May 23, 2013 / 12:52 PM / 6 years ago

Argentina, Repsol struggle to bridge gap over YPF compensation

MADRID/BUENOS AIRES (Reuters) - A year after Argentina seized the local business of Spanish oil firm Repsol (REP.MC), there seems little prospect of a quick deal on compensation despite signs that both sides would rather avoid a costly, drawn-out legal battle.

A sign with the YPF Gas logo is seen outside a gas distributor in Moreno, Buenos Aires province, April 19, 2012. REUTERS/Marcos Brindicci

The Latin American country’s lack of funds and its limits on the control private firms have over their investments - which could deter Repsol from accepting other assets in any settlement - pose major obstacles to a deal, according to analysts.

Argentine President Cristina Fernandez expropriated Repsol’s majority stake in YPF (YPFD.BA) last May, accusing the firm of investing too little. Repsol denied the charges and filed lawsuits against the country for a loss valued at $10.5 billion.

A year later the Argentine government, keen to rebuild relations with foreign investors and attract funds to develop a vast shale field, has held talks with a major shareholder in Repsol over a possible deal to side-step a long legal battle, a source familiar with the matter told Reuters.

Repsol has officially denied any involvement in talks with Argentina but says it will keep all avenues open for settlement.

The Spanish government, eager to protect the investments of other companies like Telefonica (TEF.MC) in Argentina, has also said it would listen to options to settle the YPF dispute.

Repsol’s chief financial officer, Miguel Martinez, said earlier this month it would be open to a mixed package including cash, cash equivalents or liquid assets.

One asset option tipped by analysts is a stake in YPF’s valuable Vaca Muerta, or “dead cow”, shale field.

But for such an asset to be liquid, as Repsol demands, the Argentine government would have to revise laws that limit private firms’ control over their investments, a change some analysts say is unlikely while Fernandez is in power.

Presidential elections are not due until 2015.

Analysts are also doubtful about Argentina’s ability to pay Repsol any compensation. Dollars are scarce in the country and central bank reserves are down by 10 percent so far this year.

In 2012 the economy cooled abruptly after booming during most of the previous decade.

“Argentina is in no condition to pay outright. The government could propose paying by way of an installment plan. But considering the state of YPF and the country’s reserve position, the payment period would have to be a long one, perhaps of about 10 years,” said Rodolfo Rossi, former head of Argentina’s central bank.

Argentine officials were not available for comment.


Even if Repsol were offered a stake in Vaca Muerta, which is still in preliminary stages of development, analysts have questioned the wisdom of returning and trying to do business with a government with which it has been at odds.

“The current legal framework has the ingredients of Repsol potentially being ‘trapped’ in the country,” Credit Suisse said in a research note.

After losing YPF, Repsol launched a new strategy with exploration projects focused in countries such as the United States, Spain, Brazil, Russia, Bolivia and Trinidad and Tobago.

So far the new plan has driven an 11 percent growth in first-quarter production to 360,300 barrels of oil equivalent (boe) per day and put the company firmly on track to beat a 2016 target for 500,000 boe.

“We think Repsol would be better off spending funds elsewhere, where potential returns are far better,” Credit Suisse said.

Not holding its breath for an out-of-court settlement, Repsol’s Martinez said it would continue to pursue legal action.

The company filed a claim against Argentina with the World Bank’s International Court for Settlement, known as the ICSID, in December 2012, and also has legal cases open in a New York court, a Spanish court and an Argentine court.

However, legal compensation is likely to take time.

On average, ICSID cases last 3.2 years from the date of registration. Argentina is the country with the most ICSID claims against it, and has failed to pay fines from previous judgments by the arbitration body.

Analysts do not currently include any estimates for YPF compensation in their valuations of Repsol, so any settlement could boost a share price that has recently recovered to the level it was trading soon before the YPF seizure.


Last week YPF signed an agreement with U.S. oil firm Chevron (CVX.N) for an up to $1.5 billion investment in Vaca Muerta, located in Argentina’s southern Patagonia region.

The deal, expected to be signed in July, has run into obstacles because of Chevron’s own legal battle with Ecuador, which has an embargo on the California-based company’s assets.

However, Chevron’s president of Latin American and African operations, Ali Moshiri, said the suit does not affect the deal.

YPF declined to comment.

If the Chevron agreement goes through, BES analyst Filipe Rosa said it could reduce pressure on Argentina to settle compensation with Repsol over the YPF expropriation.

Repsol has lodged a suit against Chevron and has threatened to sue any company that tries to make a profit out of Vaca Muerta, an asset it continues to claim. The potential value of the field is estimated from $7.5 billion to as much as $90 billion, if it were to achieve $25 billion per year in investments to develop the prospective resources.

Repsol had signed at least 15 memorandums of understanding with potential strategic investors in the months before the YPF nationalization to spend an annual $25 billion on the field, according to Repsol documents about the YPF seizure.

Additional reporting by Andres Gonzalez; Editing by Mark Potter

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