Move stymies Chinese firm’s drive to buy South American country’s largest petroleum company

Argentina’s president has proposed nationalizing the country’s largest oil and gas company, YPF S.A., putting an end to Chinese efforts to buy it.

Cristina Fernandez de Kirchner’s move kills China Petrochemical Corp.’s (Sinopec) potential purchase of YPF from its controlling shareholder, Spain’s Repsol-YPF S.A.

Repsol held a 57 percent stake in YPF, and the nationalization has been criticized by the international community. The Spanish government strongly opposed Kirchner’s April 16 proposal and the European Parliament passed a resolution condemning it, saying the Argentine government was “unilaterally dictating behavior.”

However, Kirchner’s announcement has won support from the governing alliance and opposition.

The Argentine government took control of YPF the day of Kirchner’s announcement. The government’s planning department took over the board of directors and YPF’s Spanish employees left for Spain.

YPF was a state-owned enterprise in 1990s, but was later privatized.

PFC Energy, a global consulting organization specializing in the oil and gas industry, said Repsol’s stake in YPF was cut to 6.4 percent. Under Kirchner’s plan, the Argentine government takes a 51 percent controlling stake in the company.

The official Xinhua News Agency reported that the Argentine government told congress it aimed to buy a 50.1 percent stake.

Wu Guoping, a researcher at the Chinese Academy of Social Sciences’ Institute of Latin America, said Kirchner’s plan was strongly supported by Argentina’s political parties and people, and YPF was portrayed by Kirchner as a national icon.

Besides the oil sector, Spain’s investment in Argentina also includes telecoms and banking, so the Spanish government would not fight Argentina over YPF, Wu said.

Before Kirchner’s announcement, Sinopec was in talks to buy YPF and was negotiating with Repsol, Spain’s largest industrial company and the sixth-largest oil company in Europe by sales, on a non-binding agreement, a source close to Sinopec said. The acquisition price was over US$ 15 billion.

In early April, China National Offshore Oil Corp. (CNOOC) planned to buy YPF for 9.16 billion euros, a Spanish newspaper reported. But the source close to Sinopec said CNOOC was not involved.

Sinopec intended to acquire all the shares owned by Repsol, whose board of directors supported the deal, the source said. The deal would have required approval by authorities in Spain and Argentina.

Sinopec had seen huge potential in the oil blocks owned by YPF and was confident it could meet the requirements of Kirchner’s government to speed up exploration, a source familiar with the situation said.

China’s elimination from the deal appears to have created an opportunity for Brazil. On April 20, Brazil’s minister of mining and energy signed a memorandum of understanding with Argentina’s planning minister, a sign Brazil would continue its investment in Argentina’s oil industry.

Recently, the relationship between YPF and the Argentine government grew strained. Kirchner’s government has blamed YPF for a lack of investment in the sector, leading to shortages of refined oil. Also, six Argentine provinces withdrew exploration licenses involving ten areas from the company.

Argentina’s government strictly controls oil prices, keeping them low at US$ 42 per barrel and sapping the enthusiasm of oil firms. In addition, Argentina has imposed 40 percent tariffs on exported oil and gas. Earlier this year, YPF was involved in a dispute with the government over a US$ 8 million tax bill for export of natural gas.

Caixin has learned that since 2008 international investment banks have tried to sell YPF for Repsol, and China’s Big Three oil firms – Sinopec, CNOOC and China National Petroleum Corp. – all showed interest.

But there were risks. A senior executive from an international energy consulting firm said many of its oil fields were aging and the output capacity was limited. Investments were needed to restore the oil fields and increase productivity. Because the prices of oil and gas were managed by Argentina’s government, foreign companies faced great uncertainty regarding investment and cost recovery.

A CNOOC source said he was not optimistic about investments in Latin American countries, especially Argentina because it was renowned for nationalizing its natural resources. “First, if we make an investment there, but cannot send the oil back to China, it will be useless for China’s energy security. Second, the refined oil is not going to be sold at a good price because of the controls by the Argentine government.”

By staff reporter Wang Xiaocong