President of Argentina Cristina Fernandez de Kirchner has nationalized a major oil firm Repsol-YPF inside the South American country. She says the action was necessary to gain control of the South American country's oil resources., a photo by Pan-African News Wire File Photos on Flickr.
YPF, the view from Argentina, part I: Expropriation was right
April 20, 2012 4:35 pm
By Mario Rapoport
Financial Times Blog
On April 16, the government sent Congress a bill for the expropriation of 51 per cent of the shares of Repsol-YPF, the biggest Argentinine oil company, which had been privatised in the 1990s. “We are the only country in Latin America, and almost in the world, which does not control its natural resources”, said Cristina Fernández, the president. She said that between 1999 and 2011 the net profits of the company were $16.5m, while the company distributed dividends of $13.2m. This was a policy of draining the country, of non-production, of non-operation, which culminated in 2012 when, for the first time in 17 years, Argentina was a net importer of oil and gas.
We know that current society is still governed in large measure by the economic and political power of interests linked to petroleum. Bertrand Russell, the British philosopher, said that two men were most responsible for creating modern society: Rockefeller and Bismarck. And he said that, one economically and the other politically, they refuted in practice the liberal dream of free individual competition, “replacing it with monopoly and a corporate state”.
Petroleum brings with it a new and fundamental source of energy and, above all, great gains. It becomes an essential part of the strategic agenda of nations, as well as a symbol of sovereignty. Mexico, for example, a major producer of crude and an important supplier of the US, after continuous conflicts with foreign petroleum companies, decided to expropriate them in 1938 and create the state company Pemex, which the government in Washington had to accept.
In Argentina, the first oil reserves were discovered in 1907 and, in 1922, the state company, Yacimientos Petrolíferos Fiscales (YPF) was created. From then, national production increased considerably and regulation of prices in the local market was achieved. Also the involvement of foreign companies in refining and marketing was accepted, and it was decided with varying degrees of success to grant concessions to companies from other countries for oil exploration and production in the search for petroleum self-sufficiency.
Then, under the military dictatorship, which deindustrialised the country, YPF’s earnings were used to finance the country’s costly external debt. The company was left as potentially the last jewel in the crown. Then the government of Carlos Menem decided to obviate the economic and strategic importance of this non-renewable natural resource by selling a controlling stake in YPF to a Spanish company.
Whereas neighbouring countries like Brazil, with Petrobas, Venezuela, with Pdvsa, and Mexico, with Pemex, kept petroleum in the hands of the state, Argentina was hastily selling it to preserve a false stability in its exchange rate, although the proceeds of the sale were not enough to settle the foreign debt – nor, in an environment of shady deals and corruption, were they used for this end.
Repsol-YPF came to possess considerable market power, similar to that held by its state-owned predecessor, while replacing the logic of the national interest with that of business gain. Production was aimed in large measure at exports, to take advantage of the steep rise in the price of crude, while building indispensable reserves for the future was left to one side. At the same time, risk exploration diminished and there was a considerable reduction in the number of years covered by reserves.
Meanwhile, oil income was recycled outside Argentina’s productive economy, in favour of remitting profits and transfer pricing. There was no state control of an increasingly scarce resource, essential for the next stage in Argentina’s economic development based on industrialisation and social inclusion – policies which left behind the neoliberal model put in place in March 1976 and reinforced in the 1990s, which brought Argentina to an almost terminal crisis in 2001-2002.
While the country was re-industrialising – in spite of the global recession – with high rates of growth averaging 8 per cent a year, Repsol-YPF began to reduce production and enact a strategy of profit stripping. Thanks to a corporate operating logic more attuned to the world of finance than that of production, Argentina had to increase fuel imports 11-fold between 1995 and 2011, worsening its trade deficit.
All this clearly demonstrates the responsibility that falls on Repsol-YPF, which failed to meet prior commitments in investment and production and put Argentina’s energy sovereignty at risk. Argentina’s current deficit in the oil account is closely associated with the policies practised by this company. Its corporate conduct failed to deliver an expansion in production at a time of great dynamism in demand and in the context of the most significant and continuous period of growth in national history.
While many private companies, both foreign and local, expanded their activities and their production, Repsol-YPF reduced them progressively. In 1997 it represented 42 per cent of petroleum production and 35 per cent of gas. Those shares fell, in 2011, to 34 per cent and 23 per cent, respectively.
So its expropriation, with a more meaningful involvement of Argentina’s provinces in the management of hydrocarbons, is an essential measure in reversing an already unsustainable situation. Argentina is hereby retaking control of a strategic resource, which will allow it to continue with development policies that are very different from those which predominate in parts of the the world that are now in crisis. This is not an assault by the State on foreign interests. It was the latter, by failing to meeting previously agreed objectives, that put in danger, for its exclusive gain, the economic growth of the country, the well being of its inhabitants, and its democratic stability.
The Argentine government’s decision has no effect on judicial security, as the latter assumes a two-way street in which contracts must be respected by both sides, the private sector and the State. The current world crisis is a clear example of how business and financial strategies that prioritise short-term profit produced a chain of bankruptcies, leading millions of individuals and businesses to ruin. It has obliged those same States to recover from unsustainable situations – which is exactly what is happening now in Argentina with the nationalisation of YPF.
Mario Rapoport is visiting professor at the University of Buenos Aires and senior researcher at the National Council for Scientific and Technical Research.