So Who is Eating Argentina’s Lunch Now?

Cristina Fernández de Kirchner, the President of Argentina, was on fire that day, almost exactly a year ago, when she introduced the bill that would enable the government to grab the controlling stake in YPF, the energy firm, held by the Spanish Repsol Group.

An economic populist moulded in the country’s Peronist tradition, the President was not deterred by the barrage of international criticism hitting Argentina when rumours surfaced that the government considered expropriating YPF. Nor did Ms Fernández tremble at the thought of confiscating resources from Argentina’s largest foreign investor – and in a crucial sector in obvious need of foreign direct investment to fund expansion of especially its big shale reserves. Like her predecessor, her late husband Néstor Kirchner, the President was determined to undo flagship reforms during the liberal leadership of the country in the 1990s, this time the denationalisation of YPF in the early 1990s.

Yet the expropriation has been a complete failure. On all the charges that the government threw against Repsol, the current situation is worse. Neither Argentina’s nor YPF’s production has increased as consequence of the asset grab. While the government waxed lyrical about an alleged 2.5-percent increase in YPF’s oil production in 2012, any discerning observer will soon detect that total output in 2012 cannot be compared with total output in 2011.

Strikes in Santa Cruz severely disrupted YPF’s oil production between April and July in 2011. The drop in production makes total production for 2011 an unreliable benchmark for output in 2012. If, however, production in the last quarter of 2011 is compared to the same period last year, YPF’s production fell by about 8 percent in 2012, according to statistics form Argentina’s Department of Energy. Total oil production in Argentina followed the same path.

Nor did the Argentina close its trade deficit in energy, which the government had promised. President Fernández accused the former owners of YPF for throwing away Argentina’s self sufficiency in energy, and blamed them for the 3 billion US dollar energy trade deficit in 2011. Before 2011, Argentina had been running an energy trade surplus and the government now suggested the energy reserves of the country to be evidence enough for why the country should run a surplus.

Yet the energy surplus had been withering away for several years, and nothing suggests it has changed after the government grabbed the controlling stake in YPF. On the contrary, forecasts for 2013 suggest the energy deficit to climb up to 5 billion US dollars, partly (but far from only) because of the recent damages by flood and fire in YPF’s La Plata refinery. According to the same estimate, the country’s energy import went up by almost 50 percent in the first two months this year, compared with the same period last year.

None of this is surprising. Current oil production in Argentina is primarily based on old discoveries with shrinking reserves. The main problem for the sector is rather that energy policy has deterred investment into new fields by artificially depressing energy prices and an uncertain system for license approvals. And the most damaging consequence of the confiscation is that the government has undermined efforts to fund new production in the giant oil shale reserve, Vaca Muerta, discovered by Repsol in 2010.

The expropriation has created a very uncertain investment environment, to say the least, for potential partners in Vaca Muerta. The costs for production are high because of the technical and geological difficulties to extract the oil, and the previous owners had started forming partnerships with other oil firms to start full production. The government did not like this strategy, and generally claimed the company should have invested its profits rather than paying dividends to shareholders. Never mind the dividends were part of a deal engineered in 2007 by the Kirchners to get Petersen Inversiones to take up a minority stake in YPF, Argentina now claimed it could radically boost investment into the new fields.

However, the government has had to back down from this brazen attitude, and is now back to the strategy employed by the former owners to get other investors to join in. But that strategy is not exactly going stellar. A few international firms have pledged to invest smaller sums with YPF for pilot projects in Vaca Muerta, but the big deal between YPF and Dow concerns the gas reserves. Still, they – and others – remain wary of teaming up with a company whose owners may well confiscate their assets once the big investments have been made.

A rational populist would have postponed the expropriation until the point when foreign investors had put their money into Argentina. Now the government is in a position where the way to lure some investors into the project is to offer so good returns that they are prepared to take the political risk. But such a strategy is self-defeating. President Fernández pushed the confiscation of assets because she charged the former owners for eating Argentina’s free energy lunch. Now she may have to give even more of it away.