Sunday, January 29, 2006

A Spurious “Victory” for Nationalization

Since the start of the Morales presidency commentators and investors alike have been looking very carefully at any developments within the Bolivian oil and gas sector, obsessing over supossed omens of imminent expropriation. President Morales’ campaign promises of “nationalization” received a boost when he appointed journalist and notorious globalization oponent Andrés Solíz Rada, as minister of hydrocarbons. Solíz Rada, whose ideas regarding energy policy are well documented in a number of books and articles [1] , has been a staunch proponent of nationalization.

Surprisingly enough, not even a week after being appointed minister, Solíz Rada is already causing controversy. This past Friday reporters had a field day with his declarations that “a major victory” had been won over Repsol [NYSE:REP], the Spanish energy company, heralding the “beginning of the nationalization process”. Solíz Rada claims that Repsol incurred “massive accounting fraud” by “subscribing Bolivia’s oil and gas reserves as its own in the New York Stock Exchange”.[2] The Bolivian press seems to have taken these claims at face value, ignoring the solid fact that Repsol's filings to the Securities and Exchange Commission or its statements in its Annual Report regarding oil or gas reserves don’t constitute a claim of ownership whatsoever.

Further, the press has misinterpret recent movements in the NYSE (Repsol’s stock had dropped 4.79 percent or $US 1.34 at the market’s closing on Friday) attributing the movement solenly the Bolivian announcement.

In reality, the drop in Repsol’s stock responds to a number of other factors:

Repsol has indeed, restated a percentage of its reserves, which it never “claimed as its own” given that as is the case everywhere from Libya to Venezuela to the United States, the resources are national property, under concession to a private company. But the restatement obeys more of a move towards complying with US-GAAP and IASB accounting standards rather than a response to the Bolivian situation alone.

The company hasn’t given up “authority” over any reserves (which it holds as a concessionary) it has simply reclassified reserves from proved to probable in Bolivia (52%), Argentina (41%), Venezuela and Trinidad y Tobago (7%). Together these reserves amount to 25 percent of Repsol’s global reserves. [3]

The shift responds to two factors:
  • That the Securities and Exchange Commission’s definition of proved reserves entails the following: geologic certainty that the reserves exist and are recoverable under current methods, that there is a firm contract for their recovery and sale and finally that the resources will be recovered during the concession period. Repsol honestly recognized that some of its reserves througout Latin America did not have one ore more of these features and decided to restate.
  • That conditions in some countries have changed making many of its fields no longer profitable under current conditions (in Bolivia this refers to the new hydrocarbons law and directly affects the Yapacaní fields). Repsol has also relocated close to $US 400 million to its Argentinian offshore explorations.
Finally, Repsol’s debt structure has been worrisome for a number of years now, and this is starting to have consequences as various research firms, including Fitch and Standard & Poors, have consistently downgraded the company’s debt instruments.

As you can see Solíz Rada’s declarations fall short of accuracy, there has been no “victory” over Repsol or recognition of fault by the firm; and regarding Repsol's share price and returns -which can be safely sustained by current oil prices- believe it or not the stock market doesn’t float around an oil minister’s allegations.

ADDENDUM: As it was expected, Repsol’s stock picked up again today [Jan 30], (only 0.15% with maybe a little more after hours) but already in the recovering process; the worst announcements have already been made, and now the market should respond positevely to Repsol’s attempts to move on (betting on the Peruvian LNG, it’s partnerships with Petrobras and it’s offshore operations in Argentina). Meanwhile, Bolivia losses investment for a sensible project that its needed now more than ever, even though the Tarija projects are expected to kick in only by 2009.

Further Reading:
Repsol's Annual Report for 2004, or Reporte Anual Consolidado para el 2004.
El Deber “Ley del gas provoca caída de las reservas de Repsol” 27 Ene 2006

1.- El imperio en Bolivia. EEUU, el 21060 y el poder judicial (Cbba: 2002), El Gas en el Destino Nacional (La Paz: 1984) Some articles are available here.
2.- Soliz Rada, Repsol y el Asalto a las Reservas January, 29, 2006
3.- Webcast, Repsol Estimates Reserves Revision Conference Call, Jan 26, 2006.

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1 comment:

Boli-Nica said...

Nice post, good detailed breakdown of what Soliz Rada said vs. reality.

AFP's piece, which is what many people will ultimately read, really shows the shocking level of ignorance the guy displays.

I am keeping on this guys case, he is a real piece of work.

Will have another posting on the topic later on tonight, and will link back to you as well.