I did not expect my prediction to come true so fast! The Argentine government moved to nationalize 51% of YPF today. You can find the text of the expropriation decree here.
What are the key points? First, the decree creates a National Hydrocarbons Council. The Council will have representatives from the both the national government and the provinces, directly. This is less important than it may sound.
Second, the national government will take 51% of the state share of YPF (51% × 51% = 26% of total equity); the other 49% will be distributed among the provinces that currently produce oil and gas. This is also less important than it may sound.
Third, for the time being the federal goverment will run the show. (See Article 9.) In fact, it will run the show for 50 years. Ah.
Fourth, there will be no reprivatization without a 2/3rd vote of Congress. (Article 10.) Do not bet on the Argentine courts holding that constitutional. Future Argentine governments and congresses will do what they will do.
Fifth, compensation will be decided according to Article 10 of the National Expropriation Act, aka Act Nº 24,199. “Compensation will only consist of the property’s objective value and any damages that are a direct and immediate consequence of expropriation.” The National Appraisal Council makes the decision according to a set of published norms, which you can find here and (in more detail, and in English!) here. Key quote:
“In case of appraisals for expropriation, it will be appropriate to determine the property objective value, understood — according to the Act Nº 21,499 — as the sum of money which permits the party subject to expropriation to get compensation for the value of the affected property and for the damages which are a direct consequence of the expropriation, in equivalent conditions to those which were previous to the expropriation, without taking into account personal circumstances, emotional values, hypothetical profits or the greater value which the works to be carried out may confer. Therefore, the objective value can square with the market value when it may be determined or with the depreciated replacement cost (CRD) instead.”
It is easier to parse if you redact it, but I want to post the full text. The upshot is that the law says market value is the correct value. Market value, to answer Bernard’s second question, is “The net amount which reasonably could receive a seller for the sale of a property on the date of valuation.” Given that the book value of YPF’s fixed investment is $9.8 billion, and its total assets are worth $13.7 billion, it seems unlikely that the Argentine government will try to use replacement costs for a company that had a market value of only $8.6 billion on the eve of the decree. That said, it is conceivable that the Argentine government will argue that the company is worth only $4.6 billion, which is the book value of shareholders’ equity.
Under the Spain-Argentina BIT, the compensation standard is simply “adequate.” If the dispute goes to arbitration, it is very unlikely that the panel will use net worth as a standard, rather than market value as either an NPV calculation or, uh, actual market value.
The thing is, arbitration is sloooooow. Article 10 of the Investment Treaty gives the two governments six months to hash things out if Repsol asks for it. Then Repsol has to go through local courts for 18 more months. At that point an arbitration panel can be convened (either under ICSID or Unictral), but there is a three-more-month cooling off period. In other words, unless Argentina makes Repsol an offer it can accept, decisions won’t even start to be made until July 2014. Right in time for the World Cup!
My money is still on a settlement that give YPF shareholders at least the Friday, April 13, value of the company. (Yes, its value on Friday the Thirteenth.) Argentina has the money, and even if Spain isn’t about to park one of its aircraft carriers off the coast (that’s Britain’s job! Although some Argentines are mocking the “English” for lacking a carrier to send) it does have points of leverage. Plus, Argentina needs foreign investment, and lots of it. It is in everyone’s interest to settle.
My next post will go back to the cases that Argentina is currently fighting in ICSID. In those cases, justice is on Argentina’s side. Here, though, not so much ... not that it matters.