Following Argentina’s 2012 re-nationalization of oil company YPF, Axel Kicillof, then the deputy economy minister, scorned a $10.5 billion compensation claim by its controlling shareholder, Spanish energy firm, Repsol. Only "madmen" would pay such a claim, he told lawmakers. A month later, Repsol sued Argentina in a New York court.
But yesterday, the wrangling came to an end. Mr. Kicillof, now Argentina's economy minister, agreed to pay $5 billion to Repsol via a series of bonds.
The deal, analysts say, is a pivotal step in Argentina’s bid to polish its international image, tarnished by the expropriation, other outstanding credit issues, and trade protectionism. Settling with Repsol is also key to government efforts to attract foreign capital to develop the vast Vaca Muerta shale oil and gas field in the southwest of the country. However, the general consensus is that this week's move alone is not sufficient to allay foreign investor fears.
“This is positive as it finally brings the whole ordeal to an end,” says Jorge Piñon, director of the Center for International Energy and Environmental Policy at the University of Texas. Repsol had threatened legal action against companies that partner with YPF and even sued Chevron, which signed a $1.2 billion deal with the company last year. “But we have to be careful about thinking that [this] absolves Argentina when it acted outside the rule of law,” Mr. Piñon says.
Repsol is “very satisfied” with the agreement, said company president, Antonio Brufau. Spanish officials will travel to Buenos Aires tomorrow to sign the deal, Kicillof said, 22 months after he and the planning minister ousted Repsol’s management from YPF’s offices here. The terms of the agreement must also be approved by Argentina's Congress, where President Cristina Fernández de Kirchner’s ruling party has a majority.
At the time of the seizure, Argentina said Repsol had failed to invest in the energy sector, and YPF needed to be controlled by the state so that the nation could stop importing more than $9 billion in fuel annually.
However, by repaying Repsol with debt, including more than $3 billion of new bonds due in 2024, the government has backtracked on its drive to cut debt, one of the pillars in what President Kirchner describes as a “winning decade.” Argentina’s foreign debt as a percentage of GDP has declined drastically since Néstor Kirchner, the president's late husband and predecessor, came to power in 2003.
“It’s paradoxical,” says Gastón Rossi, a former deputy economy minister. “They speak of the virtues of debt reduction, and they solve this by issuing debt.”
The government has also been forced into other contradictory moves. Kirchner had vowed not to devalue the peso, for example. Despite this, the currency was devalued last month after foreign currency reserves fell to a seven-year low.
“[Issuing debt] goes against the rhetoric,” says Horacio Lazarte, an economist that specializes in oil and gas at Abeceb, a Buenos Aires consultancy. “But reality imposes itself. [Paying cash to Repsol] would have been too strong a blow to the reserves.”
Vaca Muerta holds the world’s second-largest reserves of shale gas and the fourth-largest reserves of shale oil, according to US Energy Information Administration data. While it is now set to become a more attractive investment prospect for foreign companies, ending the Repsol dispute “is not enough” to trigger deals similar to those Chevron and DOW Chemical struck with YPF to develop the the field, says Claudio Loser, an Argentine economist and senior fellow at the Inter-American Dialogue in Washington.
There will be no avalanche of international interest because of a range of factors, including distrust, high inflation, import restrictions, and strong government regulation in the energy sector, analysts say. The government is also accused of falsifying economic data on which investors rely.
“Caution will rule,” says Mr. Rossi.