Facing spiraling inflation and electoral defeat, Argentina offers repsol $5B for YPF compensation

The shale gas wars that have pitted the government of Argentina against Spanish oil giant Repsol could be close to concluding, after an initial agreement regarding compensation for the 2012 nationalization of YPF has been signed.

  Under pressure by major shareholders CaixaBank and Pemex, Repsol CEO Antonio Brufau appears to have been convinced of taking a $5 billion payment, half of what he was originally asking for, and to drop litigation against the Argentine oil company, which is in the process of joining forces with the likes of Chevron CVX +0.02% to ramp up production at the massive Vaca Muerta shale field.

While the specifics of the agreement haven’t been disclosed, Repsol’s board is set to vote on the agreement on Wednesday.  Brufau, who had remained steadfast in his attempt at getting international courts to rule against Argentina, had created a tense atmosphere in the board room, sparking the rage of his two largest shareholders, CaixaBank and Mexican oil company Pemex.

The administration of Cristina Kirchner is willing to pay Repsol with “liquid assets,” Argentina’s Finance Ministry said in a statement.  Back in June, the internal rifts in Repsol’s board surfaced after the rejection of a previous proposal by the Argentine government which stipulated paying $1.5 billion in government bonds and $3.5 billion in acreage in the Vaca Muerta shale field.  Under the terms of the agreement, Repsol would enter into a joint venture with YPF, with the latter maintaining operational control, and Pemex, in order to commercialize 6.4% of Vaca Muerta.  Brufau, concerned with the Argentine government’s aggressive past, rejected the proposal, sparking the Ire of Pemex CEO Emilio Lozoya who threatened to offload their 9.34% stake in the Spanish energy firm.

Brufau was forced to fold, though, after the Spanish government threw its weight behind Pemex and CaixaBank.  Indeed, while Brufau is said to have approved of the deal, he remained in Madrid, while Spain’s Industry Minister, Jose Manuel Soria, negotiated with Argentine finance minister Axel Kicillof and YPF’s CEO Miguel Galuccio.  Soria was joined by Repsol executives and the heads of both CaixaBank and Pemex.

The deal has important implications for global energy markets.  Vaca Muerta is considered the second largest shale oil reservoir in the world by Chevron, which signed an agreement with YPF to invest in ramping up production.  According to the Argentine oil company, Vaca Muerta contains 27 billion barrels of oil and 802 trillion cubic feet of natural gas.  YPF doesn’t have the technical or the financial capacity to capitalize those resources, though, and has been actively looking for external partners.  Beyond Chevron, YPF signed a deal with Dow Chemicals, but it has been partially blocked by Repsol’s threats of litigation.

The decision to negotiate with YPF marks a turn in the foreign policy of the Argentine government, which has remained intransigent in its financial problems with foreign institutions.  After a dramatic default in 2001/2, the government of Argentina has been engaged in litigation with a group of holdout bondholder led by hedge fund Elliott Management, and has threatened to disobey rulings by the Supreme Court if they aren’t favorable.  Argentina also has several cases open at the World Bank’s International Center for Settlement of Investment Disputes and debts with the Paris Club of rich nations.

Yet, spiraling inflation, which has severely eroded Argentina’s foreign reserves holdings, a difficult loss in October’s midterm elections, and a rising energy deficit seem to have forced Kirchner to change her mind.  After spending about a month out of office due to brain surgery, Cristina Kirchner reshuffled her cabinet, even designating former finance minister Hernan Lorenzino to a special unit in charge of negotiating with holders of sovereign debt, the World Bank, the IMF , and the Paris Club.

It is unclear whether the move represents an ideological shift or purely a pragmatic one.  Reserves have fallen 26% since late-2012, breaching the $32 billion mark in November, and inflation remains out of control.  Argentines are forced to cope with a dual exchange rate as capital controls and the blocking of imports have been the government’s response to the drainage.  Cristina Kirchner’s approval ratings have sunk dramatically, and her party has been punished by the electorate in October.  While Cristina continues to speak of “deepening the [economic] model,” it seems reality has finally dropped in.  Yet, given what has been seen in the past, investors should wait for actions, rather than words, before making a value judgment as to what she is actually thinking.

http://www.forbes.com/sites/afontevecchia/2013/11/26/facing-spiraling-inflation-and-electoral-defeat-argentina-offers-repsol-5b-for-ypf-compensation/?ss=business%3Aenergy