End Game for Argentina

Argentina to Seek Controlling Stake in YPF

By MATT MOFFETT &TAOS TURNER

President Cristina Kirchner, in a move that marks a watershed in expanding the state's grip on the economy, said she will send a bill to Congress to nationalize Argentina's largest oil-and-gas company, YPF YPF -11.16% SA.

Under the proposal, which declares the petroleum industry of "national public interest," Argentina's federal and provincial governments would take 51% of the company, now majority owned by Repsol YPF SA of Spain. The move is sure to be approved in Argentina's Congress, where the leftist Mrs. Kirchner's governing Peronist party holds a majority.

The nationalization marks the culmination of a months-long battle between YPF and the Kirchner government. The administration blames YPF for low production that has forced Argentina to spend heavily for imported energy, at a time when it is enduring a scarcity of dollars due to capital flight.

YPF, which has maintained that the government's own interventionist economic policies are to blame for the energy crunch, had no immediate comment. As of Monday afternoon, YPF's spokesman started referring all press calls to Argentina's planning ministry, saying the government is now running the company. A Repsol spokesperson wasn't immediately available to comment. Meanwhile, Spanish Prime Minister Mariano Rajoy was meeting with cabinet members to analyze Argentina's plans, a spokeswoman said, adding that Spain's government would comment in due course.

Mrs. Kirchner, who last week faced warnings from Spanish and European leaders over rumors of nationalization, struck a defiant tone in making the announcement in an address to the nation. "This president will not answer threats, nor insolent phrases," she said.

The nationalization is certain to spark an intense legal fight between the government and Repsol, while also straining the Kirchner government's relationship with Spain, a big investor and trading partner. In addition, the action is likely to further damage Argentina's reputation among investors while adding tension to Argentina's relations with the European Union.

"This sends a real negative signal to pretty much the entire world in terms of the rules of the game and investing in Argentina," said Mark Jones, a political scientist at Rice University. "This is a big flashing sign that says 'Investor Beware.' " Indeed, analysts question how Argentina will obtain the capital and expertise needed to develop YPF's significant shale reserves, after its strong-arm move on Repsol.

The Kirchner government evidently didn't waste time in asserting control. A person familiar with the situation said some Spanish executives were barred from YPF's Buenos Aires headquarters Monday afternoon. After Mrs. Kirchner's speech, the government issued an emergency decree announcing an "intervention" in the company's operations, which will be put under the authority of Planning Minister Julio De Vido.

Mrs. Kirchner's bill calls for YPF's shareholders to be compensated at a value to be determined by a federal tribunal. Repsol sources had previously said the government would have to pay around $18 billion to take full control of YPF, according to YPF's statutes and relevant Argentine law. The government would be required to make an offer for all of YPF's shares even if it wanted to obtain only 51% of them, according to the company's bylaws.

The Spanish company had said in the past that it would vigorously defend shareholders' rights in local and international forums if the government tried to expropriate the company without abiding by all legal obligations.

YPF accounts for more than 50% of Repsol's consolidated daily ouput. In 2011, it represented about 35% of Repsol's consolidated earnings before interest, taxes, depreciation and amortization.

YPF originated as a state-controlled company in 1922, before being partially privatized by a conservative government in 1993. Repsol YPF obtained control of the company in 1999, and currently holds 57%.

Argentina's leading stock exchange suspended trading in YPF shares. In a statement, the Buenos Aires Stock Exchange said the move was in the best interests of YPF investors. YPF American depositary shares traded in New York were down 11% at $19.50 in afternoon trading.

Spanish officials said they would have support from the rest of the continent in contesting the move. "Our European partners are with us," Maria Dolores Cospedal, the second-ranking official at Spain's ruling Popular Party, said at a press conference. Ms. Cospedal said the Spanish government "will respond to this situation" once all details are known.

Mrs. Kirchner blamed YPF for declining oil and gas production and said the company is largely responsible for forcing Argentina to become dependent on imported oil and gas for the first time in 17 years. She said a lack of investment in the sector led Argentina to incur an energy deficit surpassing $3 billion last year. "This situation almost turned us into an unviable country," Mrs. Kirchner said.

Argentina is the only major Latin American country without a significant state presence in the oil industry, she said. Mexico, Chile, Brazil, Venezuela, Peru, Colombia, Bolivia, and even tiny Uruguay, all boast state-run firms that are important players in their respective oil and gas industries. "We are the only country in Latin America that doesn't control its own energy policy," she said.

Though Repsol owns 57% of YPF, it is Argentina's Eskenazi family, which holds a 25.5% stake, that is responsible for day-to-day management of the firm. The rest of the company's shares trade on exchanges in New York and Buenos Aires.

The mismatch in Argentina between rapidly growing energy consumption and languishing oil production after a decade of accelerated economic growth appears to be spurring the country's increasingly aggressive stance on YPF. Consumption of oil and gas increased 38% and 25%, respectively, from 2003 to 2010, but oil and gas production decreased 12% and 2.3% in that period, according to Barclays Capital.

Mrs. Kirchner blames declining oil and gas output on companies that she says haven't invested enough. Following her cue, provincial governments in recent weeks have rescinded more than a dozen of YPF's production concessions and unleashed a wave of vitriol against the company.

Certainly Argentina has big potential. Overall, Argentina ranked third in the world, behind China and the U.S., in potentially recoverable reserves of shale gas with 774 trillion cubic feet, according to a study last year by the U.S. Energy Information Administration.

But critics and industry officials say government policies such as high taxes, price caps on home energy rates and unpredictable rule changes like a suspension of tax breaks on production spending have discouraged investment.

Ever since declaring a default of its foreign debt in 2001, Argentina has been considered something of a renegade nation by the international financial community. But analysts say that Mrs. Kirchner's oil nationalization takes state economic dominance to a new level. "We've shown that state projects can be managed well too," she said in response to critics who have claimed the government doesn't have the technical expertise or the money to run YPF.

The nationalization fits with recent interventionist moves since Mrs. Kirchner's re-election last October, when she has imposed new capital controls and tightened restrictions on imports. She has also struck a more nationalist tenor in diplomatic relations, reviving Argentina's long dormant claim for the Falkland Islands from the U.K.