Argentina’s leftist government is taking control of YPF, the oil and gas company 57 percent owned by Repsol of Spain. Worse, the state is nationalizing only Repsol’s shares. Stakes owned by Argentina’s Petersen Group, and other minorities, will escape the expropriation.
It’s not yet clear what price Argentina will pay for the shares, but given that a state tribunal will decide, it’s safe to assume Repsol will get a raw deal. Nor is this small beer for the Spanish company. YPF has accounted on average for 63 percent of Repsol’s oil and gas production since 2007 and has contributed nearly 30 percent of its group operating income, according to Société Générale estimates. What’s more, Repsol’s exposure to YPF is actually larger than it looks. Argentina’s Petersen group still owes Repsol $1.9 billion after it struck a deal to buy shares from the Spaniards. Petersen has relied on dividends from YPF to service the loan. Now Argentina may redirect these dividends into capital investment at YPF.
Fighting the expropriation will probably be an uphill struggle, though Spain’s government has already said it would defend its national interest. The EU has also expressed concern and this might carry more weight, since Europe is Argentina’s second biggest export market after Brazil.
If diplomatic pressure fails, Repsol could try the courts. A bilateral investment treaty between Argentina and Spain includes robust protections for shareholders. But Argentina has a history of flouting adverse judgments by international bodies. Just last month, the United States said it would suspend waivers on import duties for Argentine goods in retaliation for the country’s failure to pay more than $300 million in compensation awarded to two U.S. companies by international arbitrators.
Yet while Argentina’s naked power play may be overwhelming, Repsol should not just roll over. It has too much to lose. Besides, financial realities mean that Buenos Aires may be persuaded to soften its line. After all, it will cost billions of dollars a year to develop one of the largest reserves of shale hydrocarbons worldwide in Vaca Muerta. After this display, it is hard to see the Argentine state raising much cash from private sources.