The Exchange

For Argentina’s Nationalized Oil ‘Industry’: A Year of Nothing

By Pierpaolo Barbieri

Exactly a year ago, Argentina President Cristina Fernández de Kirchner announced to the world the expropriation of 51% of Argentine oil company YPF from Spain's Repsol.

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It had all been planned. The announcement, broadcast on all the television channels, between applause and ovations. The Argentine provinces, seduced with a stake in the new company. And the Spanish board, disoriented after failed negotiations.

The commercials were ready. Even the retro logo preferred by Kirchner's marketing was premeditated: It promised a back to the future featuring independent development, increased production, and “popular” prices to encourage consumption, culminating in precious energy independence. And this independence would be achieved with Argentina’s own resources, not as vassals of foreign companies.

The Kirchner rhetoric was, as always, both nationalistic and hopeful. The privatization of the hated neoliberal years was tinged with irregularities. A new era dawned.

The reality of YPF

In the teleology of Kirchnerism, YPF was therefore reserved a special place: the nationalization of the largest company in the country – symbol of a past of plenty every Argentine wants to return to – crowned the "return of the State". Everything that had come before, from the takeover of Aerolineas Argentinas to utilities and even pension funds, was minor.

Propaganda is attractive, but the reality is inevitable. Today, YPF reserves in hard currency and hydrocarbons have failed to cover the energy deficit that the government so criticized Repsol for.

The gap between what Argentina consumes and what it produces will grow by between 20% and 40% in 2013. And that, with all the help from friendly Venezuela.

The company's share price also reflected this failure: in a year fell it over 35 percent.

The management team is skilled, starting with the President, Miguel Galluccio, who returned to YPF with Kirchner. But Galluccio cannot defy gravity: as in any company, an increase in production requires investment.

An expensive problem

The unconventional gas (shale gas) of Vaca Muerta, in the Argentine Province of Neuquén, requires between 4 and 6 billion dollars over several years to kick off production. Argentina may own the world’s third largest shale reserves after only the US and China, but gas cannot be extracted with publicity stunts.

To achieve the energy revolution that is apparent in the US today (and that is beginning in Mexico) requires money, technology, and time. The Kirchner government lacks the first, has blocked the second, and fears for the third.

Marketing notwithstanding, none of the companies that have the technology to develop shale in Argentina have invested in YPF. The limited agreement with Chevron (CVX) is on standby due to a legal disagreement with Ecuador's Rafael Correa, a close Kirchner ally. The Bridas conglomerate has avoided signing on the dotted line, and so has Dow Chemical (DOW). If the funds do not flow, neither will the gas.

Part of the problem is Repsol’s legal suits, supported by the European Union. But Argentina’s very own energy policy, which has increased controls to Soviet levels, is also to blame. All new investments require the explicit approval of the executive, even though YPF already responds to the state.

The basic issue is simple to explain: When even China’s Sinopec and Russia's Gazprom are complaining about the lack of legal guarantees, you know you have a problem.

With international markets closed, Galluccio had no alternative but to resort to local markets. YPF attracted local funds in 2012, being one of the few investments for Argentine savers eager to escape the inflation tax (which stands at 30%). But the tiny Buenos Aires capital market cannot possibly quench YPF’s thirst for funds. And even worse, the YPF’s efforts are crowding out smaller companies that have no way to access other markets.

A pricing game

CEO Gallucio also had to increase prices to reinvest profits, so the "national and popular" company raised the price of fuel by an average of 24% in the last year. The rises were understandable with the actual inflation rate, but wholly incompatible with the government’s statistical lies.

In order to celebrate the anniversary, Trade Secretary Guillermo Moreno announced last week a fuel price freeze for six months – right until after the parliamentary elections in October. YPF hurried to raise prices and insisted that it will continue to do so. But it is obvious that the Kirchner economic triumvirate – Moreno, Deputy Minister Neo-Marxist Axel Kicillof, and Vice President Amado Boudou – dislike Galluccio.

It may be because ideology ultimately cannot achieve economic results: YPF production has not improved. Kicillof, the President’s favorite, promised a year ago in the Senate a production boom. In the first quarter of 2013, gas production fell by 3.5% and oil production by 2.7%. In 2012 gas had already fallen and oil had barely risen (aided by a long 2011 strike that provided good optics).

Perhaps Kicillof will now attempt to blame Europe, as he does routinely to explain the stagflation in the wider economy. But excuses fall short.

Unlike true democracies, authoritarian leaders can never admit mistakes, lest they show their fallibility. That is why in spite of the facts, new commercials are being broadcast explaining the victories of YPF and its nationalization.

But a year after the epic, reality prevails. There was no plan whatsoever.

Pierpaolo Barbieri is strategic advisor for the Institute for New Economic Thinking and Ernest May Fellow at the Harvard Kennedy School. His book, Hitler’s Shadow Empire: The Nazis and the Spanish Civil War, will be published by Harvard University Press in the fall. His next project will explore the economic history of Latin America.

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