Robert Campbell : YPF grab
Argentina's energy woes
Argentina's planned takeover of oil and gas company YPF is a desperation move aimed at boosting investment in oil and gas production while avoiding policy shifts that might have otherwise made the sector more attractive to private capital.
The country's oil and gas reserves have tumbled in recent years as heavy-handed regulation has made the sector unattractive to many private investors.
The partial renationalization is effectively an effort to maintain those policies, including bans on exports of hydrocarbons and price controls that keep both oil and gas prices below international levels.
The 1993 privatization of YPF helped spark a boom in Argentine energy investment, culminating in Spain's Repsol making the disastrous decision to merge with the company in 1999.
The collapse of Argentina's economy in 2002 and subsequent restrictions on hydrocarbons prices turned YPF from Repsol's crown jewel into an albatross, though it still provided substantial cash flows for reinvestment elsewhere in the world.
Repsol's use of YPF as a cash cow has rankled the government and a partial selloff of the company has not helped matters.
In 2008 Repsol sold a minority stake to local investors the Petersen Group, and agreed to pay out 90 percent of YPF's net income as dividends, according to filings with securities regulators.
The large pay outs have constrained the amount of new investment YPF can undertake due to its policy of relying mainly on internally-generated cash to fund its capital expenditures.
As the biggest player in Argentina's oil and gas sector, YPF's cash and dividend policies had an overwhelming influence over the overall level of investment by the industry.
The Argentine government has for months complained about the policy and now appears set on a course of action that would, at least in the short term, boost YPF's capital expenditures.
By taking a majority stake in the company the government will be able to dictate dividend policies and direct more cash to investment.
KEEPING THE LIGHTS ON
To be sure, altering the dividend policy will free up quite a lot of cash. Dividend payments in 2011 totaled nearly 5.6 billion pesos ($1.25 billion), compared with capital expenditures of 13.64 billion pesos and net profits of 5.3 billion pesos.
But whether this will be enough to fix Argentina's energy problems is far from clear. The most pressing issue is natural gas supplies.
Domestic production shortfalls have forced the government to increase imports of liquefied natural gas (LNG) in the winter to meet demand for the fuel.
With global LNG prices surging with higher oil prices and strong spot demand from Japan following the Fukushima nuclear disaster, the fuel bill has become burdensome.
Argentina may need a record 80 cargoes of LNG in 2012 but has been struggling to find cheap supplies.
With government finances strained even as the local economy booms, curbing outlays on energy imports would go a long way to shoring up the government's balance sheet.
But YPF's proven gas reserves have been declining for years due to a lack of investment in exploration. The company's gas reserves fell more than 6 percent in 2011 to end the year at 2.36 trillion cubic feet.
Stepping up investment may boost production and add to discoveries, but at the currently low prices YPF receives for the gas produced from its existing fields, returns on the investment will be low.
That, of course, is precisely why Repsol preferred to milk the company for dividends rather than invest.
With Argentina's government still largely locked out of international financial markets, the long-term picture for YPF is one of diminishing returns and cash flow.
That in turn means this move is largely going to have an impact in the short run. A temporary boost to gas output and exploration may be achieved, but there is no sign this policy will ensure a stable basis for the local energy industry.
Moreover the takeover may well frighten off private sector investors, such as ExxonMobil and Total who have been eyeing the country's shale gas potential.
Therein lies much of the irony. Argentina counts world class shale gas reservoirs and, unique to much of Latin America, a relatively well developed infrastructure for transporting gas to market.
Little wonder YPF started touting the size of its shale resources as the huge capital expenditures, estimated at between $5 and $8 billion a year that would be needed to develop these fields.
Given attractive returns, YPF would doubtless have had few problems finding the capital, or a deep-pocketed partner able to pick up a share of the costs.
But government policy has constrained investment for the sake of keeping prices artificially low as a means of containing consumer price inflation.
As a result much of this shale bounty will probably remain in the ground. The government's dearly bought "solution" to inflation will keep getting more expensive.
Follow us and post your comments: in Twitter Facebook
Robert Campbell is a Reuters market analyst and has a very extensive experience as an oil & gas correspondent in Latin America for various news agencies. (The views expressed are his own). Petroleumworld does not necessarily share these views.
Editor's Note: This commentary was originally published by Reuters, on April 16, 2012. Petroleumworld reprint this article in the interest of our readers.
All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.
Use Notice:This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.
All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.
Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law.
If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner. Internet web links to http://www.petroleumworld.com are appreciated
Petroleumworld News 04/17/2011
Follow us in Twitter
And post your comments in our Facebook site
Petroleumworld welcomes your feedback
and comments, share your thoughts on this article,
your feedback is important to us!
We invite all our readers to share with us their views and
comments about this article, write to email@example.com
Copyright© 1999-2010 Petroleumworld or respective author or news agency. All rights reserved.
We welcome the use of Petroleumworld™ stories by anyone provided it mentions Petroleumworld.com as the source. Other stories you have to get authorization by its authors
Send this story to a friend Any question or suggestions,
please write to: firstname.lastname@example.orgBest Viewed with IE 5.01+Windows NT 4.0, '95, '98, ME,
XP, Vista, W7 +/ 800x600 pixels