Argentina's YPF Takeover Creates an Uncertain Future for Spanish Firm Repsol
On April 16, after weeks of rumors, the government of Argentine president Cristina Fernández de Kirchner expropriated the 51% of shares in Argentina’s Repsol YPF that belonged to Spanish oil firm Repsol, declaring that the move was in the public interest. The nationalization measure came after months of political pressure during which Repsol was blamed for a decline in the country’s crude oil production, and for not making enough investments in exploration and production. The percentage of shares expropriated by the government will come entirely out of the 57.4% stake in YPF that Repsol currently owns, leaving Repsol with little more than 6% ownership in YPF. The deal will not affect Grupo Petersen, an Argentine firm that will maintain a 25.46% stake in YPF that it acquired in 2008, nor will it affect the number of YPF shares traded on the stock market.
The government of Argentina made its decision because it wanted to regain the ability to be self-sufficient in the production of fuels. For years, it has been spending millions of dollars on energy imports that eroded its trade surplus. Nevertheless, many analysts have doubts about the government’s ability to replace Repsol´s technical expertise in oil production, and its ability to acquire the financing needed to make the necessary investments to increase the country's oil production.
It did not take long for Repsol to react to the expropriation announcement. Antonio Brufau, president of Repsol, said the following day at a press conference that the Argentine decision was an act that was “illegal and unjustifiable, preceded by a campaign of harassment, coercion and self-motivated leaks.” However, according to Mauro Guillén, a professor of management at Wharton, “Repsol must have anticipated this problem. It is very easy to blame Argentina or Fernández [for the expropriation]. But we already know what this country is about in terms of legal security and the jolts in its economic policy. Repsol has had years in which it could change course, sell YPF and look for alternatives.”
Brufau asserted that after the expropriation has been completed, his company “will take all legal measures within its reach” against the government of Argentina. He added that the country has a “commitment” to make a public offer for 100% of the shares of YPF if it wants to take control of YPF. A wide range of defensive measures could be adopted against the expropriation of YPF, “comprising individual and class action measures in various countries involved, such as lawsuits based on constitutional, administrative, stock exchange, civil and commercial law, and involving compensation for the damages and harm caused.”
Repsol calculates that the value of YPF is US$18.3 billion, or US$46.55 per share, which means that the value of Repsol’s 57% ownership in YPF amounts to US$10.5 billion. “All governments have the right to expropriate, but they also need to pay a just price,” said Brufau.
However, Axel Kiciloff, Argentina’s vice minister of the economy, responded, “We are not going to pay [Repsol] the US$10 billion that they and Mr. Brufau are talking about.” In his comments to the Argentine Senate on April 17, Kiciloff added, “The valuation of YPF will be based on objective data, rather than on stock market speculations.” Kiciloff has been appointed the administrator of YPF by President Fernández de Kirchner.
On April 17, the market value of YPF was about US$10.4 billion, having fallen by about one-third in 2012. The shares fell because of constant pressure exerted on the company by the Argentine government to increase its investments, and because of fear than an expropriation would ultimately take place.
Carlos Jiménez Piernas, professor of international public law and international relations at the University of Alcalá in Spain, notes that the international legal framework regulating investments between Spain and Argentina is the agreement on the protection of investments signed by the two countries in 1991. According to its text, Repsol and Argentina can maintain negotiations for six months with the goal of resolving their differences amicably. Once that time has passed, Repsol has the option to directly resolve its differences with Argentina at an international court of arbitration, instead of submitting the case to Argentine judges. This court would be constituted under the auspices of the International Center for Settlement of Investment Disputes (ICSID), located in Washington, D.C.
Jiméneznotes that in order to obtain satisfaction through arbitration, Repsol “will have to prove that both the measures adopted by the Argentine government with respect to its expropriation procedures as well as by the various Argentine provinces in recent weeks have resulted in removing YPF’s [energy] exploration concessions, which would mean that the [expropriation] measures are both illegal and discriminatory.”
Jiméneznotes that this method of arbitration “yields inconsistent results and involves many unknown factors for foreign investors,” so he says it is “advisable [for] Repsol to explore in depth the possibility of reaching a reasonable settlement regarding the amount of its compensation during the earlier phase of negotiations” by engaging in arbitration with the Argentine government [rather than, later on, at the ICSID]. “That approach would minimize its losses from the expropriation of YPF.” He adds, “Managing to settle [that way] would no doubt offer [Repsol] the invaluable advantage of avoiding a long and complex procedure of international arbitration. Because of its seriousness and its economic impact, the act of expropriation can also lead to a parallel, long-term deterioration in the relationship between the two countries.”
The Argentine measure has also sparked a diplomatic crisis between Argentina and Spain, while provoking harsh international criticism against Argentina. The Spanish government’s first move was to punish Argentina by setting limitations on biodiesel production in Spanish plants. In practice, this will limit its imports of Argentine biodiesel, whose value rose to 750 million euros in 2011. Overall, Spain purchased 719,473 tons of biofuels from Argentina, or about half of the 1.6 million tons that it consumed last year. In addition, Jose Manuel Soria, Spain’s minister of industry, energy and tourism, told the country’s Congress on April 24 that Spain would continue with its “steadfast” defense of Repsol, and would take its case to international economic forums in order to “achieve just compensation.”
Spainhas received a great deal of international support on this issue, including from the United States, Mexico and the European Union, which has already taken its first steps to punish Argentina. On April 20, the European Parliament partially suspended the tariff preferences that it concedes to imports from Argentina. By a wide majority, European deputies approved a resolution asking the European Commission and the European Council to evaluate such options as “the possible partial suspension” of Argentina from the Generalized System of Preferences, which provides benefits for Argentine exports to the EU market. According to EU data, in 2010 about 27% of all Argentine exports to the EU (worth 2.4 billion euros) benefitted from this type of trade preference -- especially such products as biodiesel, soy oil, sunflower seed oil, shrimp, filets of frozen hake, lemon juice, tobacco, mandarin oranges and table grapes.
“In conformity with international law, Spain has quite a limited series of options at this time,” warns Carlos JiménezPiernas. With respect to bilateral relations between Spain and Argentina, he notes that the agreement between the two countries regarding protection of investments permits Spain to initiate international legal proceedings against Argentina if Spain believes that Argentina has failed to comply with some of the obligations that Argentina recognized in that agreement. However, he warns that there are several problems if Spain pursues that route. “This decision would have very negative repercussions on Spanish investors who operate in Argentina.” He adds that there has been little experience in using this legal approach.
Jiménez believes that it is important to consider the role that the EU can perform in this conflict. In the Treaty of Lisbon, EU member states granted themselves competence in matters regarding the protection of foreign direct investment. According to Jiménez, that treaty “invites the government of Spain to manage and reach a consensus on all decisions that it adopts with respect to this subject with the rest of its European partners.”
According to Jiménez, “In the short term, both the Spanish government and the EU must get involved in the informal measures designed to facilitate a successful way out for Repsol.” He believes that “there will be time,” both if the negotiations between Repsol and the Argentine government fail with regard to the amount of compensation, as well as if, later on -- in the event Argentina refuses to honor the compensation fixed by the arbitration decision -- “arm twisting measures are adopted against Argentina, including reprisals; depending on how events wind up developing.” He adds, “That’s because there will be compensation, and the Argentine government knows that.”
Strategic Options for Repsol
While the compensation payment is being resolved, Repsol will have to consider how to approach its future without YPF. Guillén notes that “Repsol is a midsize company with few reserves compared with the big global companies. It has to grow. The acquisition of YPF was made more than 10 years ago, and since then it has not made a major decision. Now that there is a euro crisis and a shortage of credit, things are going to be more difficult for it.”
Joaquín Garralda, professor of strategy at IE Business School, identifies three possible routes for Repsol: A merger with one of the big companies in the sector; an agreement with a company from China; or an acquisition by another company in Latin America. As for the first of these options, Garralda considers that “the size of Repsol is one of the key factors; when it owned [a controlling interest in] YPF, it was big and it was harder for another company to launch a hostile takeover offer. But that [sort of move] is more feasible now.”
“Repsol has some important strengths that can interest some big global companies,” notes Garralda. In his opinion, Repsol has done a very good job of developing its knowledge of deepwater drilling; has maintained good relationships with governments in Latin America and it is good at managing human rights in the region. He adds, “It will also be important to know how things will develop with the Dodd Frank Law, which requires all publicly traded companies in the United States to make public the payments that they make to governments in return for natural resources, identifying those payments by country and by project. Repsol has a very good reputation when it comes to good governance and transparency. It will be able to contribute to some U.S. company with its experience managing corporate responsibility from a European point of view.”
Guillén agrees that “Repsol can establish an alliance with another company, especially an Asian one.” However, he believes that “without YPF, [Repsol] is less attractive.” In the Argentine region of Patagonia, where YPF had invested more than US$400 million, the company was planning to develop what it calculated could be one of the largest deposits of non-conventional resources (shale oil and gas) in the world.
Guillén believes that it will be “very difficult” for Repsol to use acquisitions of new companies in Latin America to regain the strength that it will lose from the expropriation of YPF. That’s because “Latin American countries have not been affected as much by the [global economic] crisis as European firms, and they have raised the price of their petroleum and raw materials so they don’t have an economic need to make big offers to sell national companies in order to achieve liquidity.”
What about the option of going it alone? Repsol “might be able to do that,” says Garralda. “But the external dynamic forces are very strong, and now, after its decline on the stock market, it is selling at an attractive price in the market. The problem for Repsol is that while it is big enough to attract a big Spanish oil company as an investor, it is too small to interest the big [multinational] oil companies.”