Saturday, November 22, 2014

Argentina’s Energy Dilemma

BUENOS AIRES – The expropriation of nearly all of the Spanish company Repsol’s stake in Argentina’s energy producer YPF, announced in a vehement speech by President Cristina Fernández de Kirchner, has raised legal alarms worldwide. In fact, the move will not resolve the country’s energy problems in the absence of enormous inflows of investment to the sector.

Repsol acquired complete control of YPF in 1999; in February 2008, it transferred part of its shares to the Petersen Group, which today holds 25%. Repsol currently holds 57%, with the rest owned by stock-market investors. The Argentine government intends to expropriate 51%, leaving Repsol with a 6% stake.

In the 2008 sale of shares, the two majority stockholders agreed to distribute at least 90% of future profits in cash. That decision was intended to allow the Petersen Group to service the debts to banks, and to Repsol itself, that it incurred with its share purchase, for which it made no initial payment.

This is an extraordinarily high dividend in the world oil industry. In the past decade, YPF’s reserves diminished significantly, along with those of most oil companies operating in Argentina, because investment in exploration was greatly reduced.

At the same time, natural gas accounts for 51% of energy consumption, compared to 32% for oil and barely 17% for coal, renewables, and hydroelectric and nuclear power. Worldwide, gas accounts for barely a quarter of total energy consumption – for example, 27% in the United States and just 9% in neighboring Brazil. Argentina has the world’s largest fleet of vehicles running on compressed natural gas; families use gas intensively; most electricity is generated with gas; and the petrochemical industry is based on it.

Of course, in a few other countries (Qatar, Algeria, the United Arab Emirates, Iran, and Russia), gas also accounts for more than half – or even more than 60% – of energy consumption. But there is an enormous difference: all of these countries have reserves that will last another 70-100 years. Argentina, by contrast, is a highly gas-dependent country with diminishing reserves – equivalent to less than eight years of production.

Covering this drop in reserves – more than half of gas reserves and a fifth of oil reserves have been consumed – with imports implies an annual cost of more than $300 billion. Indeed, after two decades of cheap, abundant energy and exports of surplus output, a new cycle of expensive, scarce, and imported energy has begun, as oil production has fallen by one-third since 1998, and gas production by 15% since 2004.

Argentina’s greatest challenge today is to try to regain energy self-sufficiency through significant investment in exploration on land, as well as in the Atlantic Ocean. At the same time, the country must modify its consumption model through greater reliance on hydroelectric, nuclear, and wind energy. While there is great potential for new non-conventional resources, all of this is expensive, requiring annual investment of about 3% of GDP over the next five years.

It is very likely that, in the short term, growing imports of expensive liquid natural gas and other fuels will continue to exert pressure for change. Last year, the external energy deficit was more than $3 billion, and this year it is expected to double.

The important question is whether the Argentine government’s decision to nationalize 51% of YPF’s shares is the best way to recover self-sufficiency in oil and gas production, and to attract the capital needed for exploration and development of conventional reserves. Argentina has particularly high potential for production of non-conventional gas resources as well, given that it holds the world’s third-highest level of such reserves, after China and the United States. But, as with the country’s conventional resources, these reserves will not produce themselves.

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    1. CommentedDiego Arrigorriaga

      There are two questions, equally important to the one discussed by the author, that remain unresponded: will Argentina pay a fair price for Repsol’s assets? And why is Argentina specifically targeting Repsol’s stake in YPF, leaving local investors untouched?

      Argentina is selectively acting against foreign investors. This will make it harder to attract the funds that are necessary to solve its energy problem and will make the expropriation useless.

    2. CommentedJonathan Lam

      Gamesmith94134: Argentina’s Energy Dilemma

      The dilemma for Argentina to nationalize 51% of YPF’s share while Alieto Guadagni compare the high potential for production of non-conventional gas resources like China and US. In assumption, with less of the foreigner’s investment to exploration and research on the secondary energy like gas Argentina would not produce more gas or oil. Perhaps, the alternative for Argentina is to yield control of YPF from Spain’s Repsol YPF SA (REP) in order to cut its share on the dependency on oil it produces.

      “Argentina is once again going to take control of a strategic resource that no other nation in the world has given up,” Interior Minister Florencio Randazzo said in a statement yesterday, citing Chile, Uruguay and Venezuela as examples of countries with state-run energy companies.
      Apparently, Kirchner’s surprise takeover of YPF SA (YPFD) is likely to boost her flagging popularity as Argentines rally behind the re-nationalization of the country’s biggest oil producer; and she has a lot of supports of its populace, About 62 percent of the public backs Fernandez’s move to reclaim YPF, according to an April 19-20 survey by Poliarquia Consultores that was published in newspaper La Nacion. The poll of 1,115 people had a margin of error of 3 percentage points; except for the Spain sovereignty bond buyer pigeonholed on the Spain’s equitable share of Repsol YPF SA(REP).

      Could it be another dilemma for Repsol to pull another division for gas if there are investors eager for an exploration? Or, some are confused with nurture for business with investment with buy to own. With much of my Repsol shares in failing price I am proud to support Repsol and Kirchner instead of being eat away by investor or invader with his fiat money to crack up Repsol with their 51% of it. Perhaps, it is time to invest for another bid of gas Argentina can produce, and it is not a race to China or US in alternative resources for energy. Finally, It is an reminder that commodity prices for food went up three fold in the last ten years, green industry may just a smoking gun, mirrored the ClubMed to tourism for the third world countries in doing the wrong thing; just look at the PIIGS. Then, the requirement of annual investment of about 3% of GDP over next five year can be an alternative in social programs to revive the other industries or food programs for the global consumption.

      If Spain fails to bundle the sovereignty debt or the Green industry teeters, I would blame Kirchner. Can’t I?

      May the Buddha bless you?