy, the lack of potential investment in Argentinean gas and oil reserves is a primary show cause behind the seizure of Repsol YPf’s shares. The President said that Repsol was not producing enough oil and was therefore failing to meet the country’s total energy requirements. Argentina is currently facing a serious shortage in its total production of energy. This situation is being fixed by importing energy at a higher price from other countries (Economist, 2012a). Ms. Fernandez has said that if this continues Argentina would become an unviable state for investment (Macalister, 2012). Pressure exerted by the government on YPF was increasing since the past two months before the decision of nationalization was taken. It is evident that the current situation has been created as a turn from the 2004 situation, when profitability in oil industry went so low due to low price and high export taxes, that domestic production was disrupted. With domestic production becoming uneconomical, Argentina’s net import of natural gas rocketed. Production of natural gas has been on the fall since 2009 and by 2011 fuel import had to be doubled over the existing figure to meet the shortage. The value of imports summed at approximately $9.4 billion in that year (Weinstein, 2012). Kirchner might hold private dreams of oil boom associated with the recently found oil fields. Hence the government’s attention has been arrested by YPF, control over which would bring financial as well as political benefits for Kirchner’s government (Economist, 2012b). The $1.3 billion profits arising from the venture can be wiped away by the government (Economist, 2012b). Axel Kichiloff, belonging to the political party led by Fernandez’s son, Maximo, has been appointed to look after the yields from the oil field (Economist, 2012b). This move has been described by Fernandez as a step towards recovering sovereignty and bringing under national control one of the fundamental instruments by which to steer the economy (Forero, 2012). Argentina is one among the few nations whose natural resources of oil and gas are being controlled by foreign companies and the decision of nationalization is a way to alter this fact (Macalister, 2012). Losses faced by Repsol Fernandez’s decision has created considerable clamour in the international oil industry. The sudden expropriation brought enormous loss to Repsol and led to a fall in its share prices (Realinstitutoelcano, 2012). The announcement of seizing 51 percent shares from Repsol made the company’s shares swing down by 6.1 percent on the Wall Street (Minder and Romero, 2012). The compensation to be made for these shares has not yet been decided. While Repsol has made a demand of $10.5 billion, the government of Argentina has not complied with the amount yet (Weinstein, 2012). Kirchner has announced that the value would be decided by “the national appraisal tribunal” (Macalister, 2012). In the context of the economic strain that Spain is undergoing currently due to the European financial crisis, expropriation of Repsol’s YPF is being seen as a political theatre staged by Argentina to take advantage of Spain’s weakness and attack the Spanish investment in the country (Large, 2012). Effects on Argentina The President’s attempt to increase control over the energy reserves in Argentina would rather hurt the Argentinean economy over a much bigger sphere than just the oil industry. The biggest sufferer due to nationalization of the country’s oil would be Argentina itself, rather than any other nation (Economist, 2012a). In effect this is a serious and complicated issue that involves reputation of government and investment climate in Argentina. The Government of Argentina has been bearing the infamy of being involved in a long term diplomatic disagreement with the government of United Kingdom regarding the dispute over the ownership of “the Falkland Islands” (Llaudes and Kaczyński, 2012, p. 1). A series of events associated with the President Fernandez’s coming in power followed by the latest issue regarding nationalization of oil in Argentina is estimated to build up tension regarding the investment climate in the country. Previously, the government sought to block the dividends earned by the Spanish owner of YPF and also supported the provincial governments that cancelled fifteen out of 104 oil field permits of YPF in 2012. After accepting office in 2007, Kirchner also confiscated pension funds worth $24 billion held privately and the airline named Aerolineas Argentinas (Economist, 2012b). According to some sources, Argentina shares a troubled relationship with its European trading partner, Spain, and nationalization of local assets, which have been controlled by a Madrid based company, would add fuel to this deteriorating relationship (Macalister, 2012). Besides making the announcement on nationalization of YPF, Kirchner has also declared that new partners would be sought for YPF. This would help the producers exploit the rich reserve of natural resources efficiently and with no loss of time, particularly in the extensive oil deposits newly discovered by YPF. Such announcement, although is aimed at benefiting the economy, is detrimental to its already withering relationship with Spain. Consequences of nationalization of oil in Argentina The announcement of April 2012 has inspired significant public protest in Madrid and also the European Commission (Llaudes and Kaczyński, 2012). The Spanish government has declared that it would act against the incidence of seizure of control over YPF from Repsol (Macalister, 2012). Solidarity between Argentina and Spain would run the risk of being broken and Argentina might face international isolation. Duty free exports of Argentinean exports in the European countries and in the United States might be suspended. As a member of G20 the country is eligible to take loans from multinational organizations that help it meet expenditures for various accounts, outstanding debt payments and payment for its energy imports. In future Argentina might lose its eligibility to these loan facilities. Besides, another significant cost of the President’s decisions would be felt if the privilege, that Argentineans are allowed to travel across Europe without possessing a visa, is cancelled (Economist, 2012a). The major risk that Argentina is likely to face is that the foreign companies would be concerned about the future security of their business in the country. In some cases they might also consider withdrawing from Argentina. Some analysts predict that as a consequence of expropriation, the much-needed investment might dry up in the country. Big foreign companies, like British Petroleum, might consider Argentina an unsafe place for making investments in future (Forero, 2012). Conclusion The President expects nationalization of oil to increase investment in energy industry and improve the situation. However, the other factors that share responsibility in underinvestment in the sector, such as strict price controls and over-consumption of energy, are being overlooked. Energy consumption of Argentina is 15 percent more than its total energy production (Economist, 2012b). No changes are discussed in relation to these issues (Economist, 2012a). Changes have to be made in the government policy regarding price controls. Strict price regulation is one of the key reasons behind strained investment by Repsol YPF for production of oil. Not many changes should be expected to occur if YPF is tied to a different partner keeping the government policies unchanged. Besides, the government has not been successful enough in regulating excessive consumption and unnecessary wastage of energy by business houses in the country (Economist, 2012a). The President might have waited for Spain to recover from its financial crisis and then co-operate with Repsol to increase production figures in the coming years. On severing ties with Spain, Argentina would lose a major investor in its own economy that might dampen its overall economic activity. References Economist, 2012a. Cristina scrapes the barrel. [online] Available at: [Accessed 15 March 2013]. Economist, 2012b. Fill’er up. [online] Available at: [Accessed 15 March 2013]. Forero, J., 2012. Seisure of Repsol affiliate in Argentina stuns oil market. [online] Available at: [Accessed 15 March 2013]. Gaudín, A., 2012. Argentina nationalizes subsidiary of Spanish oil company Repsol. [online] Available at: [Accessed 15 March 2013]. Hernandez, V., 2012. YPF nationalisation: Is Argentina playing with fire? [online] Available at: [Accessed 15 March 2013]. Large, J., 2012. Nationalization,the big picture. Revista De Negocios Internationales, 5(1), pp. 55-61. Llaudes, S. and Kaczyński,P. M., 2012. Duel between the EU and Argentina: Weapons in the EU Arsenal. [pdf] Available at: [Accessed 15 March 2013]. Macalister, T., 2012. Argentinean president moves to nationalize Spanish-owned oil assets. [online] Available at: [Accessed 15 March 2013]. Minder, R. and Romero, S., 2012. Spain Weighs Response to Nationalization of YPF. [online] Available at: [Accessed 15 March 2013]. Realinstitutoelcano, 2012. Notes of Repsol after the expropriation of YPF. [pdf] Available at: [Accessed 15 March 2013]. Weinstein, B. L., 2012. In Wake of YPF Seizure, Is Argentina a Good Investment? [pdf] Available at: [Accessed 15 March 2013]. Read More