Argentina: The beginning of a wave of resource nationalism

Despite the Arab Spring, it was not a Middle Eastern country which grabbed biggest headlines for resource nationalism in 2012.

It was Argentina, where populist President Cristina Fernández de Kirchner proposed a bill on April 16 to renationalize Yacimientos Petrolíferos Fiscales (YPF), the country’s largest energy company. Her idea was subsequently approved in early May 2012 by the Argentinean legislature. The move sent shock waves across the global energy industry, the desks of geostrategists, and political risk consultants.

Leaders from Europe to Mexico rushed to criticize the move. Kirchner cited the need to keep energy prices manageable for Argentineans but at that time, the price of gasoline within the country was actually less than the price at the pump to be found in some of its neighbors.

The re-nationalization of YPF, at the time largely owned by Spain’s Repsol, came at a time when some geostrategists were predicting a shift in global energy politics from the Middle East to the Americas. North and South America are home to the largest oil resources outside of the Middle East and North Africa. Other projections were more modest, noting that with shale gas in the United States, pre-salt oil fields off shore in Brazil, Canadian tar sands, and above all gains on energy efficiency, the United States might one day be able to reduce its energy imports to countries strictly within the Americas. The re-nationalization of YPF suggested the future of energy policy in the Americas might be closer to the goals of Hugo Chavez than regional development.

Argentina’s re-nationalization of YPF at the expense of Spain’s Repsol was so shocking that even some of the most seasoned political risk firms were caught off guard.

The threat of nationalization falls under what the business world considers political risk. While all international industries are concerned with political risk, the energy industry whose project can cost billions of dollars and take years to complete is particularly concerned.

One of the firms that concern itself with political risk is Maplecroft based in Bath, UK. The company’s Political Risk Atlas of 2012 had only ranked Argentina as a “medium” risk. The damage already done, the Political Risk Atlas of 2013 gave Argentina a similar “medium” ranking, though it described the nationalization of Repsol as the most “notorious” example of resource nationalization last year.

In the 2013 edition, Maplecroft identified Somalia, DR Congo, Sudan, Afghanistan, Myanmar, Iraq, Libya, Central African Republic, Syria, and Yemen, as places with an “extreme risk” that resources will be nationalized. All of these nations boast either weak governments, even weaker respect for the rule of law or both.

One year later, the most striking thing about the nationalization of Repsol is how little Argentina has suffered any consequences for a clear breach of the rule of law that undergirds all democracies. It has not however dented enthusiasm for Argentina amongst most investors. Repsol is seeking compensation for the seizure. It has also flirted with the idea of accepting shale gas from the government.

A US Government study noted that Argentina’s 774.000 billion cubic feet of recoverable shale gas constitute the third-largest reserves in the world. Argentina’s ability to stun Repsol with impunity may encourage other nations to follow suit. Any country with a sagging economy may be tempted to nationalize its resources.

Professor Michael Ross of UCLA points out in his 2012 book, The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, resource nationalism tends to come in waves. Other examples of resource nationalism took place in Bolivia and Egypt in 2012, which halted gas exports to Israel and Jordan. We are likely entering a new wave of resource nationalism.

The last era of resource nationalism was in the Middle East, which saw the nationalization of foreign oil interests in the 1960s and 1970s. This wave of resource nationalization often spawned violence. In 1956 Israel, Britain and France attacked Egypt over the nationalization of the Suez Canal by Egyptian leader Gamal Nasser. The incident is still well remembered in the region, but the fact that U.S President Ike Eisenhower brought an end to the conflict in favour of the Egyptians is forgotten. More recently the conflicts and disputes in the Sudan, the Caspian Sea and off the coast of the Philippines are clearly influenced by resource nationalism.

Indeed, Kirchner’s move to nationalize YPF came after recent oil discoveries near the Falkland/Malvinas Islands led her to renew Argentina’s claim to the disputed territory.

There are positive signs, though. One nation stung by Kirchner’s move was Mexico, whose state-owned oil company Pemex is a 10 percent stakeholder in Repsol. There is a certain degree of irony, of course, as Mexico famously became the first major oil exporter to nationalize its reserves in 1938. Argentina, though only a small producer, nationalized its oil production in 1907 before privatizing the state-run oil company in 1993.

Yet, recently, Mexico has signaled that it hopes to liberalize its energy industry in a substantial way for the first time since Pemex, the state oil company, became a monopoly. Large scale privatization may indeed be possible, though it will require a constitutional revision. Mexico is making the move after two straight years of expanded oil reserves both onshore and offshore.

While examining this issue last year, I noted that even in this era of globalization, “mercantilism still lurks in the shadows.” Yet, the example of a country like Mexico shows that trends toward nationalization are not irreversible.

Republished from DoubleThink with permission from the original author.