July 31, 2014
Repsol agrees to YPF settlement
Repsol agrees to US$5-billion accord through three bonds and guarantees
Ending a two-year dispute with the federal government, the board of directors of Spanish oil major Repsol approved a US$5 billion settlement over the expropriation of 51 percent of YPF’s shares from the company in 2012.
Argentina will have until 2033 to finish paying for the expropriation of the country’s largest energy company that caused rifts with the market and a bilateral dispute with Spain.
Under the agreement, Repsol will receive a package of three dollar-denominated Argentine sovereign bonds — Bonar 24, Bonar X and Discount 33 — with a nominal value of US$5 billion. It will also receive additional bonds for a maximum face value of up to US$1 billion to compensate for any market discount on the first group of bonds.
The total market value of the combined packages will be at least US$4.67 billion before the additional US$1 billion would be handed over as guarantees. Repsol can sell the bonds whenever it wants though the final amount it receives for the bonds cannot exceed $5 billion after expenses and interest.
As part of the deal, which follows nearly three months of negotiations in Buenos Aires and still requires approval from Repsol’s shareholders and Congress, Repsol will drop all lawsuits against Argentina and waive any future legal claims.
After the seizure, Repsol initially sought US$10.5 billion in compensation in international arbitration.
The government is hopeful the agreement will help it attract foreign investment in the country, which holds one of the world’s most promising shale gas and oil formations.
Though the compensation is half of what Repsol initially demanded after Argentina expropriated its majority stake in energy firm YPF in 2012, the company has been eager to end a rocky chapter in its history and avoid a drawn-out legal fight.
Alongside several governors from oil-producing provinces and Federal Planning Minister Julio De Vido, Economy Minister Axel Kicillof, the ideologue behind the YPF expropriation, announced the agreement at a press conference and highlighted the details of the negotiation.
“The final agreement will be signed on Thursday in Buenos Aires with representatives of Repsol,” Kicillof said, detailing that Repsol had launched 31 lawsuits and judicial complaints against Argentina, YPF and its partners since the expropriation.
Up to US$3.25 billion of the US$5-billion expropriation will be paid with the new bond Bonar 24, which expires in 10 years and has an interest rate of 8.75 percent. The remaining amount will be paid with the bond Discount 33 (US$1.250 billion), which expires in 2033 and has an interest rate of 8.28 percent, and with the bond Bonar X (US$500 million), which expires in 2017 and has an interest rate of seven percent.
Argentina’s debt to Repsol will only be considered to have been paid once Repsol obtains the US$5 billion, either as a result of interest payments, the sale of the bonds, or their maturity — or a combination of each.
“If the amount is not covered with the interest, the last bond expires in 2033 so that would be the end of the debt,” Kicillof said yesterday.
Repsol will have to return to the federal government any additional revenue received. If there are any disputes at any point before Repsol receives its US$5 billion, the United Nations Commission on International Trade Law (INCITRAL) will be charged with arbitrating.
“I think to finally reach a friendly agreement on this contentious issue that has taken two years is extremely positive,” Repsol Chairman Antonio Brufau said in a video message that accompanied a statement on the terms of the deal. “As far as we are concerned, from a financial point of view, we have started a new chapter where we are stronger and have enormous enthusiasm.”
YPF CEO Miguel Galuccio praised the deal as a crucial step for Argentina’s economy and anticipated it will lead to more investments in the local energy sector.
“YPF is a fundamental tool for the country’s energy future and I believe the expropriation has given that tool back to Argentines,” Galuccio said. “This kind of decisions rectify YPF’s role as a company with international projection which can attract investors to develop its own gas and oil resources.”
Investments to come
A negotiated agreement between Repsol and YPF could be what Argentina’s energy sector needs to boost investments in the country’s promising shale fields. The country has been trying to woo foreign investors with its potential for unconventional production ranked among the highest in the world by the US Energy Information Administration.
When President Cristina Fernández de Kirchner signed the expropriation of 51 percent of YPF’s shares from Spain’s Repsol on May 4, 2012, she vowed it would mark a new era for Argentina’s oil and gas production after years of steady decline.
A key part of this strategy involved the massive Vaca Muerta shale formation, mostly located in the Patagonian province of Neuquén. In late 2011, Repsol seemed to give new life to Argentina’s stagnant hydrocarbons exploration when it announced its “largest ever oil find” in Vaca Muerta. The company said that the resources in Vaca Muerta could double Argentina’s gas and oil production within 10 years.
It could prove to be one of the biggest shale fields in the world. But in order to free the hydrocarbons trapped in rocks, a technique involving drilling with a practice called hydraulic fracturing must be used. And it’s far from cheap. At the time, Repsol said it would require an investment of around US$25 billion a year.
When YPF unveiled an ambitious five-year plan shortly after the state take-over, it placed particular emphasis on shale exploration, saying it planned to partner with international oil companies to explore Vaca Muerta.
Yet Repsol’s threat of legal action, and the continuing uncertainty of how it could affect investments in Argentina, has left many investors on the sidelines, wary of getting involved in a bilateral dispute.
With a deal behind it, Repsol can now focus firmly on a strategic plan to boost its international exploration and production business to compensate for the loss of YPF, which had accounted for over half of its output. It has said it could sell its 30 percent stake in Spanish power firm Gas Natural Fenosa to help fund a purchase in North America, as well as its remaining 12 percent stake in YPF, worth about US$1.8 billion.
Herald with Reuters