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How Argentina's oil raid will end ?

By John Gapper/Raul Gallegos

John Gapper for The Financial Times said Argentina's oil raid can only end badly, while Raul Gallegos wrote for Reuters' BreakingViews; Oil majors can't afford to shun Argentina.The articles see the situation from two different angles, Gapper with skepticism, ill timed raid; Gallegos see it in a more pragmatic way, but both agree on that the oil game is for the long run.

Argentina's oil raid can only end badly / John Gapper

Sometimes the most obvious and tempting strategy is the stupidest. That applies to Argentina's decision to seize a majority share in YPF , its biggest oil company, from Repsol , the Spanish energy group.

It is obvious because Latin American countries have often expropriated the assets of foreign companies, ever since Bolivia did so to Standard Oil in 1937. It is tempting for President Cristina Fernández because oil is expensive, confidence in her erratic government is low and Repsol is a soft target.

But it is stupid because Ms Fernández has her tactics wrong. The best time to squeeze foreign companies is when the hard work of investment and exploration is over and a state-owned oil company can reap the benefits. It is not when your country has deep fiscal problems, no access to international capital markets and a looming investment challenge.

Solving Argentina's energy problems would be difficult for any company, let alone “the most badly run enterprise in the history of the world”, as Francisco Monaldi, a professor at IESA, the Venezuelan business school, describes YPF before the state-owned company was privatised in 1992. It managed to lose money, a perverse achievement for an oil company.

YPF is no doubt in better shape after 13 years, many of them vexed, under the ownership of Repsol. But it and the Argentine government must now develop its huge shale gas discovery at Vaca Muerta (Dead Cow) without a western oil major to provide capital, technology and someone to blame.

Many are as scandalised by Ms Fernández's coup as if she invented the idea of seizing mineral resources. Antonio Brufau, Repsol's chairman, warned on Tuesday that “these acts will not go unpunished”, while Felipe Calderón, Mexico's president, said that “no one in their right mind is going to invest in a country that expropriates investments”.

The problem – as Argentina knows – is that both statements are probably false. Argentina's chances of being punished, as opposed to hurting itself, are slim – the worst it is likely to suffer is an adverse financial ruling by an international arbitration panel. Meanwhile, the world is stuffed with investors and companies that repeatedly pile back into such places.

This is the biggest act of resource nationalism for a while, but there was a wave of interventions between 2003 and 2008. In Russia, Yukos was seized and Gazprom took a majority stake in the Sakhalin II gas project from Royal Dutch Shell . In Latin America, international contracts were reneged on by Argentina, Bolivia and Ecuador, and Venezuela took control of the Orinoco oil belt.

Group of Seven countries have also rewritten contracts by force majeure – the UK did so with the tax on North Sea oil in 2005 and Canada's Alberta province raised its take of oil sands revenues in 2009. That is not as bad as seizing companies, but it involves changing the rules long after the wells are sunk.

Governments strike deals with companies when the price of oil is low and the cost of exploration high and then tear them up when the expensive work has been done and the yield rises. “These agreements are supposed to last for 30 years but they rarely do,” says Louis Wells, a Harvard professor who has served as an expert in arbitration cases.

In the long run, they also tend to get away with it, after paying compensation. ExxonMobil and ConocoPhillips resisted Venezuela's Orinoco raid but others such as Total , BP and Chevron acceded to its wishes. Eni , the Italian company, demanded compensation but went back into a deal with PDVSA, the state-owned company, in 2010.

Argentina's problem is that its own seizure is extreme, badly timed and unlikely to address Ms Fernández's complaint – that Repsol was failing to invest enough in her country. She wanted it to stop taking 90 per cent of YPF's earnings in the form of dividends and reinvest the money in oil production.

This ignores some salient facts. One is that Argentina's fields were discovered in 1907 and, like mature fields in the US and elsewhere, are slowly running out of oil. A company can upgrade its extraction techniques – as YPF has been doing – but cannot alter time and geology.

Since Néstor Kirchner, Ms Fernández's late husband, gained power in 2003, Argentina has also turned itself into an unattractive place for an oil company to invest. It has capped domestic fuel prices and held the wholesale price it pays to YPF below the global level – an incentive for Repsol to invest in more promising and less interfering places, such as Brazil.

The Kirchners were a driving force in the dividend policy – Repsol lent money to Petersen Energia, which is controlled by the Eskenazi family, to acquire a 25 per cent stake in YPF when the Eskenazis were close to Mr Kirchner. The dividend was needed for Petersen to repay the loan but Ms Fernández has now fallen out with the Eskenazis.

Kicking Repsol out solves none of its self-inflicted problems and damages the chances of investment flowing to where it is now needed – the Vaca Muerta discovery, which could be the third-largest gas shale reserve in the world. That will demand capital and technology, and Argentina now lacks both.

In the long run, Argentina may get another outsider to fill the gap it has just created – perhaps a Chinese company such as Sinopec , with which Repsol was negotiating a deal before Ms Fernández struck . But the price that any multinational will demand to compensate for the political risk will be high.

If a country is going to indulge in resource nationalism, it should at least act rationally. Ms Fernández has not.

Oil majors can't afford to shun Argentina / Raul Gallegos

The seizure of YPF may not be the end of it. Argentine President Cristina Fernandez could easily embark on an overhaul of the entire energy sector. Even so, the country's vast shale reserves are too important in the global scheme of things. The nationalization is bad, but Big Oil can't afford to shun Argentina.

It isn't just Buenos Aires that's inhospitable. From Baghdad to Moscow and beyond, the risks of extracting such resources run high. Oil majors have learned to live with many of their unfriendly hosts and still make a buck. The increasingly difficult task of replacing reserves means Argentina's Vaca Muerta basin, which could supply some four centuries' worth of the country's consumption demands, isn't easy to abandon.

Four more years with Fernandez won't be much fun for these companies. Up till now, YPF's returns haven't been terrible. It achieved a 26 percent return on invested capital in 2010, against a 17 percent cost of capital, according to Credit Suisse. That was before Fernandez forced oil companies to repatriate off-shore holdings and eliminated the sector's fiscal incentives. She's now declaring the production chain fair game for potential takeovers.

Oil companies have seen this movie before, in Venezuela. President Hugo Chavez has restructured his country's energy legislation, hiked taxes and royalties and forced foreigners to accept less beneficial partnerships. Exxon Mobil and ConocoPhillips fell out with his regime and now lack a presence in the largest heavy oil patch in the Western Hemisphere.

But Chevron's skilful handling of Venezuela's leftist government may be the example to follow. It shrugged off the president's ideological bent to forge a relationship with the administration and remains a major player after 13 years of Chavez. And if his government should eventually fall to a more business-friendly opposition, Chevron's tenacity could pay off even more.

Exxon, for one, has already seen value from its 1 million acres in the Vaca Muerta formation, which, at nearly 7.5 million acres, is slightly larger than America's Eagle Ford. And it stands ready to invest over $50 million more. Apache and Chevron also have a presence in Argentina. Of course, there won't be 20 percent-plus returns any time soon. But these companies know their business is about the long game.


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John Gapper is associate editor and chief business commentator of the Financial Times. He has worked for the FT since 1987, covering labour relations, banking and the media. In 1991-92, he was a Harkness fellow of the Commonwealth Fund of New York, and studied US education and training at the Wharton School of the University of Pennsylvania ( ). Raul Gallegos is the Latin America financial columnist for Reuters Breakingviews. Raul has more than a decade of experience covering the region's business, finance and economics. His work has appeared in the Wall Street Journal, the LA Times and Institutional Investor. From 2004 through 2009, Raul was the Venezuela-based oil correspondent for Dow Jones Newswires, and a member of the OPEC coverage team in Vienna. He holds a bachelor's degree in economics from the University of California at Berkeley and a master's degree in International Affairs from Columbia University. He was a 2010 Knight-Bagehot Fellow at the Columbia Business School ( .  Petroleumworld does not necessarily share these views.

Editor's Note: This commentaries were originally published byThe
Financial Times  on April 18, 2012 and by Reuters's BreakingViews on April 20, 2012. Petroleumworld reprint this article in the interest of our readers.

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