I wouldn\’t study history at King\’s you know

Richard Drayton is Rhodes Professor of Imperial History at King\’s College London

Hmm, so what\’s he got to say about Argentina then?

YPF, under Repsol, paid extraordinarily high dividends to its foreign owners – some 9% in 2011 – which it paid for by borrowing. So while YPF debts soared and Argentina\’s oil went undrilled, Repsol both banked profits and \”invested\” Argentinian capital elsewhere in its corporate structure. As the rating agency Standard & Poor\’s commented on 19 April: \”Repsol does not guarantee any of the debt at YPF.\” Madrid got the juice, but the liabilities all fell on Buenos Aires.

High dividends allowed Repsol also to cash out of 25% of its YPF holding by selling it on to the Eshkenazi family, with the capital coming from Credit Suisse, Goldman Sachs, BNP Paribas, Standard Chartered and Citibank, with banks then making money buying and selling derivative contracts on Repsol and YPF debt.

Err, no. Wrong way around. Repsol was given, erm, a little bit of political encouragement to sell that 25% stake. As the Eshkenazi family didn\’t have the income to service the loans they had taken out to purchase the stake then YPF was encouraged to pay out 90% of income in dividends so that they could.

YPF in the 1990s drilled three times as many exploratory wells in Argentina as it did in the 2000s under Repsol. Argentina\’s oil and gas output was falling, and new reserves were not being found to replace exploited deposits.

Bit strange.

In nationalising, Argentina showed that a democratic government can stop predatory financiers. And it has not scared away new investors: already Talisman, ConocoPhillips, Chevron, and Chinese companies are seeking access to Argentina\’s shale oil reserves, the third largest in the world.

It was Repsol, through YPF, that found those shale reserves.

I do think that those wishing to study history might want to give King\’s a wide berth.

12 thoughts on “I wouldn\’t study history at King\’s you know”

  1. Besides Repsol didn’t have anything else to do with the money, because the prices are fixed at loss making levels.

  2. Serf- I suppose that $45 a barrell for conventional land production from oil fields which were developed before privatisation amounts to “loss making levels”. Actually, no- YPF was milking it, and REPSOL was asset-stripping.

    and Tim- I doubt you’d be admitted to read history at Kings

    Tim adds: Would that be on ideological or intellectual grounds?

    “I suppose that $45 a barrell for conventional land production from oil fields which were developed before privatisation amounts to “loss making levels”.”

    Yes indeed, this is loss making.

    Ever heard of opportunity cost?

  3. Tim, er, I meant academic ones, actually.

    And Tim, the logic of opportunity cost does not apply where there is no need of capital injection to produce yield. Repsol was making vast profits on the basis of the oil infrastructure in Argentina which it had acquired in 1998. It should have re-invested a large share of those profits within Argentina to both maintain that plant and to expand it, before remitting profits to shareholders abroad. If you disagree with that as a principle of honest participation of a multinational in a local economy, then you are if anything offering one of the strongest arguments for nationalisations. The implication of your thinking is that transnational companies cannot be trusted to manage local resources in the best way, because their obligation is always to the maximizing of their gain on an international scale. You think a predatory kind of capitalism, squeezing the world for maximum yield without thinking of externalities is okay. But most people don’t, particularly when they are thinking of their own energy sector. The comparison of the behaviour of YPF under Repsol and Brazil’s Petrobras, which is state controlled, is illuminating: it is the Brazilian model towards which the Argentinian government, quite rationally, aspires.

    Tim adds: “And Tim, the logic of opportunity cost does not apply where there is no need of capital injection to produce yield.”

    And that’s as insane a misunderstanding of economics as you’ll ever find. There is always opportunity cost. It is not possible for there not to be opportunity cost.

    Whether or not you’d fail to get into the LSE with that I don’t know: they do claim to be trying to educate people after all. But you’d certainly fail to get out of an economics degree there iwth that nonsense.

  4. Opportunity cost turns on a hypothesis of relative returns on capital being placed in different contexts. Where capital is already locked into a fixed plant — as per oil fields already under production — its not as if you can choose to place the capital elsewhere, at least outside the realm of theory, except by over years refusing to reinvest into that plant the cost of its repair and reproduction. Clearly REPSOL had opted for that strategy, but its profits turned essentially on the destruction of capital in Argentina, and the running down of reserves and plant. No sovereign government could accept that in perpetuity.

    I’d be interested to know your views about Chinese investors becoming the proprietors of the UK’s new nuclear plant. I trust you support that?

    Tim adds: “Opportunity cost turns on a hypothesis of relative returns on capital being placed in different contexts.W

    Nope, ding ding! Wrong!

    There is nothing that restricts opportunity costs to the use of capital. And especially not to sunk capital.

    And you’re still missing the point of why YPF was paying out those dividends. So that those mates of the Kirchners who bought 25% of the company could afford to finance their holding. They were actually pressed, by hte President, into paying out 90% of net profit in dividends for God’s sake.

  5. I came across Drayton a couple of years ago when I was a history undergraduate at Cambridge, and this goon was still there. Let me assure you, if you are not already aware of the fact, that Richard Drayron is an absolute cunt. No ifs, no buts.

  6. Sorry, Tim, as usual you don’t understand the ideas you’re retailing. Opportunity cost = the loss of potential gain from other alternatives when one alternative is chosen. When you have illiquid capital at time T-1, you don’t consider it at time T as representing something you have an alternative about. I suspect I’ve spent more time in business school classes than you have. And YPF’s dividend structure under REPSOL was already in place seven years before it cashed out of 25% to the Peterson group (read your Financial Times, Tim… check the April 15,16 issues), even before Kirchner was in power.

    Chas, given the level of your intervention, I doubt you ever darkened Cambridge’s doors.

    A

    Tim adds: “Opportunity cost = the loss of potential gain from other alternatives when one alternative is chosen.”

    Correct.

    “When you have illiquid capital at time T-1, you don’t consider it at time T as representing something you have an alternative about. ”

    There is always an alternative. Like selling the subsidiary for example, as Repsol is rumoured to have tried to do to Sinopec.

  7. metacomment– instead of “Tim adds”… might “Tim responds” not be more appropriate, along with some way in which the reply is distinguished from the comment?

  8. Actually, no- YPF was milking it, and REPSOL was asset-stripping.

    I’m sorry, what is this based on? What YPF assets did REPSOL sell off? And how was YPF milking it? By not investing?

    Well, if there is a minimal level of investment required, or other stipulations such as production rates, these needed to have been spelled out in the licensing agreement for the block(s). If a company fails to meet them, then the license is revoked. What is not acceptable is a government helping itself to a private company because it doesn’t think it is shovelling enough spare cash in their direction.

  9. Repsol was making vast profits on the basis of the oil infrastructure in Argentina which it had acquired in 1998.

    They bought it. They paid for it. No doubt there are people making vast profits on the basis of dump trucks they acquired a few years before, but it doesn’t give Caterpillar the right to take them back.

    It should have re-invested a large share of those profits within Argentina to both maintain that plant and to expand it, before remitting profits to shareholders abroad.

    Firstly, do you have any evidence that the plants were not maintained? Secondly, what is the basis for thinking their plants should have been expanded? Can you explain how they could have been? Additional wells? Extra production trains? Or do you simply mean more people employed?

    The comparison of the behaviour of YPF under Repsol and Brazil’s Petrobras, which is state controlled, is illuminating: it is the Brazilian model towards which the Argentinian government, quite rationally, aspires.

    Firstly, Argentina cannot emulate Brazil due to the enormous size differential between the two. Brazil, like Russia, is so big that people will invest there no matter what and work with malfunctioning national oil companies. Argentina is not big enough to do that. Secondly, let’s reserve judgement on how clever Brazil’s resouce nationalism is until we see the results of it, eh? Chances are they’ll look more like PEMEX than Statoil in a decade.

  10. Funnily enough, I’ve just spent the last 5 hours or so in the company of Petrobras guys, one of whom is at MD level. They think the seizure of YPF by the Argentine govt. is stupid, and their attempt to be like Petrobras laughable.

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