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Repsol Downgrades Reserves, But Who Is Really to Blame?

PARIS -- Spanish oil and gas major Repsol YPF downgraded its reserves this week by a massive 25%. Their statement induced a suspension of their shares from the Spanish equity index the IBEX.
The company issued a statement saying that the new government in Bolivia was the main problem. They said “uncertainty” over future production and tax changes meant some “gas fields were no longer commercially viable.”

Bolivia recently elected a left-nationalist government under President Evo Morales. Morales said he wants to nationalise Bolivia’s energy assets, after discussions with the oil and gas companies.

The reserve downgrade in Bolivia amounted to 52% of the total reduction. Reserves in Argentina and Venezuela made up the rest. The total amount downgraded was 1.25 billion barrels of oil equivalent (boe).

However the reasons given by Repsol YPF may not be the whole story. Daniel Gómez Cañete is President of the Spanish energy think tank, Asociación Para el Estudio de los Recursos Energéticos, (AEREN) or Association for the Study of Energy Resources.

“Repsol wanted to be in an LNG project, the Pacific projects in Bolivia,” said Cañete. “[They] went to the SEC to formally put down the oil reserves [they had in Bolivia] straight away, thinking that this was also in the interest of the Bolivian government. In the end it was not. So they were basically playing a bit of a game, and they lost.”

“Evo Morales told Repsol that if they wanted to be in the Pacific LNG project, they had to go over the reserves that they had already declared. Because those reserves, after the new hydrocarbon law was passed in Bolivia (under the former government), could no longer be justified in front of SEC,” he said.

Over eager management at Repsol YPF may have been the problem, rather than Morales government. After all Morales’ government have not been in power long enough to force through any changes as yet. The management dynamic inside Repsol YPF may also be open to scrutiny.

This centres around the informal merging of Gas Natural, Spain’s largest gas company and Repsol YPF. Many see the 45% share ownership of Gas Natural by Repsol YPF as in fact a merger, even a kind of reverse takeover by the more dynamic Gas Natural.

“Gas Natural is Spain’s biggest gas supplier and many of Repsol’s new management come from Gas Natural. This may have influenced the decision to get rid of assets in South America,” said Cañete.
In fact shareholders and analysts had been asking for disinvestments in Latin America for some time. Despite being formed in 1999 after Repsol bought YPF of Argentina, profits from Latin America have been disappointing. Repsol YPF also only replaced a meagre 33% of production in 2004.

New chairman and CEO Antonio Brufau Niubó was formerly the chairman of Gas Natural. He may have taken the opportunity presented by Morales’ election to rid himself of some difficult reserve estimates.

After all 48% of those discarded reserves are from Argentina and Venezuela. Repsol YPF stated that they wrote them off after “concerns over renewals of licensing agreements.”

This would be a pretty amazing reason for simply wiping 550 million barrels off the books.
“Repsol YPF are only the 30th biggest oil producer at the moment,” said Cañete. “Medium and mid-sized oil companies are going to find it hard to survive in the coming years. This may be part of long-term streamlining by Repsol YPF to make themselves more attractive. Also maybe when they bought YPF of Argentina they found that YPF had made themselves look bigger than they really were. This could all be a clean-up operation, a political play.”

The fascinating but complex management and political scene surrounding Repsol YPF and Gas Natural, could well be the hidden secret in the reserves downgrades. In an attempt to streamline Repsol YPF for coming years, questionable assets may no longer be needed.

Plus in a small footnote Repsol YPF pointed out that they will be making further “adjustments” in February. Watch this space.

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