The renationalisation of YPF, one year on

Could Argentina's renationalisation of YPF lead to a modern era wave?

Has Argentina set a precedent?
Joseph Hammond
On 15 May 2013 14:25

Despite the Arab Spring, it was not a Middle Eastern country which grabbed the biggest headlines for resource nationalism in 2012. It was Argentina, where populist President Cristina Fernández de Kirchner proposed a bill on April 16th to renationalise Yacimientos Petrolíferos Fiscales (YPF), the country’s largest energy company. Her idea was subsequently approved in early May 2012 by the Argentinean legislature.

Leaders from Europe to Mexico rushed to criticize the move. Kirchner cited the need to keep energy prices manageable for Argentineans but at that time, the price of gasoline within the country was actually less than the price at the pump in some neighbouring states.

The re-nationalisation of YPF, at the time largely owned by Spain’s Repsol, came at a time when some geostrategists were predicting a shift in global energy politics from the Middle East to the Americas. North and South America are home to the largest oil resources outside of the Middle East and North Africa. Other projections were more modest, noting that with shale gas in the United States, pre-salt oil fields off shore in Brazil, Canadian tar sands, and above all gains in energy efficiency, the United States might one day be able to reduce its energy imports to countries strictly within the Americas.

And yet the re-nationalisation of YPF suggested the future of energy policy in the Americas might be closer to the goals of Hugo Chavez than regional development.

The move also took many in the global energy industry by surprise, sending shockwaves across the desks of geostrategists and political risk consultants – the latter being particularly concerned with nationalisation. While all international industries are concerned with political risk, the energy industry, in which projects can cost billions of dollars and take years to complete, is particularly so.

One such firms that concerns itself with political risk is Maplecroft, based in Bath, UK. The company’s Political Risk Atlas of 2012 had only ranked Argentina as a “medium” risk. The damage already done, the Political Risk Atlas of 2013 gave Argentina a similar “medium” ranking, though it described the nationalisation of Repsol as the most “notorious” example of resource nationalisation last year.

In the 2013 edition, Maplecroft identified Somalia, DR Congo, Sudan, Afghanistan, Myanmar, Iraq, Libya, Central African Republic, Syria, and Yemen, as places with an “extreme risk” of resources being nationalised. All of these nations boast weak governments, even weaker respect for the rule of law, or both.

One year later, the most striking thing about the nationalisation of Repsol is how little Argentina has suffered for its clear breach of the rule of law that undergirds all democracies. It has not even dented enthusiasm for Argentina amongst most investors. Repsol is seeking compensation for the seizure and has also flirted with the idea of accepting shale gas from the government. A US Government study noted that Argentina’s 774.000 billion cubic feet of recoverable shale gas constitute the third-largest reserves in the world.

But what is most worrying about all of this is that Argentina’s ability to stun Repsol with impunity may encourage other nations to follow suit. Put another way, any country with a sagging economy may be tempted to nationalise its resources.

Professor Michael Ross of UCLA points out in his 2012 book, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, that resource nationalism tends to come in waves. Other recent examples of resource nationalism took place in Bolivia and Egypt in 2012, which halted gas exports to Israel and Jordan. Combined, these examples may well indicate that we are entering yet another wave of resource nationalism.

The last era came in the 1960s and 1970s, mainly in the Middle East, where oil interests were nationalised. This wave of resource nationalisation often spawned violence. In 1956 Israel, Britain and France attacked Egypt over the nationalisation of the Suez Canal by Egyptian leader Gamal Nasser. The incident is still well remembered in the region, but the fact that U.S President Ike Eisenhower brought an end to the conflict in favor of the Egyptians is forgotten.

The presence of violence is a characteristic that has made the transition to the modern wave too: recent conflicts and disputes in the Sudan, the Caspian Sea, and off the coast of the Philippines have all been clearly influenced by resource nationalism. Indeed, Kirchner’s move to nationalise YPF came after recent oil discoveries near the Falkland Islands led her to renew Argentina’s claim to the territory.

There are positive signs, though. One nation stung by Kirchner’s move was Mexico, whose state-owned oil company Pemex is a 10 percent stakeholder in Repsol. There is a certain degree of irony, of course, since Mexico famously became the first major oil exporter to nationalise its reserves in 1938. Argentina, though only a small producer, nationalised its oil production in 1907 before privatizing the state-run oil company YPF for the first-time in 1993.

Recently Mexico has signaled that it hopes to liberalise its energy industry in a substantial way for the first time since Pemex became a monopoly. Large scale privatisation may indeed be possible, though it will require a constitutional revision. Mexico is making the move after two straight years of expanded oil reserves both onshore and offshore.

Examining this issue last year, I noted that even in this era of globalisation, “mercantilism still lurks in the shadows.” Yet the example of a country like Mexico shows that trends toward nationalisation are not irreversible. Argentina, Bolivia and other emerging markets should follow Mexico's lead.

Joseph Hammond is a former Cairo correspondent with Radio Free Europe and former editor for a publication focused on the energy sector. A version of this article originally appeared at DoubleThink

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