Nationalization: Argentina vs. Spain, the YPF Repsol Case

On December 9th, 2012, YPF announced it was in talks with Norway’s Statoil to start a potential partnership. Argentina is close to signing deals with Chevron, the US oil major, and Bridas Corp, the Sino-Argentine joint venture. These deals are crucial if Argentina, lacking its own capital, is to develop its massive energy reserves. Will Argentina succeed in securing these deals after the country nationalized YPF from Spanish oil company Repsol?

During the European debt crisis in early 2012, Spain received upsetting news from Argentina: President Cristina Fernandez Kirchner announced the renationalization of the 51 percent of shares of YPF from Spanish shareholder Repsol. YPF is Argentina’s largest oil and gas company. Following YPF, other Latin American countries, such as Bolivia and Venezuela, also announced plans to nationalize foreign-invested oil and gas companies.

The following pronouncements were made in the uproar resulting from YPF’s nationalization:

  • Argentina will scare off foreign investors and jeopardize the economy in the long run.
  • It is a breach of investment agreement and international law to expropriate Repsol’s shares, and it is nothing different from stealing and robbery.
  • The compensation is not derived from negotiation with the Spanish company and is far from fair.

Facing these criticisms, the president of Argentina responded with claims of the nation’s sovereignty and control over its most precious natural resources. Other government officials supported renationalization for economic reasons, such as improving the balance of trade in oil and satisfying domestic need for natural resources.

One side maintains the legal and economic traditions that protect private property and contract obligation, while the other tries to control the nation’s natural resources for further development. Behind these arguments is a conflict between two different economic and political world-views.

I.               The Road to Renationalization for YPF

When President Hipolito Yrigoyen founded YPF in 1922, it was the first entirely state-owned oil company in the world. Due to mismanagement and embezzlement in the 1970s and 80s, the company suffered significant annual losses, and many employees were fired. To reverse the situation, President Carlos Menem initiated the privatization of YPF in 1993.

The Spanish corporation Repsol purchased 98 percent of YPF in 1999. The union of the two companies took on the name Repsol YPF. YPF represented 40 percent of the new firm’s reserves and more than 50 percent of its production.

Despite the fact Argentina is rich in natural resources, the country has gone from being a net exporter to a net importer of energy in recent years. Its international energy trade experienced an imbalance of $3 billion in 2011, the first negative figure since 1987. The government blamed Repsol for underinvestment in exploration at YPF. Indeed, Repsol’s investments into YPF were lower than in its other subsidiaries, falling from 30 new wells in 1998 to eight in 2010. Its reserves of crude and natural gas also fell 67 percent in 2011.

President Cristina Fernandez Kirchner cited the trade imbalance, huge dividends paid to overseas investors, and declining investment in further exploration, as the reasons for nationalizing YPF. The President further claimed Repsol had taken most of the company’s profits back to Spain, leaving Argentina without resources to develop new energy sources. Argentina’s senate approved the takeover of YPF on April 26, 2012, with 63 votes in favor of the measure, three opposing, and four abstentions. The Chamber of Deputies in turn approved the bill on May 4 with 208 votes out of 257.  President Kirchner signed YPF’s renationalization into law on May 5, 2012.

In its own defense, Repsol argued the decline in exploration and production was the result of government controls on exports, prospecting leases awards, and price controls on domestic oil and gas. As the economy plunged towards collapse in the late 1990s, the government began freezing energy prices. After the Argentine currency was sharply devalued, the new government fixed prices in pesos and increased them later at a snail’s pace. As a result, natural gas is 75 to 80 percent cheaper in Argentina than in neighboring countries, and electricity is 70 percent cheaper. These below-market prices discourage investment, encourage excessive energy use, and cause trade imbalance. To explain the outrageous dividends paid out, Repsol blamed the scheme the government concocted, in which Enrique Eskenazi, a bank owner who had previously dealt with former President Nestor Kirchner, bought a 15 percent stake in YPF (later increased to 25 percent). Because he put up precious little cash, the company and a group of banks lent him the money. YPF then agreed to pay out 90 percent of its subsequent profits in dividends so that Eskenazi could afford to repay the loans.

In addition to these economic arguments, many considered the renationalization a cynical political ploy by President Cristina Fernandez Kirchner. Moises Naim, a political columnist for Spain’s El Pais, pointed out a couple of political reasons for the decision, such as the government’s financial needs and the president gaining political support for her re-election.

II.  The Right to Private Property Versus the State’s Right to Natural Resources

The right to private property is the oldest principle in the legal system. However, in a modern legal system, the law is no longer solely for the protection of private property. With the dawn of the welfare state, conflicts emerge between those who seek social order based upon ownership of private property and those who seek to restrict private property to ensure the just distribution of wealth.[1]

Many legal systems provide justification for interfering with private property, including expropriating private property without compensation to attain social welfare. International law does not prohibit a state from expropriating alien property; in fact, in the bilateral investment treaty between Argentina and Spain, “Agreement Between The Argentine Republic And The Kingdom of Spain On the Reciprocal Promotion and Protection of Investment,” Article V permits nationalization or expropriation under the conditions of public interest and nondiscriminatory and appropriate compensation.[2]

In the YPF case, the question is whether public interest is best served by expropriating Repsol’s investment in YPF. From a utilitarian point of view, expropriation of YPF is morally right if the overall wellbeing of society increases. Utilitarianism gives its strongest support to nationalization when it helps promote overall public interest.  From a Rawlsian viewpoint, if nationalization of private assets accords with Rawls’ difference principle, then expropriation is fair.  The difference principle, explicated in A Theory of Justice, holds that a state is just when social and economic inequalities are arranged so they are of the greatest benefit to the least-advantaged members of society. Nationalization is legitimate if the least-advantaged members of society benefit from this economic framework.

In the YPF case, Argentina’s government emphasized the utilitarian and Rawlsian arguments. The government restricted imports of countless other products to cope with the energy industry’s effects on its trade balance, making it harder for citizens to swap pesos for dollars[3]. Control of the nation’s largest energy company, so goes the Argentinian argument, helps in countering the domestic energy shortage and the trade imbalance.

Critics do not accept these arguments. First, it is purported that nationalization was to gain political support for President Christina Fernandez Kirchner in her election campaign. Secondly, the energy shortage had other causes, such as the domestic price ceiling and the suppressed currency exchange rate. Third and most importantly, nationalization jeopardizes the crucial relationship with Spain, which may dry up foreign investment towards the search for new oil wells.

Morally, libertarians criticize the nationalization of YPF. They argue property rights should not be violated under any circumstance, regardless of the consequences to the poor, and nationalization is morally wrong because it violates the property rights of private corporations. Libertarians and other critics reject the utilitarian argument because people are not a means to an end, but are ends in themselves, with their own human dignity. The right to private property should not be sacrificed for questionable benefits to society. Libertarians further cite Robert Nozick’s attacks on Rawls’ difference principle – no one should be managing economic inequalities at all. If economic inequalities arise from voluntary exchange they are not unjust. On the other hand, it is impossible to govern economic inequality without sacrificing a great deal of liberty.

In legal terms, no matter how President Kirchner stressed the necessity of nationalizing YPF for national security, energy development, and the public interest, Argentina may yet have violated the bilateral investment treaty with Spain. It is not a coincidence and is unjustifiable that Argentina took control of its natural resources immediately after Repsol YPF announced its new discovery of shale oil and gas. However, despite the arguments against nationalization, most Argentinians support the renationalization of YPF. Some may have been manipulated by government propaganda, but most genuinely believe the state should take YPF back from Repsol.

Different theories may give us reasons to justify nationalization or condemn it. As a legal principle, it has never been clear whether nationalization of natural resources is absolutely prohibited and under what circumstances. With the development of emerging countries and increasing need for energy, the only conclusion is that nationalization of foreign investments in natural resources is a real risk. Instead of preventive stabilization clauses in bilateral investment treaties or foreign investment agreements, the more realistic, remedial solution for foreign investors like Repsol is to get compensation after renationalization. This issue is fraught with difficulties and is yet another controversy in the YPF case.

III.           What is Fair Compensation?

Repsol officials maintain company statutes state that if any one party acquires a 15 percent stake of the stock held by Repsol, the acquisition triggers a mandatory purchase of Repsol’s entire 57 percent stake, rather than the 51 percent sought by the Argentines. Repsol officials calculate compensation by multiplying YPF’s highest price earnings ratio from the previous two years using its earnings per share in 2011 and arrive at a price of US$10.5 billion for 57 percent of YPF. Argentine Deputy Economy Minister Axel Kicillof rejected these demands, claiming that with debts of nearly $9 billion, the book value of YPF was US$4.4 billion at the end of 2011.  YPF’s total market capitalization on the day of the nationalization announcement was $10.4 billion. Repsol claims that Argentina’s government drove down YPF shares ahead of the announcement (market price of the shares declined by more than half from February to April 2012), and Repsol Chairman Antonio Brufau estimates the company’s potential loss at $7.5 billion.

IV.           Ultimate Threat; Likely Self-Defeating if Carried Out

Behind the rational arguments for and against the nationalization of the YPF, there is perhaps an subconscious colonialist struggle between the resource needs of a former colony and the profit needs of a former European colonial master. This conflict has been around since the fight for independence of the colonies, and such conflict is unlikely to disappear in the future. There are other nationalization cases in Latin America, including Bolivia and Venezuela.

Nationalization is a quick drink to quench the thirst for natural resources. Though nationalization of foreign investments is questionable from legal and ethical standpoints, it still is a risk. For Spain, in the midst of the European debt crisis, it will be difficult to count on a favorable outcome to its complaint against Argentina for seized assets which it filed at the World Bank’s international arbitration forum. For Argentina, the country prefers to risk possible future punishment from investors in the hopes investment memories are short, than to suffer current resource, economic, and political problems.









[1]           M. Sornarjah, “The Pursuit of Nationalized Property”,p.32.

[2]           Agreement Between The Argentine Republic And The Kingdom of Spain On the Reciprocal Promotion and Protection of Investment, Article V: “Nationalization, expropriation or any other measure having similar characteristics or effects that might be adopted by the authorities of one Party against investment made in its territory by investors of the other Party shall be effected only in the public interest, in accordance with the law and shall in no case be discriminatory. The Party adopting such measures shall pay the investor or his assignee appropriate compensation, without undue delay and in freely convertible currency.”

[3]           “Argentina’s Energy Industry, Fill’er up”, The Economist.

Photo: Courtesy of jpgarnham at Flickr