Since writing my article Argentina on the Brink: What is the Real Investment Risk?, events in Argentina over the last week have moved even more rapidly towards what I believe is the impending nationalization of the Argentine oil and gas industry. These events also indicate that the Argentine government is targeting foreign companies not only operating in the oil and gas sector but across the Argentine business sector. These recent events have escalated the degree of investment risk for foreign investors who hold investments in Argentine companies or foreign companies operating in Argentina. It has also significantly increased the risk for non-Argentine companies operating in the oil and gas sector, because I believe that these companies will eventually lose their oil and gas concessions.
Before delving deeper into last week's events I think it is useful to recap on what has occurred since President Kirchner won a landslide victory in the October 2011 elections. Since winning the election president Kirchner has demanded that all oil and gas companies operating in Argentina, including foreign companies, repatriate all future export earnings to Argentina. This also included demanding that Argentine companies not pay dividends and reinvest those funds earmarked for dividend payments in Argentina.
In conjunction with this demand the government has also introduced regulations that significantly increases the amount of capital a bank must hold prior to being legally able to pay a dividend. As a result of this pressure combined with the regulatory changes we have already seen many Argentine companies such as YPF.SA (YPF), Banco Macro (BMA), BBVA Banco Frances (BFR) and Telecom Argentina (TEO) agree to either not pay dividends or be unable to do so due to changed regulation.
These demands in themselves indicate that the government is determined to not only establish highly interventionist or protectionist policies but actively and systematically intervene in the economy in the name of national interest. All of this does not augur well for the independent future of the oil and gas industry in Argentina and possible other sectors including banking and communications.
During the week the Argentine government stripped further oil and gas concessions from Spanish Repsol's (REPYY.PK) Argentine subsidiary YPF and events indicate that it is only matter of time before the company is nationalized.
On Monday April 2, 2012, the governor of Chubut province announced he was revoking the YPF concession for the Manantiales Behr field, which was responsible for 10% of YPF's production in 2011. The Argentine government in the same week also terminated the YPF concession for the Nirihuau field in Patagonia.
In total, over the past few weeks YPF has lost 12 concessions in five provinces and overall since the government started stripping oil concessions from YPF, it has lost 27.7% of its production. But it is anticipated that this will reach 44.7% as more concessions are terminated by the government.
But it is not only YPF that is feeling governmental pressure through the loss of oil field concessions. Petrobras Brazil's (PBR) Argentine subsidiary Petrobras Argentina (PZE), of which it is a 67% owner, had its Veta Escondida exploitation contract terminated by the regional governor on Thursday April 5th 2012. Yet Petrobras is adamant that it has not breached any of the terms of its contract and the concession remains in force until 2027. How this plays out over the next few weeks will be a good indicator of how other foreign companies will be affected by the government's policy. Furthermore, Canadian based oil and natural gas explorer and producer Azabache Energy (AZBCF.PK) was ordered by the Neuquen provincial government on Wednesday 4th April 2012 to hand over its concession in Neuquen province.
A further indicator of the impending nationalization of the oil and gas industry was an announcement from the government of Chubut province that it is seeking new investors for the fields it confiscated from YPF and that will invite private investors to partner with it so as to exploit those fields.
Throughout the week there have also been rumors afoot, as reported by the Argentine newspaper Clarin, that the Argentine government will use the state controlled pension funds to provide the required capital to purchase a controlling stake in YPF. However, Argentina's Planning Minister Julio de Vido has denied this.
Based upon these events it is highly likely that the end result will be a nationalization of YPF once the government has weakened the company sufficiently to ensure that it is no longer a profitable concern for its parent Repsol. Of further concern are the actions being taken against other foreign owned oil and gas companies operating in Argentina. These actions include the government threatening to strip these companies of their oil concessions or even terminating their oil concessions on the basis that they have failed to meet agreed production targets. All of which only sharpens the risk of wholesale nationalization of the Argentine oil and gas industry.
How the current government would achieve this is difficult to predict, but they essentially have two options. Firstly, they could amend the law to make oil and gas a matter of national interest and then using the powers this would confer on the government, expropriate all oil and gas concessions. Or secondly, they could use the state controlled pension funds to provide the necessary capital to purchase controlling interests in all of the key oil and gas companies in Argentina. However, it is doubtful that they have sufficient funds to do this.
Of even greater concern is a recent incident that indicates the government's heavy handed regulation of business is moving beyond the oil and gas industry. The Argentine government has announced that Spain's Telefonica SA (TEF), which operates the Movistar cellular phone network, will be heavily fined for a service disruption that left 16 million customers without phone and data services for several hours. According to Telefonica this outage was due to a software glitch and they have already offered compensation to the affected customers. However, the Argentine government has reiterated that the fine will be imposed regardless of any compensation already paid.
The Argentine government is exerting such pressure on foreign owned or controlled companies operating in the oil and gas industry that in my opinion it is inevitable the industry will be nationalized. However, what is of greater concern is the increasingly punitive actions the government is taking against foreign owned or controlled companies operating in other industries. Eventually this can only end in disaster for the Argentine economy as foreign investors and companies withdraw from Argentina, starving the country of much needed foreign direct investment. It is also quite foreboding for the many investors holding shares in Argentine companies or those foreign companies that derive a large portion of their revenues from Argentina.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.