Friday, April 20, 2012

Argentina and oil production

Mark Weisbrot, who commonly defends the economic policies of left-leaning governments in Latin America, defends the nationalization of YPF. The crux of his argument is that Argentina needed to do so in order to increase oil production.

There are sound reasons for this move, and the government will most likely be proved right once again. Repsol, the Spanish oil company that currently owns 57% of Argentina's YPF, hasn't produced enough to keep up with Argentina's rapidly growing economy. From 2004 to 2011, Argentina's oil production has actually declined by almost 20% and gas by 13%, with YPF accounting for much of this. And the company's proven reserves of oil and gas have also fallen substantially over the past few years.

However, has anyone made a convincing argument that nationalization will increase production? Steven Bodzin recently wrote that this assumption is wrong:

Oil output and investment were the key issues here, but like Noel, I don’t see anyone stepping in with adequate money to really increase investment. The Chinese might loan some money (Venezuela style) or try to send their own work crews (Sudan-style) but if there’s one thing China likes, it’s stability — and that’s not on order in Argentina. Other companies? Talk to Americas Petrogas, an explorer with big chunks of Argentine shale under license. It’s lost a third of its value in two months as this whole drama has played out. It’s going to be tough for them to get money from the public markets, and the bonds and banks have been shut off since Argentina defaulted a decade ago. I could see a few of import-dependent countries investing, including China and Chile, but with heavy conditions, and not with the kind of money Argentina needs.

See also Boz on distribution problems. Is there reason to believe, as Weisbrot does, that the government "will most likely be proved right once again"? Right now, Argentina is trying to get more investment from Petrobras, which seems lukewarm to the idea:

Brazilian Energy Minister Edison Lobao said during a news conference following the meeting that Petrobras would invest all that it could in Argentina, which he said would amount to roughly $500 million in 2012, unchanged from 2011.
So let's wait and see.


Aguachile 1:50 PM  

A very good question. There's some (highly qualified) support for Weisbrot's productivity argument from this week's Economist article:

"The government has blamed its woes on Repsol, accusing the company of carting off profits instead of reinvesting them. There is some truth to this. Though YPF has invested $11 billion in Argentina since 2006 while handing out $3.5 billion in dividends, it has mostly gone to bolstering existing fields rather than to exploration.

But YPF cites two reasons why it has had to pay money out, rather than spend it on drill-heads. The first is that in 2007 the government concocted a scheme in which Enrique Eskenazi, a bank owner who had previously dealt with Kirchner, would buy a 15% stake in YPF (later raised to 25%). Because he put up precious little cash, the company and a group of banks lent him the money. YPF then agreed to dole out 90% of its subsequent profits in dividends so that he could afford to pay it back"

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