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Negotiated solution for YPF

The agreement with Argentina saves Repsol a costly lawsuit, but fails to clear up all uncertainties

The in-principle agreement, strictly political in nature, between the governments of Spain and Argentina on the expropriation of Repsol’s capital in YPF, merits some detailed explanation by the government, not only regarding the terms of the agreement (of which only a few details are known), but also of the reasons that led to the intervention of the Industry Ministry, and to the preliminary consultations with the government of Mexico to head off the international lawsuit.

It is not enough to speak in terms as generic as “it is good to put an end to uncertainties,” though the markets are accepting this argument in the short term, and have reacted in the form of rising share prices for Repsol and YPF. Because it is possible that underlying uncertainties may remain, even after the ratification of the agreement by Repsol’s board of directors on Wednesday. The principle that a bad agreement is better than a good lawsuit — and Repsol’s one against the government of Argentina threatened to be long and costly — is valid, provided there are sufficient assurances that Argentina will pay what it has promised.

The amount of compensation now being spoken of, around 3.7 billion euros, is well below what the expropriated group was demanding, even taking into account the saving in legal costs that will no longer have to be paid. The advantage for Repsol is that it will no longer have to concern itself with a complicated legal wrangle with the Argentinean government; and this will allow it to concentrate on its principal task, which is that of putting its international business back in order. In this sense, the agreement is useful.

The pact has also been advantageous, no doubt, for Petróleos Mexicanos (Pemex) and for the government of Cristina Fernández. Pemex has succeeded in eliminating the partnership obstacle that prevented it from reaching agreements to take part in exploiting the Vaca Muerta oilfield — Repsol promised to sue any company that formed a partnership with the Argentinean state for operating these wells — and, in passing, with the support of the Mexican government, has harassed the top management of Repsol, which has been holding out for higher compensation. As for Cristina Fernández and her team, they have managed to counteract many of the consequences of the expropriation — namely, the country’s reputation for regulatory insecurity.

What the agreement is not going to resolve is the looming threat of instability among the shareholders of the Spanish oil firm. It would be naive to suppose that the confrontation between Pemex, which owns 9.34 percent of Repsol’s capital, and the top management team has disappeared simply because the YPF case is now closed. What is most likely is that it will continue, buried and muted perhaps, but active.

Nor does the understanding with Argentina guarantee, as the government is suggesting, that the danger of a takeover bid on the Spanish group, driven by foreign capital, is now out of the question. As long as Repsol does not widen its activity in other markets, and regains at least the financial perimeter it had previous to the expropriation of YPF, it will go on being an attractive target for investment.

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