Category Archives: Argentina
Published November 22, 2012
BUENOS AIRES, Argentina – Argentina is running out of wiggle room in a billion-dollar showdown over foreign debts left unpaid since the country’s world-record default a decade ago, and the stakes couldn’t be higher for President Cristina Fernandez.
She risks triggering another historic debt default if she doesn’t agree to pay the so-called “vulture funds” she blames for much of Argentina’s troubles.
Fed up with Argentina’s refusal to honor its debts despite losing in appellate court, U.S. District Judge Thomas Griesa in New York said he is determined to make Argentina pay at least something to the plaintiffs.
His idea is to tap into the money Argentina already pays to other bondholders, by making banks that process the payments divert some of the money to the plaintiffs. U.S. financial institutions would become his enforcers, either helping to satisfy the judgment or “aiding and abetting” a crime.
The unprecedented idea was broadly upheld on appeal last month and Griesa tried to push the case closer to resolution late Wednesday by lifting a legal stay, and issuing an order directing Argentina to make a first round of payments into an escrow account on Dec. 15, when the country is scheduled to make payments to the other bondholders.
The idea has sent jitters through the legal departments of the most powerful financial institutions in the United States.
The U.S. Federal Reserve and the Clearing House, a trade group representing the world’s largest commercial banks, warned that Griesa’s remedy could have severe consequences for the backbone of the U.S. financial system, which automatically moves an average of $2.6 trillion a day in half a million transfers between more than 7,000 banks.
The Federal Reserve’s legal brief, filed Sunday, said the entire system depends on transfers being “immediate, final and irrevocable” when processed. Requiring intermediaries to identify, stop and divert payments according to court orders “would impede the use of rapid electronic funds transfers in commerce by causing delays and driving up costs.”
The plaintiffs dismissed the concerns, saying that the only bank at risk would be Argentina’s “paying agent,” the Bank of New York Mellon, which should be held responsible by the court if it doesn’t guarantee compliance.
Still, the Federal Reserve’s filing pleased Fernandez so much that she cited it in a speech Monday night.
“When an Argentine says something, the President of the Argentines or the economy minister, well, everyone comes out to criticize them, but now it’s (Federal Reserve Chairman Ben) Bernanke talking, honey, and everyone shuts their little mouth,” she said.
As with so many other things involving Argentina, these debts date back to the bloody dictatorship that ruled from 1976-1983. The military junta tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.
Sovereign debt is supposed to be paid no matter who runs a country, but Fernandez has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor Nestor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.
Instead, they offered new bonds paying less than 30 cents for each dollar owed in default, and by 2010, 93 percent of the original bondholders agreed to the swaps. The debt relief granted by these “exchange bondholders” enabled Argentina to climb out of a deep economic crisis, and many analysts have described it as a model for Greece and other debt-burdened countries to consider.
Hold-outs led by NML Capital Ltd., an investment fund owned by U.S. billionaire Paul Singer, refused the swaps, insisting on payment in full plus interest, even though some bought the defaulted debt for pennies on the dollar after Argentina’s economy collapsed. Singer’s lawyers have traveled the world since then seeking to embargo Argentine assets, even getting its navy ship Libertad seized in Ghana as collateral. But they have never collected.
The judge’s solution to all this is to force Argentina to pay the holdouts an equal amount each time it makes a payment to the exchange bondholders.
This prompted an outcry from a group of exchange bondholders who collectively own $20 billion in the restructured Argentine debt. They said they “already suffered tens of billions of dollars in losses,” and that it’s not fair to harm their already diminished returns so that a few holdouts can earn up to 200 percent on their original investments.
If allowed to stand, this kind of remedy will make it impossible for other countries to get critical debt relief, they argued.
The holdouts’ response: “Those parties made a business judgment to accept assurances of prompt payment rather than being forced to litigate against the Republic around the world, as the plaintiffs have been forced to do at tremendous expense.”
Argentina, meanwhile, has told the judge that its responsibility ends once it delivers the cash to the Bank of New York Mellon, which in turn pays the exchange bondholders. This bank, in turn, said it would suffer lawsuits from all sides if it did anything other than process the payments as intended.
There was no immediate indication from Argentina’s government late Wednesday about how it would respond to Griesa’s ruling.
The judge said he was taking the action precisely because of “inflammatory declarations” made by Argentine officials, who have vowed not to pay a cent to NML Capital Ltd.
“It is the view of the District Court that these threats of defiance cannot go by unheeded, and that action is called for,” Griesa wrote.
Argentina is running out of options. Anything short of full payments could trigger holders of all sorts of Argentine bonds to demand immediate payment in full.
“In reality, what I think they’re looking for is to provoke a technical default,” the president said Monday night. “What’s a technical default? It’s when you pay, but not in the right time, or manner, or place. For example, you don’t pay in New York so that they don’t seize the money.”
The exchange bondholders warned that if this happens, “the injunction will have turned a relatively minor default into a cataclysmic default that will further unsettle the already fragile global economy.”
Fernandez sought to calm matters, noting that Argentina has $45.3 billion in reserves and a much lighter debt burden than it did years ago.
But if Argentina pays the plaintiffs the $1.43 billion they are demanding, Moody’s Investors Service said it could set a legal precedent for other holdouts who together claim nearly $12 billion in unpaid debts.
A default, meanwhile, could put more pressure on an economy already suffering from capital flight and dangerously high inflation. Argentine debt is already rated by Moody’s as junk, so the government has few other places to turn for financing.
The holdouts blamed all this “emergency litigation and anxiety” on Argentina’s “unrelenting bad faith,” and predicted that if it is finally given no other alternative, it will submit to the courts’ will.
“There is no reason to believe — and common sense rejects — the notion that Argentina would harm its reputation and credit, and unnecessarily allow tens of billions of dollars of debt to accelerate, simply to avoid paying the plaintiffs $1.43 billion,” they said.
By Marin Katusa, Chief Energy Investment Strategist
Hugo Chàvez is undoubtedly one of the most polarizing politicians in the world today. The man who has led Venezuela for 14 years is vehemently anti-American, a proud voice for Venezuela’s poor, a patriot and a poet, and a firm believer that national resources belong to the nation and no one or nothing else.
That final Chàvez mainstay – that resources are best and most appropriately managed by the people for the people – has positioned Venezuela at the head of a group of Central and South American nations that are trying resource nationalization on for size as they struggle to make the most out of their oil and gas bounties. Venezuela is a global oil heavyweight – its 211-billion-barrel reserve is one of the top three national oil reserves worldwide – so Chàvez’s moves to nationalize his country’s massive oil machine gave neighboring countries the confidence to follow suit.
Sometimes national control over oil and gas resources can work well. Saudi Arabia, Brazil, and Kuwait are all prime examples of well-functioning, state-controlled oil sectors. However, resource nationalization is a tricky business, and more often than not the process goes awry.
Venezuela is no exception. Chàvez’s efforts to kick foreign firms out of Venezuela and use oil and gas revenues to fund social programs worked pretty well initially, but despite rising oil prices that early success has slipped away. In recent years Chàvez has demanded too much from the oil and gas sector, expecting ever-increasing revenues despite his reluctance to fund infrastructure and exploration programs. The result has been declining production, an exodus of technical expertise, and a pariah reputation in the international oil and gas industry.
Now, with a presidential election looming and Chàvez struggling with a cancer that it’s rumored will take his life within months, the path forward for the country that has been a firebrand for South American resource nationalization is far from clear.
Venezuela’s Love-Hate Relationship with Resource Nationalization
Venezuela nationalized its oil industry in 1976, at a time when many countries in the southern hemisphere were asserting sovereignty over their natural resources. The transformation of Petróleos de Venezuela SA (PDVSA) into a state-owned company was hailed as a national victory. However, it did not take long for trouble to begin.
In the 1990s global oil prices plunged and Venezuela, having based its budget on a certain level of oil income, found itself in deep economic trouble. PDVSA had 900 to 1,300 billion barrels of oil on its reserve books, but the company didn’t have the money or the technological know-how to tap into these reserves, most of which sat trapped in the geologically challenging Orinoco Belt. Seeing few other options, the country opened its oil sector to foreign investors: PDVSA started seeking out international partners willing to provide expertise and funding in exchange for a share of the profits. Big Oil arrived and started spending billions of dollars to unlock the heavy oil of the Orinoco.
Then Mr. Chàvez won the 1998 presidential election on a populist ticket that promised to use the country’s vast oil wealth to benefit the poor. Venezuela’s experiment with foreign involvement in its oil sector slowly came to a halt. Despite initially adopting “orthodox” economic policies, Chàvez soon started making good on his promise to his people – he gradually closed the door on international investment, raised rents, and changed fiscal agreements to retain ever more oil revenue for Venezuela. Imagine this: at one point the government take on oil contracts was more than 100% – foreign producers would have had to pay Chàvez for the privilege of producing oil in his country.
Chàvez brought a new form of politics to Venezuela. He identified with his supporters because he was one of them, having grown up poor, and he used language they understood, caring not that the elites saw such language as one of many signs that he was a buffoon with limited education and experience. His style stuck and the people grew to love him.
As he gained in popularity and confidence, Chàvez grew bolder in his moves to control Venezuelan oil in its entirety. In 2002 a group of PDVSA executives kick-started a general strike aimed at ousting Chàvez that lasted for a month and cut oil production to about 30% of normal levels; in response Chàvez fired nearly half of the company’s employees – 18,000 people in all – erasing large swaths of technical know-how in one fell swoop but sending a clear message that he would not tolerate dissent against his control over Venezuela’s oil.
By 2007 Chàvez had gained enough confidence to essentially complete his oil renationalization campaign – he expropriated oil assets in the Orinoco by issuing a decree that PDVSA hold at least 60% ownership in all international partnerships. What little was left of Big Oil pretty much packed up and left Venezuela. National oil production immediately fell by 25%.
You could say that was the beginning of the end, or the end of what had been a great beginning. That great beginning was undoubtedly aided by rising global oil prices: when Chàvez came to power, oil prices were sitting near $12 per barrel. By 2006 prices were averaging almost $60 a barrel, Venezuela’s coffers were overflowing, and the Venezuelan president felt unstoppable.
Those rising prices created such a sense of success around Chàvez’s experiment with renationalizing Venezuela’s oil and gas sector that Chàvez was able to convince his compatriot leaders in South America to follow in his footsteps. And it worked – Bolivia and Ecuador renationalized their oil sectors, and the concept of resource nationalization took hold in Argentina. As his geopolitical influence grew, Chàvez also devoted attention to the oil-needy nations in his neighborhood, implementing an oil-transfer program to energy-needy Central American and Caribbean countries. With his oil sector seemingly able to provide for so many, resource nationalization took on new life across South America, and Chavez was the movement’s proudest spokesman.
But here the word “seemingly” is key. As oil prices rose, PDVSA profits also rose, and it seemed that nationalization had been a boon to Venezuelan oil. But the increased profitability stemmed only from rising prices; the company itself was being strangled by a lack of investment – Chàvez spent all of PDVSA’s profits on his domestic fuel subsidies and social programs – and its dearth of technical expertise.
In short, a sector can only provide profits if it is also supplied with investment; and that is where Chàvez went wrong. Like so many other socialist leaders who nationalized resource sectors with great fanfare only to see the sectors wither away because of insufficient TLC, Chàvez failed to put money back into PDVSA.
Now the country’s once-proud oil and gas sector is in disarray. Infrastructure is old and insufficient, and production volumes are declining instead of climbing. In 2005 the company launched a new six-year plan calling for investment of US$239 billion to boost oil production to 5.8 million bpd by 2012. Instead, output has fallen from 2.9 million barrels per day (bpd) to 2.5 million bpd. Things are even worse when you look at Chàvez’s tenure as a whole: from 1998 to today, production has fallen from 3.5 million bpd to 2.5 million bpd, a decline of almost 30%:
Not only has production declined, but PDVSA’s financials have also deteriorated dramatically, its debt increasing from US$2.7 billion in 2005 to some US$33 billion now. Yet PDVSA continues to borrow money at an incredible rate, in large part to fund those domestic oil subsidies that are so very popular among Chàvez supporters. These subsidies cost the company US$15 billion a year.
The view forward is unclear. PDVSA lacks the technical expertise to take advantage of the heavy oil in the Orinoco. With foreign investment – and therefore involvement – in the oil sector banned and PDVSA drowning in debt, the prospects for turning Venezuela’s fading oil sector around are pretty dim.
Unless, of course, the sector is opened up to outside investment… which could well happen if Chàvez ceases to be part of the picture.
Over the last 12 months Chàvez has made regular trips to Havana for cancer treatments. The only official information about these treatments is that two malignant tumours were removed from his pelvic region. The secrecy surrounding Chàvez’s cancer and the fact that Chàvez, who rarely goes a few days without speaking directly to his people, enters radio silence during his trips to Cuba have fueled rumors of his declining health. Several times already these have ballooned into claims that the Venezuelan president had died.
The latest twist in the Chàvez cancer drama came from venerated journalist Dan Rather, the former CBS anchor who now hosts and directs Dan Rather Reports, a weekly news television show on HDNet. In a report he labeled as “exclusive,” Rather revealed on May 30 that he had been told that Chàvez is suffering from metastatic rhabdomyosarcoma, a rare and aggressive cancer that has “entered the end stage.” Rather said the information came from a highly respected source who is close to Chàvez and in a position to know his medical condition and history. This source says the prognosis is dire and that Chàvez is not expected to live “more than a couple of months at most.”
This is not the first time rumors of Chàvez’s pending death have surfaced. However, with his treatment having dragged on for a year already, with his uncharacteristic disappearances to Cuba growing longer and more frequent, and with Rather’s reputation for accuracy lending credence to this new information, it is time to ponder Venezuela – and South America – without Hugo Chàvez.
Chàvez would be incredibly difficult to replace. His rags-to-riches story line, bold governing style, and idiosyncratic mannerisms have earned adoration from the Venezuelan population, especially the poor and working class masses who constitute his prime electoral base. He also enjoys broad support from Venezuela’s military members.
This is a president who announces executive orders between readings of poetry, regularly draws families around their televisions to listen to his lengthy and often fiery speeches, and sings Venezuelan folk songs on a weekly show called Hello President. There are few people in the world who could match his charisma and earn such allegiance from a national population. That is why, even though others from Chàvez’s inner circle bear similar political views, most observers think any Chàvez successor would have a very difficult time maintaining the Chavista movement.
So when Chàvez dies, what might become of Venezuela? In the immediate aftermath, Vice President Elías Jaua would take power, according to the Constitution. In fact, Chàvez recently formed a nine-member State Council headed by Jaua to assist him with executive duties, a move many interpreted as a preparation for his impending demise.
In the longer term, Venezuelan political observers see five potential successors within Chàvez’s Socialist Party. All hold similar views, but none enjoy anything close to Chàvez’s recognition and support. The Party would have to hope that Chàvez’s reputation can carry one of these candidates to the presidency, but such a succession is far from assured.
If Chàvez dies before the October presidential election, opposition candidate Henrique Capriles would suddenly see his odds of winning jump dramatically. Polls show Capriles currently lagging behind Chàvez by roughly 5%, but the same polls found that Capriles would win the race by double-digit margins if he were to face a Chàvez successor instead of facing Hugo himself… unless, of course, the Socialists rig the election. Given that Chàvez has proven that a high regard for democracy is not a required characteristic for someone holding the Venezuelan presidency, this is not unlikely.
Capriles is a veteran politician, having previously served as governor of the state of Miranda despite being just 39 years old. He is a center-left politician who has cleverly focused on issues close to the day-to-day lives of Venezuelans: crime, corruption, declining services, inflation, and jobs. Capriles’ petroleum policies are less clear, but his rare comments on the matter indicate he would keep PDVSA as a national entity while allowing the company to engage in investment partnerships with foreign firms, much like the Brazilian national oil firm Petrobras.
If Chàvez is healthy enough to run, he will almost certainly win the election in October. If he is not, we see two possible paths. The first is that Capriles finds himself president of Venezuela, and South America loses its resource nationalization ringleader. However, a desire to change how Venezuela’s oil sector operates is very different from the actual ability to do so. The biggest obstacle to change: those domestic oil subsidies. If Capriles wants to revitalize PDVSA – indeed, if he simply wants to give PDVSA a chance at economic survival – he would have to significantly reduce the domestic oil subsidies, and likely also reduce social spending to free up some oil revenues for reinvestment into the country’s oil fields. And that would cause riots. We have seen it before, most recently in Nigeria: populations that are accustomed to having access to cheap oil are highly unwilling to let go of that benefit and will riot, often violently and for extended periods, at the mere suggestion that gas prices need to increase.
Oil-related riots in one of the world’s top-ten oil-producing nations would undoubtedly push global oil prices higher.
The other potential path for a post-Chàvez Venezuela is that his successor within the Socialist Party wins the presidency, legitimately or with the aid of electoral fraud. This Chàvez clone would then be stuck trying to fill Hugo’s shoes, a near-impossible task in which he would only have a chance at success by promising even more in the way of social spending. These expensive programs would put even greater strain on Venezuela’s budget, which is funded in large part by revenues from PDVSA. There would continue to be no money available to finance PDVSA’s spending needs, and production would continue to decline.
Guess what? This scenario – of continued production decline in a major world supplier – would also push global oil prices higher. The bottom line is that Chàvez has created a lose-lose scenario for Venezuelan oil. The country has become reliant on a one-way flow of money and cheap oil from PDVSA to society, but after a decade of neglect PDVSA is withering away and the flows are drying up. Even if Chàvez dies and a left-leaning leader like Capriles comes to power, Venezuela will have to convulse through many ugly years before a functional relationship can be reestablished between its oil riches and its social demands. In the meantime, Venezuelans and the world will have to do with only limited access to Venezuelan oil.
So, for those of us positioned to gain from a long-term rising oil price, it’s heads we win, tails we win.
Oil Prices to Ease Further This Year (Reuters)
The CEO of Royal Dutch Shell expects oil prices to continue easing through the rest of the year, as demand reacts to a slowing global economy and international tensions ease. Peter Voser’s statement came just as Brent crude dropped to a 16-month low – below US$96 per barrel – on the heels of further weak economic news from the US and China. In addition, concerns over the state of the European economy have taken the spotlight away from the lingering tensions between Iran and Western powers, which just three months ago helped to push Brent above US$128 a barrel.
Global demand for natural gas will rise by 2.7% annually for the next five years, a faster growth rate than previously expected. China and the United States are driving the additional demand by switching from coal to gas to generate electricity. In China alone consumption is expected to double to 273 billion cubic meters in 2017 from 130 billion cubic meters today, representing an average growth rate of 13% per year.
King Coal Still Reigns Despite Drop in Prices (Vancouver Sun)
Canadian coal companies are not slowing down exploration nor development programs despite a drop in prices in China, their main export market. Companies are generally viewing depressed prices as a transient problem and see demand from Asia remaining strong in the medium term, especially for British Columbia’s high-quality metallurgical coal.
South Sudan’s $4-Billion Question Answered: Oil Revenue Stolen by Corrupt Officials (The Globe and Mail)
It has been a mystery for years: how does South Sudan remain so poor and hungry when it receives billions of dollars in oil revenues every year? The answer is now clear: South Sudan’s president says corrupt officials have stolen $4 billion in oil revenues since 2005. He is asking those officials to return the stolen funds. Any returned funds would be especially useful at the moment, because a dispute with Sudan has shut in South Sudan’s oil production and thereby eliminated about 98% of the government’s official revenue.
Oil Rush in the Arctic Gambles with Nature and Diplomacy (The Guardian)
A small group of international scientists, politicians, and business leaders are gathered in the Ny-Alesund research station on the Norwegian island of Svalbard to discuss the path to a global low-carbon economy. Meanwhile, just outside the station an oil rush looms – one that threatens to spark territorial disputes and saber-rattling as a host of nations compete to claim rights to the Arctic seabed.
Germany Plans Massive Wind Power Grid (The Globe and Mail)
Germany’s utilities have tabled plans to build four high-voltage electricity lines to link wind turbines off the north coast with manufacturing centers in the south. The plan is a boost for Angela Merkel, who has been criticized for announcing an accelerated nuclear-power phase-out a year ago without producing an alternative plan. The lines are expected to cost around €20 billion
- Venezuela expands China oil-for-loan deal to $8 billion (chinadailymail.com)
- Report: Chavez’s Cancer Has Metastasized (hispanicallyspeakingnews.com)
Thursday, May 10, 2012 – by Staff Report
Argentine Vice President Amado Boudou on Tuesday urged US companies to invest in YPF, the nationalized oil company that Argentina recently expropriated from Spain’s Repsol … “We are very optimistic in terms of what is coming for the Argentine economy in general and the hydrocarbons sector specifically” Boudou said at a Conference on the Americas at the US State Department in Washington. Far from scaring off foreign investment because of the expropriation, the government of President Cristina Fernandez has set the framework for “excellent opportunities for those who want to invest in joint ventures and possibilities of joint work in the energy sector,” he said. The Cristina Fernandez administration is gambling that the discovery in May 2011 of a giant oilfield in Argentina’s Patagonia would be too tempting for foreign oil giants to ignore. YPF needs the know-how and the capital to fully exploit the oil fields in the south-western Nequen province, known as Vaca Muerta (Dead Cow), which according to official estimates holds 150 million barrels of oil. YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said. – Merco Press
Dominant Social Theme: Don’t cry for Argentina. It’s all under control …
Free-Market Analysis: Are Argentina’s top officials having second thoughts about their expropriation of Spain’s Argentine oil-producer? It would seem that way from the above news report via Merco Press.
If the move was as wildly destructive as people think it may have been, then this posture would tend to confirm the idea that one of the world’s more powerful and influential states is simply spinning out of control.
The results may be truly catastrophic, not just for Latin America but for the larger, struggling world.
This boom may well be ending – or certainly growing long-in-the-tooth after a decade or more.
Although the Argentine expropriation of Repsol made major shock waves, the Argentine government under President Cristina Fernandez has portrayed it as a judicious and necessary gambit.
Many other observers regardless of political affiliation have branded the move as a shallow populist one that will bring disaster to Argentina and environs.
As the predictions of damage mount, there is more speculation that Fernandez’s action may bring down not only her own government but other regional governments as well.
These predictions involve inevitably a peso devaluation that will set off a dollar-withdrawal frenzy in big regional banks. Real estate prices – radically inflated after a decade of monetary expansion – may well plunge. The results could affect large swaths of South America.
Countries that could be affected include Uruguay, Brazil, Chile and Peru among others – all countries that have pursued moderate market-based policies and have benefitted from the South American industrial and monetary boom.
Meanwhile, Repsol doesn’t seem apt to surrender. Here’s more from the article.
YPF is “open to capital and the possibility of working together with public or private companies in Argentina or abroad,” Boudou said.
Last week the Argentine president signed a bill expropriating 51% of YPF stock from Repsol, its majority shareholder, sealing a measure that has roiled the country’s trade ties with Europe.
Cristina Fernandez has argued that the move was justified because Argentina faces sharp rises in its bill for imported oil, and Repsol has failed to make agreed investments needed to expand domestic production.
In Madrid, a Repsol spokesman Tuesday said the company has warned its competitors that they will face legal action if they invest in YPF.
“The idea is to protect the assets that were confiscated in Argentina until the situation is resolved in a satisfactory way for the parties that are involved,” the spokesman said.
Conclusion: A cascading crisis in South America may still seem likely …
- Argentina: Vaca Muerta – Argentina’s oil and gas seizure poses new dilemma (mb50.wordpress.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
- Leftist economist masterminds Argentina’s YPF grab (mb50.wordpress.com)
- This Is Why President Cristina Kirchner Is Not Good For Argentina (businessinsider.com)
- Argentine Congress easily approves YPF takeover (fuelfix.com)
- BOOM: Argentine Parliament Votes To Nationalize YPF (YPF) (businessinsider.com)
- Leftist economist behind Argentina’s YPF takeover (sacbee.com)
- Argentina Backs Nationalization of YPF Oil Firm (theepochtimes.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
By Vladimir Hernandez BBC Mundo
It is a grim name, though it has nevertheless brought hope of a better future for many in Argentina: Vaca Muerta – translated from the Spanish – means “Dead Cow”.
Vaca Muerta’s barren landscape covers some 30,000 remote sq km of the Patagonian province of Neuquen, in the west of Argentina.
And it was here where energy giant Repsol-YPF struck gold last year. Black gold.
Buried in 250-million-year-old rocks, almost 3km beneath the surface here, are some of the world’s largest reserves of shale oil and gas.
According to the Spanish energy giant Repsol, there are prospective resources equal to more than 21 billion barrels of oil underneath the ground in Vaca Muerta.
Much of it could be shale oil, rather than gas, according to an independent Ryder Scott audit commissioned by Repsol, though this has yet to be proven.
But the presence of shale gas is proven, and it is clear that the reserves found here will make up a big proportion of the country’s estimated 22 trillion cubic-metre total.
That makes Argentina the world’s number three in terms of shale gas reserves – hot on the heels of the US, which has reserves of some 24 trillion cubic metres, and China, which has reserves of some 36 trillion cubic metres, according to the American Energy Information Administration.
Failure to invest
Getting the reserves out would obviously require massive investment.
Argentina’s government believes Repsol – which has been active here ever since it took over YPF when it was privatized during the 1990s – should have done this.
But instead, it says, Repsol has been dragging its feet, invested too little and thus failed to get the resources out of the ground as quickly as it should have done.
The government has even accused Repsol of pulling YPF’s profits out of the country to finance its businesses abroad.
President Cristina Fernandez said:
“If such a situation continued, we would have had big energy problems in the country because of the drop in production and the increasing reliance on fuel imports.”
So the government has stepped in to take control of what it sees as a vital, national asset.
Rodrigo Alvarez Argentine economist:
This is the real reason behind the renationalization of YPF”
Renationalizing YPF has in effect helped the government regain control of the Vaca Muerta energy reserves, since the rights to exploit more than a third of the area were held by Repsol-YPF.
The move, and the manner in which it was made, has obviously created a great deal of controversy.
Repsol and others believe the government was motivated by a desire to secure the country’s energy requirements for decades to come, and thus reduce its gas import bill which shot up to $10bn in 2011 and is expected to surge to $14bn this year.
“This could help cope with between 30% and 40% of the gas demand within Argentina, which has been covered with costly imports in the last two years,” says Eduardo Barreiro, an energy consultant and a director at the Society of Petroleum Engineers in Argentina.
Argentine economist Rodrigo Alvarez Litre agrees:
“This is the real reason behind the renationalization of YPF,” he wrote in a column in the Argentine newspaper, Perfil.
“With such shale gas reserves, Argentina could position itself as a nation with cheap and abundant energy, and profit from the high prices in the international market.”
Argentina’s government might describe its move as a step towards self-reliance, which it believes is clearly in the nation’s interest.
“Vaca Muerta could be a very important area in the future,” Mr Barreiro says.
“But it needs investment.”
Some $3bn would be required over the next three years to get the shale gas extraction started.
And then, he added: “You’ll need to be excavating constantly to keep the production levels high enough to justify the investment and to make a profit.”
According to Repsol, more could be achieved with more investment. The firm insists that some $25bn per year would be needed to exploit Vaca Muerta’s shale oil and gas potential. This, the company believes, could double the Argentine production in 10 years.
But this would require some 3,000 shale oil and gas wells in an area where there are only 28 at the moment.
Without Repsol, the government might well look to other foreign investors for help to make it happen.
But Daniel Kokogian, a geologist who works as an advisor for several foreign energy companies in Argentina, said some companies would be concerned about how they might be treated in the future, following the renationalization of YPF.
“What private investor would put money into a business where national interest will come first, then profits?” he asks.
Others are far more optimistic about Argentina’s chances to attract foreign investors.
The government says it has already had talks with energy giants such as Total of France and Petrobras of Brazil – and local energy analyst Victor Bronstein expects deals to be struck.
“Oil companies are constantly operating in turbulent environments, in problematic countries,” he says.
“If they think there’s a business opportunity, that there’s a possibility of resources, they’ll dive in.”
Besides, cash-rich states may well be keen to get involved, according to Mark Routt, a senior consultant with KBC Advanced Technologies in Houston, Texas.
“Argentina is going to have to look for government-government relationships, particularly with China,” he says.
But Mr Kokogian says he believes the main concern of most investors will be whether or not Vaca Muerta is going to deliver decent margins.
“The main issue here is to determine if these estimated resources can actually be called reserves,” he said.
“A resource becomes a reserve when it is proven that the investment can be recovered with an acceptable profit. In Vaca Muerta, I don’t think that has happened yet.
“If this area was truly the main reason behind the nationalization of YPF, then Argentina may have shot itself in the foot over an unproven source of energy,” he adds.
And if that turns out to be the case, the Argentine efforts to control “Dead Cow” could be a bit like flogging a dead horse.
- Repsol YPF ups Argentine shale potential (mb50.wordpress.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
- Is Cristina Fernandez destroying Argentina’s economy? (business.financialpost.com)
Argentina once again warned oil companies considered by the Government to be “illegally operating” in the Falklands/Malvinas Islands, and reiterated it will press charges against them unless they justify their actions before next Wednesday, May 2.
In a recent statement released to the press, the ministry said that on last April 17th, all oil companies currently performing exploration tasks in the ‘Malvinas basin’ were notified “of their clandestine actions and their consequences” by the Argentine embassy in the United Kingdom.
The Argentine government has set a May 2 deadline for companies to justify their activities.
“If case of failure to offer a response and once the legal deadline expires, we will issue the corresponding sanctions to every company according to a resolution by the Argentine Energy Secretariat, which considers these activities to be clandestine. The Government will also proceed to press criminal and civil charges,” the ministry warned.
The Foreign Affairs release states that by doing this they “reaffirm Argentina’s decision to defend the nation’s sovereign rights by any peaceful means possible – both legal and diplomatic- as well as the country’s natural resources, which belong to the Argentine people.”
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
- Argentine Senate nears approval of YPF takeover (sacbee.com)
- US State Department condemns Argentine expropriation of YPF Oil Company (alethonews.wordpress.com)
- Argentine threats against oil companies near Falkland Islands ‘bizarre and ridiculous’ (telegraph.co.uk)
- Argentina ‘satisfied’ by BP’s Falklands rejection letter (telegraph.co.uk)
(Reuters) – Government economist Axel Kicillof stormed the world stage this week when Argentina moved to nationalize energy company YPF, defending the plan he helped devise in a fiery speech worthy of Venezuelan President Hugo Chavez.
Charismatic and polarizing, the 40-year-old Kicillof lambasted “free-market fundamentalists” as he defended the push to seize control of YPF from Spain’s Repsol.
Just four months after taking the deputy economy minister post, Kicillof has penetrated the small circle of trusted advisers to President Cristina Fernandez, who singles him out for praise in her speeches.
Sporting sideburns and an open collar, Kicillof told Congress that only “morons” would think the state was stupid enough to play by Repsol’s rules and make an offer to buy 100 percent of its shares. He blasted economic theories that “justify the looting of our resources and our companies.”
People who know Kicillof say they are not surprised to see him become the public face of a move that has prompted howls of protest from abroad. They say he has always been brilliant, hard-working and even messianic.
One classmate remembered a high school camping trip where Kicillof and a group of friends played at him being God, surrounded by his chanting followers.
“It was child’s play, but it’s striking that Axel was God,” she said, speaking on condition of anonymity.
Kicillof, who declined to be interviewed for this story, spent most of his career in academia, giving classes and writing about the theories of economists such as John Maynard Keynes and Karl Marx.
His first foray into business administration came in 2009, when he took a key position at flagship carrier Aerolineas Argentinas, which the government had expropriated from Spanish travel group Marsans.
Last year, he rose to prominence when Fernandez’s administration fought to appoint him as state representative on the board of directors at steelmaker Siderar, despite company resistance.
With that, local media at odds with the government crowned him the new radical boogeyman.
As a college student, Kicillof co-founded TNT, a group that used irony and humor to tackle corruption and raise standards inside state-run Buenos Aires University’s economics department.
Later, during the 1999 presidential election, he helped organize a protest against Argentina’s obligatory vote because he said the field of candidates was too narrow.
“He’s a brilliant guy. He’s one of the most intelligent people I know, very honest and with strong ideals,” said Leo Piccioli, general manager of Staples Argentina and a fellow member of TNT in the 1990s.
Despite his youthful appearance, Kicillof is an old-school ideologue who shuns the tenets of 21st Century globalism and believes Argentina must find its own way to economic development and industrial prominence.
In his Tuesday speech, he mocked the concept of the “rule of law,” saying this was designed to protect big business. He also compared the Spanish operators of YPF and Aerolineas Argentinas, who received no compensation after the airline was expropriated.
“Spanish officials decide what is done at YPF … in the same way that (Marsans) was bent on lobotomizing Aerolineas Argentinas,” Kicillof said. “This is a transnational group that doesn’t think about the Argentine worker.”
Kicillof helped put together a strategic plan for Aerolineas, which critics say has failed because the company keeps losing money. Others say it is impossible to evaluate his administration of the airline’s finances when so much tax revenue has been used to revamp the company.
Admirers call him captivating while critics see him as inflexible and verbose. His influence is growing where it counts — with the president.
At both Siderar and YPF, Kicillof urged company officials to make fewer dividend payments abroad and invest more locally. Fernandez ended up enshrining that view in government policy.
“He was the main architect of this concept,” said a personal acquaintance who met Kicillof in the last few years. “He is absolutely convinced that (his vision) will be Argentina’s salvation and not its death knell.”
Some people view Kicillof as a threat to the country’s future, saying he will scare off private investors. Emerging markets analyst Walter Molano at U.S.-based BCP Securities called Kicillof “a flaming red Marxist” on Thursday.
One old friend said his lack of political experience, and his impulsive, irreverent style, could eventually cause a rift with the president and end with him being scapegoated.
But that view might underestimate the loyalty shown by Fernandez to another controversial government figure, price and import czar Guillermo Moreno, famed for his vulgar talk and his fanatical work ethic.
Like Moreno, Kicillof isn’t seen giving an inch.
“He is intelligent,” his old schoolmate said. “But he won’t listen to other opinions or other points of view. He won’t learn from past mistakes.”
- Leftist economist the fire under Argentina’s Repsol asset grab (business.financialpost.com)
- The Man Behind Argentina’s Next Crash (blogs.the-american-interest.com)
- Incensed Spain threatens Argentina after YPF seizure (mb50.wordpress.com)
The Government, in a move designed to ease concern among the investment community about the Argentine legal threats, has written to some 15 banks and oil exploration companies operating in the region.
In the new letter, the Foreign Office says it is “deeply sceptical” that Argentina would be able to enforce “any penalties” in courts outside its own borders. It adds that the government of the Falklands “is entitled to develop” oil and fishing industries in its own waters “without interference from Argentina.”
“The British Government has no doubt about our sovereignty over the Falkland Islands and surrounding maritime areas,” it adds.
News of the letter follows The Sunday Telegraph’s revelation that the Argentine government had written to banks involved in the Falkland oil industry threatening them with legal action. In writing to the banks concerned, including broker Oriel Securities and Royal Bank of Scotland, the Government has sought to not jeopardies the fledgling Falkland oil industry.
- Letter to banks over Argentina’s Falklands threats 21 Apr 2012
- Argentina’s Kirchner opens a new trade war 21 Apr 2012
- Falkland Oil and Gas shrugs off Argentine threats 13 Apr 2012
- Argentina’s Falklands oil threats: the letter to banks 31 Mar 2012
- Argentina includes Repsol gas unit in asset raid 19 Apr 2012
- EU parliament calls for Argentina sanctions 20 Apr 2012
Edison Investment Research, which has published research on the value of oil around the islands , slammed the attempts to silence it.
“Edison Investment Research firmly believes in the right for all financial institutions, publishers and in particular financial research houses such as ours to be able to exercise their right to provide independent analysis of all quoted companies wherever they are listed and wherever their operations may be carried out,” said Edison’s Fraser Thorne.
- Foreign Office letter to banks over Argentina’s Falklands oil threats (telegraph.co.uk)
- Argentina threatens to sue banks helping Falklands oil explorers as trade war with Britain escalates (oyiabrown.wordpress.com)
- Venezuela attacks Britain’s stance over Falklands (independent.co.uk)
- Some Argentines Demand Return Of Falkland Islands (npr.org)
MADRID – An incensed Spain threatened swift economic retaliation against Argentina on Tuesday after it announced plans to seize YPF, the South American nation’s biggest oil company, in a move which pushed down shares in Spanish energy giant Repsol, the controlling shareholder.
Madrid called in the Argentine ambassador in a rapidly escalating row over the nationalization order by Argentina’s populist and increasingly assertive president, Cristina Fernandez, a move which delighted many of her compatriots but alarmed some foreign governments and investors.
Promising action in the coming days, Spanish industry minister Jose Manuel Soria said: “With this attitude, this hostility from the Argentine authorities, there will be consequences that we’ll see over the next few days. They will be in the diplomatic field, the industrial field, and on energy.”
“Argentina has shot itself in the foot,” said Foreign Minister Jose Manual Garcia-Margallo.
Despite the rhetoric, Spain appeared to have little leverage over Buenos Aires – any action to be taken will be determined at a cabinet meeting on Friday – and Argentina has proven impervious to such pressure in the past.
Repsol said YPF was worth $18 billion as a whole and it would be seeking compensation on that basis, but the Spanish oil major’s shares fell by 7.5 percent in Madrid on Tuesday. The company said it could raise money in the bond market and sell some assets to help its cash flow.
Repsol described Argentina’s move as “clearly unlawful and seriously discriminatory” and said it would take legal action.
“This battle is not over,” Repsol Chairman Antonio Brufau said. “The expropriation is nothing more than a way of covering over the social and economic crisis facing Argentina right now.”
But Fernandez dismissed the risk of reprisals. “This president isn’t going to respond to any threats … because I represent the Argentine people. I’m the head of state, not a thug,” she said.
European Commission President Jose Manuel Barroso said he expected Argentina to uphold international agreements on business protection with Spain. “I am seriously disappointed about yesterday’s announcement,” he said in Brussels.
But action against Argentina appeared limited in scope. The EU Trade Commissioner would write to Argentina’s trade minister to “reiterate our serious concerns” while an EU-Argentine meeting this week would be postponed.
“It’s absolutely shameful considering everything that Spain has done for Argentina,” said a woman called Domi, who was filling her tank at a Repsol petrol station in Madrid.
“I hope the government takes measures and does something serious. They’ve pulled our leg long enough!”
Spanish media condemned the Argentine action, believed to be the biggest nationalization in the natural resources field since the seizure of Russia’s Yukos oil giant a decade ago.
La Razon newspaper carried a photograph of Fernandez on its front page in a pool of oil with the headline: “Kirchner’s Dirty War”, referring to her full name. The business newspaper La Gaceta de los Negocios called the takeover “an act of pillage”.
El Periodico spoke of “The New Evita”, pointing out that Fernandez had announced the nationalization in a room decorated with a large portrait of Eva Peron, the actress who was married to a president and revered by many Argentines as a populist mother of the nation and champion of the poor.
Repsol’s Brufau said he suspected nationalization of YPF was imminent when he tried to contact Fernandez last Friday and was told that the president “was angry” and did not want to speak.
YPF has been under pressure from Fernandez’s centre-left government to boost oil production, and its share price has plunged in recent months on speculation about a state takeover.
Spanish investment in Argentina may now be at risk after the move on YPF. In the “reconquista” or reconquest, of the 1990s, newly privatized Spanish businesses bought Latin American banks, telephone companies and utilities, much as their armor-clad ancestors had conquered the region 500 years earlier.
Through its latest nationalization move, Argentina runs the risk of frightening off foreign investors, key to contributing money to help develop one of the world’s largest reserves of shale oil and gas recently discovered in the Vaca Muerta area.
ACE UP ITS SLEEVE?
This led some analysts to question whether Argentina might have an ace up its sleeve in the form of a new partner such as China Petrochemical Corp (Sinopec Group).
Repsol has, however, identified Vaca Muerta as “the cause of the pillage”, or the reason Argentina went after its YPF share.
A Chinese website said Sinopec was in talks with Repsol to buy YPF for more than $15 billion, although other sources said the nationalization move would probably get in the way of such a deal. Sinopec dismissed the report as a rumor.
Fernandez said the government would ask Congress, which she controls, to approve a bill to expropriate a controlling 51 percent stake in YPF by seizing shares held exclusively by Repsol, saying energy was a “vital resource”.
“If this policy continues – draining fields dry, no exploration and practically no investment – the country will end up having no viable future, not because of a lack of resources but because of business policies,” she said.
YPF’s market value is $10.6 billion, although an Argentine tribunal will be responsible for valuing the company as part of the takeover. Central bank reserves or state pension funds could be used for compensation.
Fernandez, who still wears the black of mourning 18 months after the death of her husband and predecessor as president Nestor Kirchner, stunned investors in 2008 when she nationalized private pension funds. She has also renationalized the country’s flagship airline, Aerolineas Argentinas.
Such measures are popular with ordinary Argentines, many of whom blame free-market policies such as the privatizations of the 1990s for the economic crisis and debt default of 2001/02.
Her announcement of the YPF takeover plan, however, drew strong warnings from Spain, Mexico and the European Union, a key market for Argentina’s soymeal exports.
Mexico’s President Felipe Calderon said Fernandez’s plan would damage chances for future foreign investment in Argentina and hurt Repsol, in which Mexico’s state oil monopoly Pemex holds a 10-percent stake.
Venezuela, where socialist President Hugo Chavez has nationalized almost all the oil industry, applauded her move.
The row over YPF comes as Fernandez heaps pressure on Britain over oil exploration off the Falkland Islands, over which Argentina claims sovereignty.
- Spain threatens Argentina after YPF seizure (business.financialpost.com)
- Argentina To Seize Control Of Oil Firm (news.sky.com)
- EU calls off meeting with Argentina over Repsol (newsok.com)
- Argentina moves to renationalize leading oil company (ctv.ca)