• A version of this post ran on the author's blog, bloggingsbyboz.com. The views expressed are the author's own.
A slap at Spain: In order to nationalize YPF, Argentina will nationalize 51% of the company from the 57% currently owned by Repsol. Spain has promised retaliation. This could be a long and ugly fight.
Ideology shift: As several media outlets noted yesterday, Cristina Kirchner supported the privatization of Argentina's oil in 1992. Her shift on the issue mirrors the shifts in ideology of the Peronists over the decades.
The fracking question: This isn't just about oil. Argentina has the third largest technically recoverable reserves of shale gas in the world after the US and China. They have the potential to be a natural gas giant. YPF controls some of the biggest stakes in this emerging industry. This move by Argentina is going to scare many of the potential investors in this sector, but it also gives them control of large potential reserves. Fracking is both environmentally controversial and technically difficult, but the gas reserves would be a huge economic boom for the country.
Welcome to a very tough distribution market: The government wants YPF's exploration, drilling and refining capacity. What they get on the side is YPF's service stations. President Kirchner should find that running a gas station in Argentina is a tough business under the current government policies. One third of Argentina's gas stations have closed in the past decade (from about 6,000 to about 4,000). Companies big and small are jumping ship on the distribution side. Just last year, 49 YPF stations closed in the country. Gasoline and natural gas shortages are a regular event. The government used to be able to point fingers at foreign firms and criticize the stations for their shortages. Now that they own the biggest company in the business, they get to either show how it's done or take the political blame.
Watch the provinces: If you're an investor in Argentina you need to understand politics at the provincial and local government level, not just the national picture. This YPF nationalization was not a top-down affair the way it has occurred in Venezuela or Bolivia. Various provinces revoked concessions one-by-one, building momentum for the national move. While the opposition media portray this as a planned operation controlled and directed by the president, the details were driven by local politics moving the national agenda.
Watch China: Argentina believes that China will pick up the slack for any investments lost to Western firms or governments that avoid the market. China wants Argentina's energy and food and has invested big in the country in recent years. But even China is starting to wonder about Argentina's investment climate. The Argentine government is far more independent and nationalistic than the African governments that China likes to work with. China worries about the more radical elements of Kirchner's political base demanding more control over Chinese-controlled assets. It worries about the state governments that it doesn't quite understand. It also worries about the opposition flipping policies if they regain power. China should be as confused and concerned about Argentina's business climate as everyone else.
Watch Brazil: Petrobras is one of the other big energy investors in Argentina. Over the past year, it's quietly moved away from the market, selling a refinery and gas stations. The Kirchner government has at times placed Petrobras in the same league as YPF, Shell and Exxon in terms of foreign firms to be blamed for Argentina's energy problems. Two weeks ago, Petrobras lost a concession in the province of Neuquin, the sort of move that was a prelude to the YPF nationalization. The response to the YPF nationalization from Petrobras and Brazil will be important. Argentina will certainly want its Mercosur ally to stand with them in any economic dispute with Spain, but Brazil has a lot to lose here as well.
For those wanting to read more in English: NYT, Reuters, Bloomberg. Additionally, the Beyond Brics Blog at FT has done an excellent job covering this issue in recent weeks.
– James Bosworth is a freelance writer and consultant who runs Bloggings by Boz.
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