VOXXI: Argentina may have reached a milestone deal with Repsol

Argentina may have reached a milestone deal with Repsol
W. Alejandro Sanchez
VOXXI
November 26, 2013
Originally published: http://voxxi.com/2013/11/26/argentina-milestone-deal-with-repsol/

The deal between the Buenos Aires’s government and the Spanish company Repsol about Argentina’s controversial expropriation of the YPF energy company in 2012 may bring new possibilities to the South American nation for jumpstarting its stagnant economy.

The deal signed on Monday could signal that President Cristina Fernandez de Kirchner is revising her confrontational stance towards foreign investors.

The deal

The Spanish company Repsol had a 51% stake on YPF when it was expropriated by the Argentine government in April 2012 “without paying a single cent,” as explained by a November 25 article by the Associated Press. President Kirchner justified her decision by arguing that Repsol had not invested enough in YPF to extract Argentina’s oil.

At the time, the move was very popular among Argentines, as large segments of the population regarded free market and privatization as the source of Argentina’s economic woes over the past two decades.

In 2012, the South American state was still feeling the effects not only of the global economic meltdown but also of Argentina’s own economic shock in 2001-2002, which prompted the government to default on its debt and led to a carousel of heads of state.

But things may be changing as the Spanish Minister of Energy and Tourism, Jose Manuel Soria, recently travelled to Buenos Aires where he met with the recently elected Minister of Economy, Axel Kicillof.

Representatives of the Mexican energy giant PEMEX apparently were also involved in the negotiations as the company has a stake on Repsol. It would seem that the senior officials have reached an agreement on YPF’s future, but this solution is still at a preliminary level.  It still has to be ratified by Repsol’s board.

No exact amount has been mentioned so far regarding how much Argentina will pay Repsol over YPF.

The Spanish company has demanded $10.5 billion in compensation for the 2012 expropriation – Repsol bought YPF from the Argentine government for an estimated $15 billion in 1999.

However, it is highly doubtful that Buenos Aires will pay this amount, as Minister Kicillof has publicly stated that “we are not going to pay them whatever they want,” in reference to the Spanish company’s demands.

The renowned Argentine daily El Clarin  reported that Spain has circulated the rumor that Argentina will pay a compensation worth $5 billion, while Argentina at one point apparently threatened to unilaterally pay $1.5 billion. We will have to wait to see if a final accord is finally signed and how much will it be worth.

A sign of things to come?

Argentina’s decision to improve relations with Repsol comes at an interesting time regarding Argentine politics. President Kirchner has recently sworn in a new cabinet, which included the aforementioned Axel Kicillof as the Minister of Economy.

Curiously, Kicillof was the mastermind of the decision to seize YPF in 2012 when he was deputy minister.

Some analysts argue that “the appointment of Kicillof is not going to be welcomed by the markets […] it confirms that government policy will not be altered by the results of the midterm election,” said Ignacio Labaqui, an analyst for the New York-based consultancy Medley Global Advisors, for a November 18 article for Reuters.

Argentina’s opposition parties are trying to capitalize both on the recent cabinet changes and the government’s decision to revisit the takeover of YPF.  For example, opposition deputy Elisa Carrio argued that the deal over YPF shows that the government is backing down from some of its previous initiatives and “it wants to be irresponsible towards the [Argentine] population.”

To put the YPF decision in a wider context, it is important to note that Argentina held legislative elections this past October. While Kirchner’s Frente para la Victoria (FPV) coalition managed to keep a majority in congress, it lost important seats in as well as the control of several provinces, including Buenos Aires.

Kirchner’s goal was to run for a new presidential term in 2015 (she was first elected in 2007 and re-elected in 2011), but she lacks the two-thirds majority in Congress to modify the country’s constitution in order to get rid of presidential term limits which prohibit her from running again.

At this point, it is hard to tell where Kirchner and Kicillof will take the country in the final two years of the lengthy Kirchner dynasty.

Untapped potential

Argentina is a nation full of natural resources, but it arguably needs foreign financial investment in order to exploit them. One project that could bring some important revenue is the Vaca Muerta (Dead Cow) oil deposit in the southern province of Neuquén, near the Argentine-Chilean border.

An October 15 article by El Clarin explains that there are some 30 companies searching for oil in Vaca Muerta. The article optimistically argues that the fields could produce 100 thousand barrels a day for the next 15-20 years.

Perhaps the pre-agreement over YPF may be a sign that the economic tides in Buenos Aires are changing, but there is still plenty of skepticism in the international community regarding Argentina as a target for foreign investment.

The South American nation is an attractive market, particularly because of the Vaca Muerta oil deposits, but it is too early to tell if Argentina’s economic problems are anywhere near an end.