Development: On 27 November after a four-hour meeting in Madrid, the board of Spanish oil firm Repsol accepted in principle an offer of compensation from the Argentine government for last year’s expropriation of its majority stake in Argentina’s national oil company, Yacimientos Petrolíferos Fiscales (YPF).
Significance: This landmark agreement has major implications for both sides. For Repsol it minimises the losses on its unhappy Argentine adventure, and marks the rising influence of Pemex, the Mexican state oil company that is a minority shareholder in the Spanish group. Critically for Argentina, the deal will help unlock much-needed new foreign investment in its depressed hydrocarbons sector.
Key points:
- In April 2012, in what was presented as ringing statement of economic nationalism, the Argentine government led by President Cristina Fernández issued a decree expropriating Repsol’s 51% controlling stake in YPF. The Spanish government described the move as “arbitrary, hostile, and discriminatory”. By December 2012 Repsol had lodged a formal complaint with the World Bank’s International Centre for Settlement of Investment Disputes (Icsid) seeking US$10.5bn in compensation. Things have not gone so well for either side since then. Economic nationalism has not solved the problem of Argentina’s dwindling currency reserves; while Repsol’s minority shareholders, including Pemex (which owns 9.3% of Repsol), were impatient with the failure to recover some of the group’s Argentina losses. Pemex was particularly concerned, since the dispute was effectively preventing it from investing in Argentina’s massive Vaca Muerta shale oil and gas deposits in Patagonia.
- In the end, the Repsol board has given the green light to the deal brokered earlier this week in Buenos Aires by Argentina’s economy minister, Axel Kicillof; Spain’s industry minister, José Manuel Soria; YPF CEO Miguel Galuccio; and Pemex director general, Emilio Lozoya Austin. While not officially revealed, it is reported that Argentina has offered to pay US$5bn in compensation in the form of dollar-denominated bonds. Given the country’s poor credit rating, Repsol is said to have made the agreement conditional on guarantees of payment that have yet to be defined. While the amount is around half of Repsol’s Icsid claim, it is not that far below the value the company had declared for its Argentine assets in its most recent accounts (US$7.35bn). Taking into account the legal fees of a long-drawn out dispute, Repsol appears to have judged that it was ultimately better to settle.
- However, the future of Repsol CEO Antonio Brufau, who was conspicuously absent from the Buenos Aires negotiations and who has been criticised by Lozoya, may now be under something of a cloud. President Fernández meanwhile thanked her Mexican counterpart, Enrique Peña Nieto, for the “preponderant role” Pemex played in brokering the deal.
- For Argentina the agreement may provide a way out of its serious energy deficit, something that will take a number of years to correct. Ironically Kicillof, one of the intellectual authors of the original YPF expropriation, will now have to struggle with the problem of reducing the subsidy on domestic petrol prices and seek to attract the once-vilified international oil and gas companies. With price controls lapsing, petrol prices are reported to have increased by 11% in November in Argentina, something which analysts believe will push the real inflation rate in Argentina beyond 30% per annum. Correcting the imbalances in the Argentine economy should keep Kicillof’s hands full for some time yet.
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