Nationalization of oil industry in Argentina - Essay Example

Nationalization of oil industry in Argentina Abstract Nationalization of Argentinian oil industry has raised many concerns not only in Argentina, but also in other countries, especially in Spain. Spain has already declared a diplomatic and industrial war with Argentina since the major sufferer of this act happens to be the Spanish company; Repsol. It should be noted that globalization and liberalization processes are going on at rapid pace everywhere in the world and countries are competing each to attract foreign direct investment as much as possible. Under these circumstances, Argentina’s actions would definitely force international companies to think many times before investing in Argentina. On the other hand, Argentina believes that they have enough authorities and freedom to formulate policies which are necessary to safeguard the interests of the country. This paper critically analyses the decision to nationalize oil companies in Argentina. Table of Contents Oil & Gas Report Argentina.Q1 2013. (2012). Business Monitor International. November 2012. p.1-93. 11 Romero, S. and Minder, R. (2012). Argentina to seize control of Oil Company. The New York Times. April 16, 2012. 11 Sprinkle, T. (2013). For Argentina’s Nationalized Oil ‘Industry’: A Year of Nothing Retrieved from http://finance.yahoo.com/blogs/the-exchange/argentina-nationalized-oil-industry-nothing-232525794.html 11 Introduction “Exactly a year ago, Argentina President Cristina Fernández de Kirchner announced to the world the expropriation of 51% of Argentine oil company YPF from Spain's Repsol” (Sprinkle, 2013). The declaration of President Cristina was totally unexpected and took by surprise by many countries. In fact, Spain was shocked by this announcement because of the problems this decision might cause to Spanish economy. It should be noted that Spanish company Repsol is the 15th largest petroleum refining company in the world according to the recent statistics. Moreover, the growth of Repsol is contributing heavily to Spanish economy. Therefore Cristina’s decision has the potential to affect Spanish economic growth in one way or another. Spanish ministers have already warned Argentina about the possibility of a diplomatic and industrial war with Argentina. Before the arrival of Argentina’s decision, the common belief in Latin America was such that countries in this region can develop properly only with the help of privatization and liberalization like policies. That is why Cristina’ decision caused plenty of surprises, not only in Argentina, but also in other countries in Latin America. Cristina is one of the most popular administers in Latin America. Moreover, she has taken this decision after a cabinet meeting. In other words, Argentina has taken this decision after a comprehensive debate. They know very much about the benefits and problems this decision might bring to Argentina. In a heavily globalized world, countries are contesting heavily to attract foreign direct investment as much as possible because of the awareness that internal resources alone may not help a country to develop properly. Even communist China does not have any problem in welcoming foreign companies. Moreover, majority of Argentina’s neighboring countries are engaged in activities to welcome foreign direct investments. Under these circumstances, Argentina’s decision surprised many countries, especially Spain. Nationalization of Oil Industry in Argentina It is necessary to know the size and characteristics of Argentinian oil industry before, discussing the merits and demerits of Cristina’s decision. The following table provides a rough idea about Argentina’s petroleum data from 2010-2016. (Oil & Gas Report Argentina.Q1 2013, 2012, p.8) From the above table, it is evident that Argentina’s proven oil reserves may remain unchanged, at least for another three years. At the same time, the total net petroleum exports started to decline from 2010 onwards. From the table given above and the graph given below, it is evident that the oil export from Argentina is getting decreased as times goes on even though the oil prices are increasing rapidly in global market. (Industry Forecast Scenario, 2011, p.40) In short, Argentina failed to exploit the global oil market in recent times, even though they have immense oil stocks. “The Argentine government blames YPF for low production that has forced it to spend heavily on importing energy, at a time when capital flight has made dollars scarce” (Brat, 2012). Sprinkle (2013) pointed out that the gap between what Argentina consumes and what it produces will grow by between 20% and 40% in 2013 (Sprinkle, 2013). These factors clearly suggest that YPF failed miserably to produce as much oil required to Argentina’s energy requirements. Argentina forced to import energy sources in recent times though they have enough energy sources sufficient enough to cater the internal energy needs. “Imports of fuels such as liquefied natural gas and diesel doubled last year to about $9.4bn, eroding the country's trade surplus” (Tremlett, (2013). These factors might have prompted Cristina to take such a drastic decision to nationalize the oil market in Argentina so that the government gets more control on it. The nationalization of oil industry might help Argentina to increase its petroleum exports more from 2013 onwards. Such a scenario would help Argentina to interfere more effectively in global oil market and increase its control on oil price mechanisms in global market. The nationalization of oil industry in Argentina has brought financial gains as well as political gains to Cristina. “On the day of the announcement, posters went up around Buenos Aires reading “True sovereignty means taking back what is ours” above the YPF logo”(The Economist online, 2012). It should be noted that Brazil, the arch rival of Argentina in Latin America, is one of the rapidly emerging economies in the world at present. It is one of the prominent member countries in the rapidly emerging BRICS (Brazil, Russia, India, China and South Africa) group. Cristina knows very well that Argentina cannot stay idle while Brazil develops rapidly. This decision has the potential to make Cristina a heroine in Argentina and her political image would be increased a lot. The economic benefit of this decision is that “At a time of high oil prices, Argentina could use the YPF’s profits to finance public spending, since Argentina cannot borrow money because it faces punitively high interest rates and legal threats from holders of its defaulted debt”(The Economist online, 2012). In short, Cristina gained two birds with the help of one shot while taking the decision to nationalize the oil sector in Argentina. At the same time, Argentina would definitely face many problems also because of this decision. Spain has already declared an industrial and diplomatic war with Argentina. Spanish industry minister José Manuel Soria described this decision as a hostile action against Spain. He warned Argentina about the possibility of wars in the diplomatic field, the industrial field and on energy (Tremlett, 2013). Spain has another reason to blame Argentina. 2002 was a year in which Argentina faced huge financial problems. None of the Spanish companies operating in Argentina had stopped their operations at that time. Moreover, Spanish government helped Argentina financially at that time. That is why the present action of Argentina is creating fumes in Spain. Mexico is another country which blamed Argentina for its failure to keep international commitments. “Mexican President Felipe Calderón assailed Argentina's decision late Monday, saying it "shows little sense of responsibility and rationality." Mexico's state-run oil monopoly Petroleos Mexicanos, or Pemex, owns nearly 10% of Repsol”(Brat, 2012) Romero and Minder (2012) pointed out that the YPF share value have fallen considerably after the announcement of Cristina. The current stock market value of the entire company is only around $ 7.7 billion at present (Romero and Minder, 2012). Recent reports show that Respol is trying to sell YPF to the China Petrochemical Corp (Sinopec) for $15bn (Tremlett, 2013). If that happens, Argentina might struggle a lot. It should be noted that China is one of the major trading partners of Argentina in Asia. China is one of the major importers of soybean from Argentina. In other words, China has already a strong control over Argentina’s economic growth. The opportunity to interfere in Argentinian oil industry might help China to increase its control over Argentina. China’s increasing presence in Argentina may not be digestible to America. It should be noted that America has recently supported Argentina’s claim over Falkland Islands. America’s support is inevitable for Argentina to settle the Falkland Islands controversy with Britain. In short, Argentina is currently in a dilemma. The question of how to keep the relationship with China and America intact is a big problem for Argentina. The nationalization of oil industry is intensifying this problem further. According to Sprinkle (2013), “To achieve the energy revolution; money, technology, and time are required. The Kirchner government lacks the first, has blocked the second, and fears for the third (Sprinkle, 2013). Huge investments along with high end technology are required for the exploitation of oil resources. Moreover, it is necessary to increase or decrease production of oil based on the market trends so that the possibilities can be exploited in an efficient manner. In other words efficient management is required for a country to exploit its internal oil resources. Argentina failed to develop indigenous technology to exploit its oil resources. Until the nationalization process, only foreign oil companies operated in Argentina. In short, Argentina does not have enough capabilities to manage its oil resources properly and many people believe that this decision might backfire. “Repsol would seek compensation for the full value of YPF, amounting to about $10.5 billion for Repsol's 57.4% stake”(Brat, 2012). It would be extremely difficult for Argentina to pay such a huge amount at this juncture since the economic growth is not so good in recent times. If Argentina forced to pay such a big amount, it would be difficult for Argentina to find enough money to spend in infrastructural development at least for a couple of years. “Argentina's relationship with other oil majors will result in significant setbacks in investment confidence and overall appetite for working with the Argentine government” (Merco Press: South Atlantic News, 2012). Even though the nationalization process was aimed only at Repsol, this act created strong doubts in the minds of other foreign companies operating in Argentina at present. They started to think that Argentina is no more an investor friendly country at least for foreign companies. As a result of that, Argentina may struggle to attract enough FDI to streamline its economic growth in the right direction. Conclusion I do not believe that Argentina will be able to reverse years of oil production decline, with the help of this policy. I support the prediction of Energy Tribune that Argentina might become “a net gas importer in the future, unless it pays back its debts to private creditors, reverses its protectionist policies, liberalizes price controls, and honors its commitments under international law” (Energy Tribune, 2013). As mentioned earlier, international investors are currently reluctant in investing in Argentina because of its controversial economic policies and increasing debts. In my opinion, Argentina should restructure its economic policies as much as possible to attract foreign investors. They should realize that country’s long terms goals are more important than short term gains. Argentina does not have the resources to stay isolated in this heavily globalized world. They need cooperation from other countries for the mobilization of its internal resources. In short, Argentina should change its policies with respect to the nationalization of oil resources. References Merco Press: South Atlantic News Agency (2012). Argentina is making few friends in the oil and gas industry these days. Retrieved from http://en.mercopress.com/2012/07/25/argentina-is-making-few-friends-in-the-oil-and-gas-industry-these-days Energy Tribune (2013) Argentina’s Re-Nationalization of the Energy Industry and What it Means? Retrieved from http://www.energytribune.com/20101/argentinas-re-nationalization-of-the-energy-industry-and-what-it-means-2#sthash.7m6Dvpu6.dpbs Brat, I. (2012). Argentina's Oil Grab Draws Fire. The wall street journal. Tuesday, April 17, 2012. Retrieved from http://online.wsj.com/article/SB10001424052702304299304577349480301243796.html Industry Forecast Scenario.(2011) Argentina Oil & Gas Report. Q2 2011. Issue 2, p39-47. Oil & Gas Report Argentina.Q1 2013. (2012). Business Monitor International. November 2012. p.1-93. Romero, S. and Minder, R. (2012). Argentina to seize control of Oil Company. The New York Times. April 16, 2012. Sprinkle, T. (2013). For Argentina’s Nationalized Oil ‘Industry’: A Year of Nothing Retrieved from http://finance.yahoo.com/blogs/the-exchange/argentina-nationalized-oil-industry-nothing-232525794.html Tremlett, G. (2013) Spain attacks Argentina over nationalization of oil company YPF. The Guardian, Tuesday 17 April 2012 The Economist online (Apr 16th 2012), Feed me, Seymour. Retrieved from http://www.economist.com/blogs/americasview/2012/04/argentinas-oil-industry Read More