Editorial: Argentina YPF shocker frazzles foreign miners

When 10,000 British troops tried for a second time in 1807 to invade Buenos Aires after having taken it and lost it the previous year, they were met not only by Spanish troops and irregulars, but also by women throwing roof tiles and pouring boiling oil on them from above, prompting the British to later call the streets of B.A. “pathways of death.”

Modern-day European investors in Argentina’s oil and gas sector got an up-to-date taste of the same thing on April 16, when Argentine President Cristina Fernandez de Kirchner, speaking in Buenos Aires in the Casa Rosada’s Hall of Argentine Women, announced that the national government would expropriate 51% of the country’s largest oil producer Yacimientos Petroliferos Fiscales (“Fiscal Petroleum Fields”), or YPF. All of that stake will come from YPF’s 57% owner, Spain’s Repsol. 

The government said it would also nationalize YPF’s separate, sister gas assets.

For added drama that day, government officials and their guards showed up unannounced at the 44-floor Repsol-YPF tower in Buenos Aires and told executives working there that they had 15 minutes to leave the building for good.

The move has been broadly hailed by Argentineans, with banners appearing in the main streets of the country thanking the president personally for her courage, and polls continuing to show good support.

As anyone following Argentina’s blossoming minerals sector is well aware, shares of mining companies with significant assets in the country took a hit on the YPF news, with many juniors falling 10% or more on fears the government has taken a sharp turn towards nationalizing resource assets in the country.

Should miners and their investors be concerned? The short answer is no — or at least not about this being the start of a cascade of expropriations similar to what’s gone down in Venezuela or Bolivia in recent years. 

First off, YPF has a unique, central place in Argentina’s economic history, having been founded in 1922 on the back on oil discoveries near Comodoro Rivadavia in Chubut province. YPF was notable as the world’s first entirely vertically-integrated oil company and its first wholly government-owned oil company, and it has been intimately associated with the highest-level power struggles in the country ever since, alternately in heated competition and close co-operation with foreign oil companies in the country.

In 1999, in the depths of Argentina’s last fiscal crisis, Repsol purchased 98% of YPF for US$15 billion to create Repsol YPF, after YPF had been 75% privatized in 1993 under the Carlos Menem regime.

Since the latest news broke, YPF’s American Depositary Receipts have sunk to US$13.31 in New York, generating a US$5.2-billion market capitalization after having traded at US$41 as recently as January, when it boasted a US$16-billion market cap. 

Tension had already been building for months between the Fernandez administration and Repsol, with the government accusing the company of paying out too much in dividends instead of reinvesting the funds to develop Argentina’s oil and gas fields.

Indeed, despite its oil and gas riches, Argentina had become a net energy importer in 2011 for the first time since 1987, further exacerbating the country’s deteriorating economy and balance of trade. Repsol execs had retorted that the government’s own price-control regimes and high import tariffs had been the worst culprits in scaring off oil investment in the country.

Adding to the mix were rumours this year that Repsol was preparing to sell its stake in YPF to China’s state-owned Sinopec — a deal that that would have been vehemently opposed by the government and people of Argentina.

Repsol executives say they will take the case to international courts, and that they are seeking US$10.5 billion for their 57% stake, which is worth just US$3 billion in the open market at presstime.

For miners sitting on the sidelines of the YPF battle, their biggest concerns in Argentina remain the slow pace of dealing with national and provincial bureaucracies, the famously difficult environmental permitting in more agriculturally oriented provinces, and the outrageous game playing by the national government regarding inflation rates, which stand at 9.8% per year officially but around 25% to 30% unofficially, and may lead to the collapse of the peso in due time.