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Tuesday, April 17, 2012 - 11:40

Argentina Analysts Warn of Economic Risks With YPF Takeover

BUENOS AIRES (MNI) - Argentine President Cristina Fernandez de Kirchner is seeking to take control of YPF, the country's biggest energy company, an effort that is raising cheer among much of the population, and concerns that it could backfire and hurt the economy, observers said Tuesday.

The president announced the plans Monday to expropriate 51% of YPF, a former state oil company privatized in the 1990s. The announcement was made to a crowd of officials and supporters who applauded and chanted with stadium-fervor.

The takeover, which was expected after a simmering dispute with the firm reached a boil in recent weeks, will come by acquiring most of the 57.4% of the shares held by Repsol, the biggest oil company in Spain.

The rest of the shareholders, including Argentina's wealthy Eskenzai family, will retain their shares, of which about 17% are publicly traded in Buenos Aires and New York. This means YPF will be a public-private enterprise controlled by the state.

Fernandez de Kirchner said she will submit the proposal to Congress where it is likely to secure a quick approval because her party controls both houses, and the big opposition parties are in support.

So is most of the population.

Julio Burdman, a political analyst in Buenos Aires, estimates that two-thirds of the country's 40 million people support the takeover, largely on beliefs that a country should control its own resources and that Repsol's poor management has cost the country its self-sufficiency in energy supplies.

CFK said the takeover will allow the country to regain energy this self-sufficiency, saying it was lost after the privatization of YPF in the 1990s.

Oil production has dropped by a third to 570,000 barrels per day from a record 847,000 barrels in 1998 -- the year before Repsol bought YPF. Natural gas output has fallen 13% to 125 million cubic meters per day -- in line with average production -- from a peak of 143.1 million in 2004.

The declines have led to more frequent shortages at service stations and a surge in energy imports.

The imports shot up 110% to $9.4 billion in 2011 from the previous year, putting a dent in the trade surplus. Imports are due to rise more this year as Argentina ramps up purchases of liquified natural gas to cover demand in a country that relies on gas for 50% of its energy.

The imports are increasing even as the economy slows to 4% growth from an average of 8% a year between 2003 and 2011.

CFK has slammed Repsol for running the business only to pay dividends and not to reinvest profits.

Repsol "pursued a policy of pillage, not of production, not of exploration," she said Monday. "They practically made the country unviable with their business policies, not resource policies."

YPF produces a third of the country's oil, close to a quarter of its gas and has a 50-60% share of diesel and gasoline sales.

Its output has dropped in line with the national decline, even though, as CFK pointed out, it is sitting on top of some of the world's largest resources of oil and gas in shale-rock formations.

The president stressed that she will seek to enlist a professional team to manage YPF, yet few doubt she can given her track record -- and that of the country -- of running state enterprises at deficit.

"Having state companies could be a good strategy for the country, like mining in Chile and Petrobras in Brazil," said Jorge Colina, an economist at the Institute of Argentine Social Development, a think-tank in Buenos Aires. "These companies are run very professionally."

Argentina, however, "won't run YPF professionally and this will generate a deficit," Colina said.

He said the country has yet to resolve a $100 billion debt default from 2001, a sign of its lack of seriousness. "If Argentina was professional. It would have resolved the default and returned to global markets," he said.

Another concern stems from experiences in the 2000s re-nationalizations of the Buenos Aires waterworks and of Aerolineas Argentinas, the state airline. In both cases, the government put loyal unionists in charge of the operations and now the companies are running at a loss and getting by only thanks to state subsidies.

Another example is Enarsa, a state energy company created in 2004 by Nestor Kirchner, the president's late husband and predecessor. While run by a seasoned oilman, it has yet to generate a profit, instead getting 90% of its funds from the state.

"They all live off the state," Colina said.

The subsidies for these three companies totaled 18 billion pesos ($4.1 billion) in 2011, while spending on a child-welfare program only reached 10 billion pesos, he said.

CFK already has put Planning Minister Julio de Vido, her chief energy architect, and Deputy Economy Minister Axel Kicillof, in charge of running YPF until the takeover is complete. Neither of them have any experience in running an oil company, Colina said.

"If YPF is not managed professionally, no investor will want to form partnerships with it," he said.

Argentina needs huge investments and experienced partners to develop immense shale resources, most of which are in the southwest of the country. Repsol has said it would need to invest more than $20 billion to put them into production, adding that when done Argentina would come replicate the shale boom in the U.S. and become not only energy self-sufficient but also a big exporter.

The country, too, will need access to international capital markets for the investments, something it has not tapped since before the 2001 default. A portion of the defaulted debt still needs to be settled before it can readily borrow, including more than $9 billion owed to the Paris Club of creditor nations.

But it is the takeover proposal, that is raising eyebrows.

"It is a unilateral decision, a hostile takeover," said Jaime Abut, a business consultant in Rosario, Argentina. "Now we have problems with Spain and Europe. Argentina is closing the economy. No investment is going to come because nobody believes in us. You need to build confidence to borrow abroad."

He said the closure of the economy -- including increased controls on imports starting this year -- could lead to a stagnation followed by recession in a country with 25% annual inflation, among the world's highest.

Abut said the state now will have to plow billions into exploration and production to rebuild hydrocarbon supplies, yet without easy access to the big financing that is needed.

Jorge Todesca, an economist at Finsoport, an economic consultancy in Buenos Aires, warned that the hostile takeover could spark a ripple effect and reduce foreign investment in Argentina.

"If companies are looking to invest in Latin America, they are going to choose Brazil or Chile over Argentina," he said.

This is problematic for Argentina, where most of the big companies are multinationals. There are only a handful of large national companies and there is little local credit. So sour relations with the world could scare the multinationals operating in Argentina, causing them to reduce investment in part because banks may become less inclined to lend for projects in Argentina, he said.

"There is a climate of instability in Argentina, and this doesn't encourage investment," he said. "The government is fabricating its own economic crisis."

** MNI - Buenos Aires **

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