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Argentina's Repsol move sets off a global ripple effect

April 18, 2012: 12:16 PM ET

If the Argentine Senate votes to expropriate Repsol's holdings, no energy company will feel safe enough to operate in Argentina for decades to come.

By Cyrus Sanati

Repsol

Repsol stands to lose if YPF is nationalized.

FORTUNE -- Argentina's impending expropriation of Repsol's Argentine subsidiary, YPF, could signal the start of a total takeover of the nation's energy industry.

Who will be hurt most? The large multi-national energy companies will, for the most part, come out relatively unscathed. They had shunned making large investments in the country due to the government's high profit take on energy projects. But the government did manage to lure in a few domestic and international energy companies through incentives, most of which were canceled earlier this year. Those companies that took the bait now stand to lose everything.

Argentina prides itself as being very European. Its sprawling capital, Buenos Aires, is known as the Paris of South America for its beautiful beaux-arts buildings and wide boulevards. But while Argentina's culture, architecture, food and language may be very European, its economy and government in the past decade has functioned more like a banana republic than a member of the European Union. From its shocking government debt default last decade to the recent $24 billion expropriation of the nation's pension funds, Argentina has gone out of its way to alienate investors, both foreign and domestic.

One area where the government has failed investors is in its energy industry. Argentina has sizable oil and natural gas reserves, enough to meet its own demand and still have more than enough to export abroad. Nevertheless, the country is a net importer of natural gas and oil products. Much of this discrepancy derives from a series of laws instituted during the default last decade when energy prices skyrocketed. The government moved to cap energy product prices and restrict the export of natural gas to appease a restless population. This made it very hard for energy companies to make a profit. When they did, the government would tax profits by 35% and take an additional 12% royalty fee on the value of oil production.

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Foreign energy companies where not enthused about investing in the country and domestic energy companies, like YPF, decreased their production. From 1998 to 2011, Argentina's energy output plummeted by a third. Knowing that they needed to do something to spur production, in 2006 and 2008, the government offered pricing incentives to companies that produced oil and gas from unconventional plays, like shale. This induced many companies to start looking for new sources of oil and natural gas in the country.

But just when some companies were showing some success, the government changed tack. Since winning reelection in a landslide last year, Argentina's President, Cristina Fernandez de Kirchner, has been making life hard for the energy companies. She first ordered that domestic and foreign energy companies repatriate all the proceeds from their profits and reinvest them back into the country. In February, she abruptly canceled the incentives that had made it worthwhile to drill. Then came talk of taking the industry "back for the people."

YPF was seen as the most at risk for expropriation as it is by far the largest energy company in Argentina. YPF was privatized in the late-1990s and sold off to the public. Spain's Repsol currently owns around 57% of the company, but could be left with just 6% if the government is successful in expropriating its assets. YPF is a major part of Repsol's energy portfolio, making up 42% of its reserves.

Beyond YPF there is a smattering of energy companies that could soon find their properties suddenly taken away from them in the next few months if Fernandez has her way. Chevron (CVX), Total (TOT) and ExxonMobil (XOM) are the three major international energy companies with activities down in Argentina, but their exposure to the country is pretty small compared to their size. Total has the biggest exposure as it produces 86,000 barrels of oil equivalent per day, which represents around 4% of the company's total production. Chevron is next with 27 Kboe/d, representing around 1% of its production. ExxonMobil doesn't show any production from Argentina but it did recently sign a deal with Canada's Americas Petrogas to spend up to $76 million for a stake in a shale gas project.

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Outside the majors there are a number of smaller oil companies that could get burned by Argentina. Apache (APA) derives 6.4% of its production from its Argentine assets. Production is slated to grow by 12% in 2012, according to the analysts at Barclays. Its shares fell hard Monday on the Repsol news but have since recovered slightly. Luckily for Apache, its Argentine production made up just 3% of the firm's total revenue last year. Overall, its Argentine assets make up around 4% of its reserves. Oklahoma-based WPX Energy (WPX) is another U.S. independent with exposure to Argentina. It produces around 9.5 Kboe/d in the country, making up 4.1% of its production.

The Canadian energy companies Azabache Energy (AZBCF) and Madalena Ventures (MDLNF) have the most to lose as they basically have all their energy holdings wrapped up in Argentina. The two relatively tiny energy companies saw their stocks collapse this week following the Repsol expropriation announcement. Azabache has the most to be worried about -- it has been warned by the government, as had Repsol, to increase spending on its fields or risk losing them. Americas Petrogas is another Canadian pure play in Argentina. It is larger than the other two Canadian pure plays with a 2.1 million-acre position in Argentina's prolific Neuquén Basin in the south of the country. The companies have said that they are not worried about having their lands expropriated, but judging by their stock prices this week, investors aren't buying it.

South of the border, there are number of Latin American oil companies that should be concerned about their Argentine assets. Pemex, Mexico's state-owned oil company, owns 10% of Repsol, so it is already feeling the heat. Privately-held Bridas Energy, through its Pan American Energy affiliate, is the second-largest energy company in Argentina behind YPF. While it is privately held, half of the company is owned by Cnooc, one of the large state-controlled Chinese energy companies. Meanwhile, Petrobras Argentina, a subsidiary of Brazil's Petrobras, was dealt a scare when an Argentine province last month revoked one of their oilfield concessions due to lack of investment. Its stock is down around 9% for the month.

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Argentina may not stop at just the exploration and production companies. Transportadora de Gas del Sur (TGS), Argentina's largest pipeline operator, seems like a tasty target for Fernandez's energy ambitions. Like YPF, TGS also was a former government-controlled company, which was privatized in the late 1990s. It operates several key pipelines that are critical to moving gas out of the country for export. The company's stock is down 10% this week on fears that it could be next.

Fernandez could eventually wrest control of Argentina's entire oil industry, but she doesn't have to do it tomorrow. She could wait for the target companies to do all the initial hard work before swooping in for the kill. There are reports that government officials have reassured other energy companies that they are safe, but the government's word has been compromised. If the Argentine Senate votes to expropriate Repsol's holdings, the truth is that no energy company will ever feel safe to operate in Argentina for decades to come.

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