The Power and the Money

Observatorio argentino 18: The state of YPF

How is Argentina’s nationalization of the YPF oil company panning out?

In short, the nationalization has so far had the salubrious (and rather ironic) effect of getting the Fernández administration to roll back some of the more counterproductive bits of Argentine energy policy, but its confused quasi-Bolivarian foreign policy is now coming back to bite the government via the ruling against Chevron. Fortunately for Argentina (and also ironically) an imperialist foreign court in the Netherlands seems to have tossed the country a lifeline.

Start with Argentine energy policy. YPF’s stock price jumped on November 29 ... because the Argentine government agreed to allow companies to sell natural gas from new developments at $7.50 per MMBTU, more than three times the previous controlled price. YPF shares then rose throughout December as it became clear that Argentina was going to raise the export price of oil from $42 to $70.

In one sense, then, YPF is doing well because the Argentine government has stopped doing some ... er ... counterproductive things. This validates a hypothesis I ventured about the expropriation in a case I wrote about it: nationalization gave the Fernández administration cover to lift some unaffordable subsidies. 

What about attracting capital into the oil industry? In August, YPF laid out an ambitious $37.2 billion investment plan. Most of the cash is supposed to come from the company’s own earnings. (Those earning would not have materialized without the decision to raise oil and gas prices.) But it also calls for $4.5 billion from international partners and $6.7 billion in bond issues.

And that is where it gets sticky. YPF’s chosen partner, Chevron, keeps getting bogged down in legal trouble. In part, that is due to the YPF nationalization. On November 20, YPF’s former owner, Repsol, sued Chevron in Spain. Repsol asked the Spanish court to issue a cease-and-desist order under Spain’s “disloyal competition law.” (“Disloyal competition” sounds weird in English; a better translation would be “unfair business practices” or “antitrust.”) On December 4, Repsol hit Chevron with a second lawsuit in New York.

These lawsuits were not enough to stop Chevron. It isn’t that Repsol has no case. It is that the case is uncertain; moreover, Chevron might not be liable at all unless Argentina refuses to pay some future arbitration judgment against it, and such a judgment is unlikely before 2017 or 2018.  Chevron is taking a legal risk in jumping into the Vaca Muerta oil shale, but it is a reasonable one. (For what it is worth, “reasonable” does not mean “If I were the head of Chevron, I would take the risk.” I would not.)

Chevron’s real problem is the lawsuit Ecuador launched against Chevron in Argentina. That one seems to have brought Chevron’s plans in Argentina to a halt. YPF is now on a roadshow in the UAE looking for partners. YPF has also received a pledge of $1.5 billion from Bridas Holdings. (Here is another description of the deal.) Bridas is half-owned by the Bulgheroni family of Argentina, and half-owned by CNOOC. Repsol, of course, has announced that it plans to sue Bridas.

There is something odd in the Chevron travails. The courts in Argentina are not fully independent, but as Setty has pointed out, the Fernández administration has had some trouble lately getting them to rule its way. (This Economist article gives more details.) In addition, Fernández herself is probably torn between needing Chevron’s money and wanting to support her Ecuadorean ally. What you smell is confusion.

My guess is that the Argentine supreme court will use the recent decision by the Permanent Court of Arbitration in the Hague (PCA) to overturn the lower court ruling and unfreeze Chevron’s assets. The PCA ruled that it had jurisdiction over the case and had previously ordered Ecuador to halt foreign enforcement actions until it made its final decision; it now holds Ecuador responsible for any damages imposed on Chevron by foreign courts. The ruling provides a basis for the supreme court to throw out the case. At that point, the action will shift to the courts in Spain.

That case, unlike the one in Buenos Aires, is a black box from where I sit. It will be fun to watch.

Ecuador attacks Chevron in Argentina: world governance runs both ways

I hate the word “governance,” but it is useful. After all, there are things that are governed without a single government. When those multiple governments are hierarchically ordered (even if legally sovereign) then I prefer the word “empire.” But sometimes imperial institutions can run both ways.

The bilateral treaties that govern the investor-state arbitration system tend to be unequal. Consider for example the U.S.-Ecuador treaty. The United States exempts Ecuadorean investors from using anything but U.S. courts in the following sectors:

• Air transportation
• Banking
• Customhouse brokers
• Government grants
• Government insurance and loan programs
• Energy and power production
• Insurance
• Maritime services and maritime-related services
• Mining on the public domain
• Ocean and coastal shipping
• Ownership of real property
• Ownership and operation of radio and television stations
• Ownership of shares in the Communications Satellite Corporation
• Primary dealership in United States government securities
• Provision of common carrier telephone and telegraph services
• Provision of submarine cable services
• Use of land and natural resources

Meanwhile, the Ecuadoreans exempt:

• Traditional fishing (not including fish processing or aquaculture)
• Ownership and operation of broadcast radio and television stations

Quite a difference! Looks pretty damn imperial, no? You can kinda understand why President Correa wants to withdraw from ICSID and abrogate the investment treaties.

Thing is, these treaties are ultimately enforced not by ICSID or some other sort of world-government-in-drag, but national courts. And the same conventions that allow national courts to enforce foreign rulings (the way Argentina lost its ship in Ghana) can be used to establish extraterritorial jurisdiction. That can do it a bit to reduce the imperial feel to the international system that protects property rights. The Ecuadoreans, in short, can use foreign courts to enforce their laws.

Last year, Ecuadorean courts levied a $18.2 billion damage claim against Chevron for polluting watersheds in the country. Ecuador’s legal team knows that ChevronTexaco doesn’t have many assets in Ecuador, so its strategy is to go around the world looking for Chevron assets that it can attach. (You can read a copy of the plan from the legal team here. They call it the “Invictus memo.”) In February, Chevron won a preliminary victory when it got an arbitration tribunal to take its side. Problem is the ruling applied only to Ecuador.

So it was big news in October when the U.S. Supreme Court ruled [CLARIFICATION: It was not a ruling per se; the SCOTUS decided not to hear an appeal, thus allowing the plaintiffs to proceed] that Ecuador could freely continue its search for Chevron assets. A week later an Ecuadorean court let the plantiffs seize $96.3 million owed to Chevron by the Ecuadorean government (yes, that would be in effect Ecuador taking cash from itself) and all licensing fees owed Chevron from the use of its logo. And now ...

... an Argentine judge has given the plantiffs all of Chevron’s shares in Chevron Argentina, all of Chevron Argentina’s dividends, its 14% stake in the Oleoductos del Valle pipeline, 40% of its bank deposits and 40% of the revenue from future Argentine crude sales!

How much is the above worth? Well, I don’t know how much cash-on-hand Chevron Argentina enjoyed and it’s safe to assume that they won’t be paying any dividends as long as the judgment is in place, but it is possible to calculate the value of its crude production. (Oleoductos del Valle loses money.) The June domestic price of crude in Argentina was US$467 per cubic meter. (If you click the link and download the data, you’ll find that the price didn’t vary much.) Using production data from January through September of 2012, you’ll find that Chevron Argentina will produce crude worth about $833 million in 2012. 40% of that is $333 million; not a bad chunk of change. Of course, the Ecuadorean government will only get about 35% of that, since the income is actually due the plantiffs and their lawyers. Still, $117 million per year is nice, and if the precedent holds it could wind up with a lot more than that as more Chevron assets are attached around the world.

Eventually the Ecuadorean government might even net enough to pay off Occidental.

Around the Revolution again

Hugo Chávez just won re-election by a convincing margin in Venezuela. If I may, my friend Francisco Rodríguez at Bank of America called it correctly. To be honest, although Capriles did have a few good poll results, most of them showed a Chávez win. Anyway, the Bolivarian Revolution will go on until 2019 , even if the President passes away in office in the meantime. His successor probably won’t be Vice-president Elías Jaua. If something happens to Chávez between now and January 10, 2017, a new election will be held within 30 days. If he passes away after that date, then the vice-president will take over, but the Veep serves at the pleasure of the President and there is no guarantee that the person in the office will be the person in the office then.

In Ecuador, meanwhile, the big news concerns Assange and Occidental. With the former, not a whole lot is likely to happen. The Ecuadorians are settling in for the long haul: it is an easy way for Correa to take an anti-imperialist posture and distract attention from press measures at home. Correa is ahead in the polls for the 2013 election, but there is a while yet.

What I love is that Rafael Correa is going to advise Tunisia about dealing with debt! That is awesome.

Bolivia is having a rougher time. Two different groups are in conflict over the mining industry: unionized employees and cooperative independent miners. Until June, the government could play a conciliatory role, with Glencore as the foreign villian. But by nationalizing the mines, Evo has lost his cat’s paw. Now he is smack in the middle of a fight between the union and the small independent miners, which is a bad place to be. Moreover, his nationalization fights are starting to go bad. He just told a Canadian silver mining firm to go hang, no compensation. Legal recourse is not the problem, since the investment happened after Bolivia left ICSID (although there are other options, see next paragraph). Rather, the problem is that the nationalization, like earlier ones, has put the government smack in the middle of a conflict between different local interests. This is trouble.

President Morales has made a habit of nationalizing something every May Day, usually with compensation, but Rurelec has taken Bolivia to arbitration over a 2010 electricity nationalization. Since ICSID is no longer available, the arbitration will be held under looser U.N. rules. The nationalization beat the hell out of Rurelec: it lost 80% of its revenues and its share price crashed from 16p to 9p (U.K.). So it wants its money. It is less clear if it can collect, although the new nationalizations are making its life a little easier. The company sounds confident.

Finally, all-quiet on the Nicaraguan front, including a giant sigh of relief that President Chávez won re-election, what with this project getting underway. We think.

Ecuador is not a colony of China

Since its big default on its foreign debt (which I should really write about, it was ingenious) Ecuador has made a lot of oil-for-loans deals with China. The FT reported that Ecuador sold oil at $14-$15 per barrel. Felix Salmon wrote a post entitled “How Ecuador sold itself to China.” Neat stuff.

But exaggerated. The Bolivarians in Quito have not sold their sovereignty to China. Here’s the deal. The China Development Bank (CDB) loans money to Ecuador. Petroecuador repays by shipping oil to China. The Chinese pay for the oil at market prices. The money is deposited in the CDB, which withdraws 21% of the revenue to repay the loan. China has made three of these loans, at fairly cheap interest rates: 7.25% for the first , 6% for the second and 6.9% for the third, at a time when Ecuador basically could not borrow and paid 8.45% on its outstanding issues.

OK, so no Chinese empire ... but is China freeing Ecuador from dependence on the United States? (We will ignore that whole dollarization thing.) Not really. There are some reports that the country is now exporting all its crude to China and Latin America. The official figures for the first half of 2012, however, tell a different story. By value, 59% of oil exports went to the United States; another 11% went to Chile and 10% to Peru. Only 2% worth (or $137 million) went to China. Ditto, imports of refined products from the U.S. of A. came to 55% of Ecuadorian petroleum imports; an additional 8% came from Panama. Only 5% came from Venezuela and nothing from China. Ecuadorian crude isn’t the best quality, but it’s good enough for Chinese refineries ... except they do not seem to really want it.*

(A useful resume of different oil blends is here: scroll to Table 1.)

OK, then. Unless something drastically changes, Ecuador is going to pay Occidental. Maybe not for a while, but it will pay. And China does not have a colony across the Pacific, fun as it is to imagine such a thing.

I should mention that the international courts thing runs both ways. Maybe Ecuador will pay Occidental with assets taken from Chevron ...

* UPDATE: I imagine that Petroecuador is swapping its oil for oil from other sources to send to China. PDVSA does this all the time, so it would not be unprecedented, and it would explain why the Central Bank reports almost no crude exports to the PRC despite the loan deals.

Ecuador loses round one to Occidental

Ecuador just lost at ICSID, where the panel ruled that it owes Occidental $1.77 billion, plus interest at 4.2% compounded annually back to May 16th, 2006. If the Ecuadorians paid right now, they would owe $2.4 billion. If they delay, it will add up at the six-month LIBOR, compounded monthly. (FWIW, Occidental initially asked for $3.4 billion, but companies always highball their claims.)

What now? Ecuador will attempt to have the award annulled on the basis of some procedural or factual error. If they fail at that, then they will pay. The reason is simple: Ecuador is an oil exporter and its export sales can be attached. There won’t be the need to go fishing around the world for small change (or sailing ships) the way Argentina’s creditors need to do. It gets better: Ecuador exports crude to be refined for the home market! If it thumbs its nose at ICSID, not only will it lose export revenues, it will see domestic gasoline prices spike upwards hard. (Of course, Ecuador has been working overtime to try to get Chinese or Venezuelan interests to finance a refinery expansion.)

Ecuador might, however, pay Oxy and stiff the other claimants. There have been some declarations in this direction. Depends on how much they think China cares about its stake.

Few appreciate how Saudi Arabia undergirds the viability of this system. Ecuador exports 212,000 bpd to the United States. That is not a lot, but its sudden disappearance could upset a tight market ... except for the fact that Saudi Arabia stands every-ready to step in with its extra capacity.

Next up: another entry in the long China-doesn’t-have-an-empire series.

When lawyers declare war!

  You know, the more I learn, the more I think that President Correa of Ecuador is really playing with fire in defaulting on his debts.  Brazil is mad at him, and you don't want to get the new imperial rulers of South America mad at you.  But more importantly, he's got his American creditors mad at you ... and it seems as though those creditors may have a rather powerful legal recourse.  It'll all depend on the definition of a “central bank.”

But let's start at the beginning.  What happens when lawyers declare war on a country?  Well, remember this post, on the U.S. sanctions against Manuel “La Piña” Noriega ?  Turns out that the sanctions weren't really Elliot Abrams' idea.  Rather, the credit goes to a lawyer, William Rogers, acting on behalf of his client, former President Eric Delvalle of Panama. 

La Piña, you see, had an anger-management problem.  He decapitated Hugo Spadafora, one of his political opponents.  When the President of Panama, Nicolás Barletta, made the mistake of thinking that he, you know, ran the country, and decided to investigate the head-chopping, Noriega locked him in his office and threatened his family.  At 3am, President Barletta appeared on national television and offered his resignation, which the National Assemby accepted in a late-night emergency session.  Eric Delvalle, the education minister, then became President.  A little while later, Delvalle decided to pass on to La Piña an American offer to let him peacefully resign with all his ill-gotten gains.  In response, Pineapple-face ejected Delvalle from the presidency.  Delvalle got word that he was going to be arrested the next day, and managed to make it to an American military base.  His ambassador-at-large hired Rogers, and then ...

Correa lo hizo

  “Hay gente que rectifica lo que dice, hay mucha gente que se contradice.”  —René Pérez

Well, it appears that Ecuador just went and defaulted on its foreign debt.  I think that this is a bad idea.   The problem, of course, is that I am on record as supporting the U.S. decision to allow its financial protectorates in Latin America to default in 1931.  The only reason that I think Britain’s subsequent decision to default was bad is that is prevented the union of Trinidad and the United States.  I have also argued that Argentina’s much later default was a good idea. In fact, I have even implied that I think there might be good arguments in favor of an Argentine default right now.  (Really.  Read the linked post closely.  I more than imply that.) 

So why do I think that this move is stupid?  After all, Ecuador is suffering from a collapse in oil prices.  What’s the problem? 

First, Ecuador does not have to default.  Debt is around 21% of GDP, and debt service is only around 1%.  A balance-of-payments crisis this is not, even with the crash in oil prices.

Second, Ecuador is vulnerable.  I don’t know how vulnerable.  Why don’t I know?  Well, I haven’t been able to find Petroecuador’s balance sheets, so I don’t know how many American assets it holds.  Nor do I know how many commercial assets the Ecuadorean government may hold.  And I certainly don’t know how many payments to the Ecuadorean government pass through vulnerable payments centers.  But the fact that I don’t know these things make me think that the country is very vulnerable.  Call it a hunch, but a lack of transparency often means that there is something to hide.

I should point out that I have met the fellows from Greylock and Elliott who will be going after the country.  They are very very good at what they do, and they are very motivated. 

Third, Ecuador could use access to the World Bank.  It will probably lose that.  It has already lost access to Brazilian development funds. 

It could still be a bluff.  This is just a default; many stand to profit from such a thing.  The Ecuadorean government may just be engaging in a complicated political redistribution, and it will restart payments once the relevant parties have taken their profits.  Alternatively, should a second Great Depression really emerge, then early default will seem like a brilliant move. 

But short of those two possibilities — a short-term move or a prediction of disaster — it just seems unwise to me.

Around the Revolution

  “You know, I’ve always wondered what South America would look like if no one gave a damn about coca or Communism.  It’s always impressed me the way you boys have carved this place up.”

“I’ll take that as a compliment, coming from a Brit.” 

Now that the U.S. election is over and James Bond is officially a friend of Evo Morales, it's time to take a trip around the Bolivarian Revolution.  How is the red banner faring around the continent? 

A new constitution

Rafael Correa is the president of Ecuador.  He has a Ph.D. in economics from the University of Illinois.  Anti-Chávez well-educated high-earning professional Venezuelan women told me on multiple occasions that they consider him very attractive.

That, however, is not why he's in the news.  He's in the news because Ecuadorean voters approved a new constitution today.  Opponents call it “Bolivarian.”  Even non-opponents have called it “socialist.” Both are silly.  Correa is far from Bolivarian.  (Update:  It has been pointed out in comments that he declared himself Bolivarian in 2006, although he is generally considered to have distanced himself from Venezuela.)  Those same professionals who called Correa handsome also called him sensible, and I tend to agree.  Correa is relatively radical.  But he's also sensible and clearly a democrat. 

Which doesn't mean that the new constitution is a good thing for Ecuador.  More below.