YPF and Argentina: The Return of National Sovereignty

If president Cristina Fernández de Kirchner has a flare for political drama, she does not hide it well. After turning last Thursday’s forecast “announcement” of renationalising oil giant YPF into a broadcasted tease, President Fernández lit up airwaves and web pages early Monday afternoon with the news the country had been waiting for: YPF would be in the hands of Argentina once again.

A new, mixed capital structure will replace the current majority control that Spain’s Repsol currently holds. According to Monday’s announcement, 51% of YPF will be managed by the state, and 49% will remain in private hands. Out of the public share, 51% will be owned by the national state and the remaining 49% will be distributed amongst the provinces.

Many Argentines will tell you that YPF’s tale is bigger than simply financial push and pull. In a country that has been rocked by as many political and economic crises as any, many view the company’s evolution as a metaphor for the sovereignty of Argentina itself.

The History of YPF

Few companies are as deeply rooted in Argentine history as Yacimientos Petrolíferos Fiscales (YPF; in English, “Fiscal Petroleum Fields”). It was founded in 1922 under the administration of radical president Hipólito Yrigoyen, and has become a source of political scrutiny and power tug-o-war nearly ever since.

It was the world’s first state-owned oil company. As such, it was an instrumental source of power and a strategic card to be played by the different governments. In 1928, the state approved a law that established the country’s monopoly on petroleum, resulting in Argentina owning the cheapest oil in the world.

The oil debate was reignited in the Perón years, when the president initiated a consolidation model “based on the nationalisation of the sites”. According to the 1949 constitution, in its article 40, oil fields, gas, coal, and other energy sources were declared “inalienable and permanent property of the nation”.

An economic recession was apparently enough to make the president change his tune just a few years later. In May 1955, Perón approved a contract with Standard Oil of California (today’s Chevron) that allowed the company exploration rights in a nearly 50,000-square kilometre area of Santa Cruz.

The decision did not fare well in the eyes of YPF and the president’s detractors, however. The contract was never implemented, but the privatising policies were continued by Arturo Frondizi’s administration. Despite his initial criticisms of Perón, he eventually signed contracts with foreign oil firms, which allowed them to maximise production without paying taxes.

Still, many believed Perón set the privatisation wheels in motion. His actions were described later by Julio Canessa, the engineer who ran the company during the first years of Perón’s presidency, as “one of the most humiliating contracts contemporary oil history has ever known”.

Or, some would say, until the 1990s.

Menem’s Privatisation

The nation’s oil fell in accordance with former president Carlos Menem’s penchant for privatisation. In an effort to answer to the state’s economic instability and to refill the holes left by billions in national debt, Menem set to privatise YPF in 1991.

Private companies were quick to react to the announcement. In 1993, 160 million shares, or about 44% of YPF was sold to international and private shareholders. According to Kang Wu and Cynthia Obadía’s ‘Energy in Latin America: Production, Consumption and Future Growth’ the sale “allowed YPF to gain US$3.04 billion in cash” and additionally sold “one of its important oil pipelines” – a 900-kilometre, 35-centimetre diameter line from Neuquén to the port of Rosales in Bahía Blanca to a “consortium of Argentine companies”.

But perhaps the most important sale came in 1999 when Spain’s oil giant Repsol acquired full control of YPF; the merger effectively creating what is now known as Repsol-YPF. Repsol is 100% privatised and is one of Argentina’s largest corporations. Prior to Monday’s announced, the corporation owned 57% of YPF, and 42% of Repsol’s total reserves—roughly 2.1 billion barrels of crude—came from Argentina’s YPF.

A “Total Failure”

Energy expert and member of political movement Proyecto Sur, Félix Herrero told the Argentina Independent that he opposed the decision to privatise from the beginning. “It was a very bad idea, and turned out to be a total failure,” he says. “You have to analyse the situation leaving ideologies aside.”

Herrero said that in the year 2000, Argentina had 300 million barrels of oil on reserve, and by 2007 that number had dropped to 250 million. “Repsol is the concessionaire,” he says. “They have a contract that specifies what the investments are.”

In the case of Repsol’s contract, the company has agreed to invest in such a way that maintains the level of oil reserves and extraction, and ensures that the company does not impose any “malicious effects” on the environment.

But Herrero says statistics make it clear that the Spanish company has failed to uphold their end of the bargain. According to the expert, the numbers prove that “there has been no investment in exploration”. Indeed, president Fernández’s announcement on Monday was accompanied by a detailed presentation about the decline in investments and the subsequent increase in oil imports, which doubled between 2010 and 2011.

Provinces React

Word of Repsol’s deadbeat reputation has not fallen on deaf ears. In March of this year, Chubut and Santa Cruz governors Martín Buzzi and Carlos Peralta, respectively, announced that they would expire the contracts of five of the eight YPF concession areas. According to La Nación, this accounted for 7.4% of the company’s production in 2011, however excluded three of the more productive sites. The provinces of Neuquén, Mendoza, Río Negro and Salta were soon to follow.

At the time, governor Martín Buzzi issued what most called a warning to the sites maintained in Repsol-YPF’s control. “Enhance these remaining areas,” he said. “Do what you have to do, or we will go for them as well.”

Officials said that the areas forfeited would be up for grabs by “new private investors,” and that the expiration of the current contract would take place within 90 days of the announcement.

Energy secretary Daniel Cameron maintained that the decision had not been “on a whim” and assured that it had the “explicit backing” of the national government.

“This is not to exploit or remove rights,” he said. “This is a time when the country needs the support of all economic sectors … [we need to make] every effort to return to self-sufficiency to sustain growth and continue to give dignity to the people.”

Rodolfo Lopez, supervisor and engineer of drilling oil and gas wells in Chubut and Santa Cruz, says he wholeheartedly agrees with the government’s decision. “If the question is whether Repsol has complied with the agreement, the answer is a resounding ‘no,’” he says. “Repsol did its business, but did not help Argentina.”

“It has not accompanied in the necessary examinations, and was supposed to have an aggressive exploration campaign,” he continued. “Repsol was devoted almost exclusively to exploiting [the land], and has done little to no exploration, and no policy for conservation of hydrocarbons was ever in its plans.”

With these announcements, talk of renationalising Argentine oil immediately began to dominate headlines, and re-established a megaphone for long-time privatisation critics, such as Herrero.

According to the expert, myriad benefits will be bestowed to Argentina now that the government has decided to take control of “black gold” once again:

• Self-sufficiency for Argentine oil.
• Lower oil prices for the Argentine public.
• Economic benefits will remain in the country. “It’s much cheaper than importing,” Herrero says.
• The national government will invest in the areas where there is the largest prospect of national income.

Herrero points out that countries that went private around the same time as Argentina, including Russia, Venezuela, Bolivia and Ecuador, have all returned to nationalisation.

Additionally, he says, in a feature by The Economist on the top 50 oil and gas companies, it was mentioned that 16 of the top 20 were state businesses.

“These are the natural things that are occurring now in the petroleum business,” he says.

Spain Steps In

Repsol-YPF has remained relatively mum in the wake of the political turmoil, and is currently refusing interview requests from the Argentina Independent along with various other news sources.

At the time of the Chubut/Santa Cruz announcement, the company issued a statement saying that it has “proven reserves in fields operated by YPF have reported excellent results,” and noted that “the wells completed during 2011 increased 14% over the previous year and 83% since 2007”.

Amid speculations of a potential lawsuit, the Spanish government stepped in on Repsol’s behalf. The country has made their support of Repsol abundantly clear, warning that “hostile gestures” against Spanish companies could mean “economic and fraternal rupture” between the two countries”.

“Breaking the rules comes with a cost and Argentina could turn itself into an international pariah,” said Spain’s secretary of state for European Affairs Inigo Mendez de Vigo, in an interview aired on Onda Cero radio network.

After Monday’s announcement, officials from the Spanish government maintained their stance and met with the Argentine ambassador in Madrid to formally announce their discontent. Meanwhile, Repsol is demanding a payout of more than US$1 billion. Further developments are nearly certain to be presented in the days ahead.

“This arbitrary measure breaks the atmosphere of cordiality and friendship that historically have held relationships,” said Spanish chancellor Garcia Margallo.

Lopez says he understands why Spain would be concerned of Argentine nationalisation. “It affects their interests, and they don’t want to lose a source of income,” he said. “This should be more worrying for Spain and across Europe as it needs foreign exchange to [aid] the growing crisis in the European world, and particularly in Spain itself.”

Despite a scorned ally, Argentine officials contend that the decision will provide for economic stability and prosperity in the years to come. Although the movement still must be approved in Congress, the action is near certain to be approved, as the ruling party enjoys a majority in both houses.

“The model chosen for the future of YPF is not nationalisation,” said Fernández, “but recovery of sovereignty and control of hydrocarbons.”

To see what the locals think about the nationalisation of YPF, click here.

Lead image by Nestor Galina