President Cristina Fernandez

For more than 12 years the Republic of Argentina has battled so-called vulture funds in US federal courts. This litigation grew out of the country’s massive sovereign debt default in 2001. At that time most investors did everything possible to unload their portfolios of the country’s debt. Yet, there were courageous investors who were willing to speculate on the country’s debt rising up from the financial abyss. A few funds invested billions into purchasing Argentina’s junk bonds. Though Argentina has renegotiated much of its 2001 debt with bondholders and has paid these “exchange bondholders” pennies on their original debt, the funds who took the risk of investing in the junk bonds have refused to renegotiate the contractual terms of their bonds. These funds want to be paid what they were promised and not a penny less. Who can blame them for demanding full payment.

Most legal experts and financial advisers close to the litigation have little sympathy for the former South American economic powerhouse. Don’t Cry for Me Argentina is their response when Argentina demands justice that it does not deserve. On October 26, 2012 the United States Court of Appeals for the

Second Circuit decided the case of NML Capital v. the Republic of Argentina. The Court affirmed in part and remanded in part the lower court’s decision of Federal Judge Griesa of the Southern District. In the case Judge Griesa ruled against Argentina in granting the applications of the Plaintiffs. Much to the chagrin of Argentina; its fiery pronunciations of sovereign integrity and legal (quasi political) arguments that it had a sovereign right to force restructuring upon debt holders were judicially debunked by the District Court.

It did not surprise anyone that Argentina appealed the court’s decision to the Supreme Court. While Argentina was litigating its case before the Supreme Court Argentinians in high office were waging a battle to wind public opinion. Clearly Argentina was (is) looking to negotiate a settlement with the non-exchange bondholders. Yet the country’s last formal offer of settlement was rejected on or about March 27, 2013 by the U.S. Court of Appeals for the 2^nd Circuit as being inadequate. I wrote at that time that Argentina was heading for another debt default. The U.S. courts are not going to let politics trump the law or their decisions. Argentina’s total disregard for the judicial decisions and judgments makes a mockery of America’s judicially system and the sanctity of the law.

The high court next considered and disposed of Argentina’s (its banks’ claim) that its foreign assets were not subject to discovery by the non-exchange bondholders. The Justice’s were almost unanimous in deciding against the Latin America country. Justice Anthony Scalia writing for the court held that the Foreign Sovereign Immunities Act did not limit the scope of discovery available to a judgment creditor in a federal post-judgment execution proceeding against a foreign sovereign. In the well written decision Justice Scalia specifically alluded to the fact that Argentina had waived part of its immunity by choosing to litigate in the U.S. courts. The Republic of Argentina stands properly before the court like any other person. Argentina’s dreaded “vulture funds” are now positioned to discovery the Republic’s assets worldwide. What follows next is rather obvious; the non-exchange bondholders will seek to attach the discovered assets in hopes of satisfying their judgments.

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According to the company’s website Chevron is in the business of providing energy that drives human progress.By anyone’s standards this is a lofty claim. Chevron does business through several companies that operate in many countries. The American oil giant has extensive interests in exploration and production of oil and natural gas. Chevron operates and manages several businesses related to its core operations. Chevron is a major player in today’s global petroleum industry. By producing 3.5 million barrels a day Forbes lists the company as the world’s 9^th largest oil company.

In 2010 Chevron purchased Atlas Petroleum to gain access to that company’s rights to shale oil reserves. At the time of the acquisition of Atlas Petroleum many knowledgeable commentators and financial experts believed that Chevron would buy other companies. The depressed gas market is forcing companies to focus on more lucrative operations. Recently the company concluded another transaction that will give it access to the world’s second largest known shale oil reserves in the world.

On April 17, 2012 Argentina renationalized YPF. In the process the Argentines ousted its partner, the Spanish business group Repsol, as majority shareholder. The action was felt by the shareholders of the Spanish oil conglomerate; the value of their shares fell by a precipitous 8%. Back in Argentina President Fernandez appeared on television to address the nation about her government’s most recent expropriation. In the nationally televised speech she brushed aside Spain’s and the international community’s condemnation of the taking to applaud the sanctity of national pride and sovereign interests. Her blaming Repsol for Argentina’s woeful energy sector’s performance did not surprise to anyone. Repsol and Spain demanded billions in compensation for the illegal taking. Argentina talked about compensation but offered no specific dollar amount and at times simply stated that it would pay “no pesos.” Repsol has taken steps to secure some compensation for its lost, but to this day has not collected any meaningful amount.

Once the political and diplomatic efforts failed to bring about some immediate compensation Repsol threatened legal action against Argentina and any company that tried to exploit its seized Argentine assets. I always thought that this threat along with Argentina’s reputation for seizing foreign companies’ assets would scare away any future investment partners. Argentina does not have the technical expertise nor the disposable capital to exploit Repsol’s reserves in the country. Argentina’s oil officials approached many large international oil companies about exploiting the seized assets and reserves. For several reasons I thought that no company would step into Repsol’s vacant shoes and partner up with the Argentines. I was wrong and have to admit it; Chevron recently concluded negotiations with Argentina that will allow it to step into Repsol’s shoes. Upon first hearing about Chevron’s agreement I thought that the company had made a colossal mistake. I now believe that Chevron’s actions were shrewd and calculated to put it in an advantageous position if Argentina’s economy weakens further.

On July 16, 2013 Argentina and Chevron signed a development agreement for the Vaca Muerte shale reserves. This was the first time that a major oil company had made a significant investment in Argentina since the Repsol taking. The pilot program will include the drilling of about 100 well in a 5000 acre tract, which sits

Reaching a Deal

in a concession of 100,000 acres. Argentina hopes that this agreement will help it become, once again, an exporter of oil. Regardless of this agreement the country might never again become a net exporter of oil. Argentina’s monetary policies scare away foreign investment. Also, many international businesses are reluctant to take a risk of losing their investments to governmental expropriation. In my opinion Argentina will have difficulty finding investment partners.

The question that most commentators and oil industry experts asked is why Chevron would risk more exposure in Argentina. The American oil company was already doing business in Argentina through one of its subsidiaries. Importantly, sources report that the company signed an agreement that contained very favorable terms. Under a new national law oil companies that invest more than a billion dollars will receive several lucrative benefits . From the fifth year of exploitation the companies can sell 20% of the production in foreign markets at tax-free rates. The oil concerns will be able to keep profits from these exports and use the money in any way deemed fit. Importantly the country’s strict capital controls will be relaxed for the multinational oil companies. It is clear that Argentina has adopted a policy to attract foreign oil company investment.

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