In late November an outline deal was reached to resolve one of Latin America’s biggest and bitterest commercial disputes: the battle over compensation after the Argentine government expropriated a 51% shareholding in the country’s main oil company Yacimientos Petrolíferos Fiscales (YPF), previously controlled by the Spanish oil major Repsol. A key broker in the deal was Mexico’s state-owned Petróleos Mexicanos (Pemex), itself an important shareholder in Repsol. So what are these three companies now trying to achieve?
A lot can happen in both politics and the oil industry in 19 months, and in this case, a lot has. Nineteen months ago, in April 2012, the Argentine government led by President Cristina Fernández, worried at a growing energy deficit and angry at what it believed was Repsol’s repeated failure to invest and boost production in the local oil and gas sector, announced it was ‘renationalising’ YPF. The move was seen as a defiant affirmation of energy nationalism: the rhetoric was that a state-owned YPF would invest in new oil fields and achieve exactly the type of turn-around that the foreign and privately-owned Repsol had failed to deliver. Repsol, too, was angry and defiant over its treatment. Backed by the Madrid government, which described the expropriation as “arbitrary, hostile, and discriminatory” it began various legal actions and lodged a formal complaint with the World Bank’s International Centre for Settlement of Investment Disputes (Icsid). Repsol demanded at least US$10.5bn in compensation.
Nineteen months on, it is evident that both positions have changed. Argentina has seen its energy deficit get progressively worse, to the point that it is now the main cause of a foreign exchange scarcity that is threatening the country’s growth. On the plus side, Buenos Aires has realised that its Vaca Muerta shale oil and gas deposits located in Patagonia, and discovered just before the ‘renationalisation’ of YPF, are one of the largest of their kind in the world. But YPF on its own has neither the investment cash nor the expertise to develop them without external help. So the US major Chevron has stepped into the gap, but its involvement has in turn been threatened by two related lawsuits filed by Repsol in Spain and the US. As subsequently recognised by Argentine economy minister Axel Kicillof, with the Icsid arbitration process underway, the Buenos Aires government knew it would not be able to get away without paying some kind of compensation, at some point.
Despite reaching agreement in principle in Buenos Aires in late November, it is clear that the exact value of the compensation deal has yet to be settled. Nothing has been officially revealed, but YPF sources spoke of a US$5bn compensation payment in 10-year Argentine government bonds. Brufau has mentioned the figure of US$8bn. Repsol has also said it wants rock-solid guarantees, and has appointed Deutsche Bank as its adviser on the payment terms. The parties suggested that a full settlement might be reached before the end of 2013, but detailed negotiations could take longer.
What about Pemex?
Interestingly, the Mexican state company is struggling with some of the same challenges faced by YPF in Argentina. It too has seen falling oil production over the last ten years; it too has discovered significant new shale, conventional, and offshore deposits, but does not have the investment cash to develop them on its own. Pemex is now affected by a landmark energy reform, approved by the Mexican congress in December, which is designed to attract the international oil majors back into Mexico through a variety of production-sharing, profit-sharing, and licensing mechanisms. Strategically, it is clear that Pemex is preparing itself to compete more pro-actively, not only at home but internationally as well. Pemex has made it clear that it too would like to be involved in association with YPF in developing the Vaca Muerta fields. To do that, the Mexicans needed to act as peace brokers and help resolve the YPF-Repsol dispute. It is also possible that Pemex will be seeking to attract Repsol to invest in future joint projects in Mexico.
- Repsol pressures
There were also pressures on Repsol’s side. The company has been performing well, but two of its key shareholders are keen to see it maximise its cash position to take advantage of new investment opportunities. While chief executive Antonio Brufau wanted to get as much compensation from Argentina as possible, Pemex’s CEO Emilio Loyoza (with a 9.3% stake in Repsol) and Isidro Fainé, the head of the Barcelona-based CaixaBank (with a 12.0% stake in Repsol) both put a greater value on getting cash in hand.
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