Landmark Court Ruling Raises Existential Question for Argentina’s YPF
By Michael J. Economides
Last Thursday during an Argentine Institute for Petroleum and Gas (IPAG) Houston event, the director of unconventional resources of YPF proclaimed he was not primarily on a fundraising mission to develop the natural gas reserves in Argentina’s massive Vaca Merta. He claimed that 70 percent would come from internal to YPF sources and much of the rest was already spoken for. While I disagreed with that assessment, a watershed ruling in the U.S. 2nd Circuit Court of Appeals in New York throws into disarray Argentina’s plans to find foreign investors for its re-nationalized energy company, YPF. The court’s ruling makes clear the Argentine government can no longer pick and choose which creditors it will pay: it must honor obligations to all, or risk precipitating another cataclysmic default. For YPF, who must raise tens of billions of dollars in new investment from U.S. and European energy companies, the decision could signal an end game.
According to the U.S. courts, Argentina will no longer be able to issue payments to one class of arbitrarily preferred creditors, while refusing to pay others –without those payments being subject to seizure and attachment. If the Argentine government refuses to comply, a default scenario is a distinct possibility. Because of its cavalier discrimination against bondholders and bad-boy reputation for failing to respect contractual obligations, many foreign investors view Argentina as a high-risk place to do business. The appellate decision increases that risk perception exponentially, just at the moment when YPF must secure long-term partnerships with U.S. companies.
Since its re-nationalization earlier this year, YPF has been aggressively courting U.S. and European energy companies whose engineering expertise and capital resources are indispensable to its $37.2 billion plan to develop Argentina’s vast unconventional energy reserves. Even before the appellate decision was issued, investment in YPF had not been an easy sell. After 40 meetings with 70 businesses and investors in Houston, Los Angeles, Boston, New York and London, no partners had emerged. YPF officials returned to Houston last week to make another sales pitch at a conference hosted by the IAPG.
It’s quite an urgent matter, in fact. Years of mismanagement, coupled with a lack of access to international credit markets following Argentina’s massive sovereign debt default in 2001 and failure to normalize relations with global creditors, have left the country a net oil importer. After forcing out the Spanish company, Repsol, YPF must now secure multiple energy partners to provide the capital and engineering know-how to develop its unconventional oil and gas reserves.
Moreover, YPF’s official estimate of the investment needed to develop its unconventional resources is shockingly low. As calculated in my paper, Argentina’s Re-Nationalization of the Energy Industry and What it Means, the Argentine government and YPF have underestimated (by a factor of 7-to-10) the capital requirements to develop the Vaca Muerta. To develop gas wells alone, YPF would require an investment upwards of $250 billion – some 62.5 percent of Argentina’s current GDP, and a far cry from the $37.2 billion estimated in its 5-year plan.
Despite the attractiveness of the Vaca Muerta reserves, the prospect of another sovereign default or of having to fend-off legal actions by competing creditors is daunting. Repsol is seeking $10 billion in compensation from Argentina following the formal expropriation of its majority stake in YPF in May and has sent warnings to other large international oil companies that it “does not plan to let third parties benefit from illegally confiscated assets.” The legal cloud hovering over YPF significantly raises the risk premium for potential outside investors. And in the wake of the appellate court’s decision, more threats of litigation are likely. U.S. energy companies will likely adopt a wait-and-see posture. Will or won’t the Argentine government change course? That’s the existential question for YPF.
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