Until April 2012, it had been looking like a rather quiet quarter on the sovereign risk front – that was until Buenos Aires revealed it would strip Repsol of its $10b stake in Argentina's biggest oil and gas company and Jakarta announced plans to tax coal and base metals exports at up to 50%.
In addition to these announcements, there have also been developments of interest in Russia and Australia.
Argentina - "Zero Pesos" for YPF stake
Argentina's recent move to acquire Repsol's controlling stake in YPF without compensation (for "zero pesos") has been widely reported as the result of growing discontent concerning energy prices and reliance on foreign sources of fuel. Professionals on the ground in Argentina have also commented that there is a further dynamic at play; being that many in Argentina see the terms of the 1999 acquisition by Repsol of its YPF stake as having been fundamentally unfair to Argentina. For its part, Repsol has announced that it reserves the right to take legal action against any party investing in the YPF and its assets and both Spain and the European Union are reportedly making concerted diplomatic efforts to facilitate a satisfactory resolution for Repsol.
At the same time, the Argentine government is reported to have approached Petrobras (the Brazilian state oil company) and to be intending to approach major private sector oil companies with a view to obtaining the investment (estimated at €25bn) and expertise necessary to bring key YPF assets online.
It will be interesting to see how the private sector now approaches YPF given the treatment of Repsol and also to see if Petrobras and Brazil are willing to deal in nationalised assets even if the risk to them of future nationalisation is considered relatively remote.
Indonesia – 50% Export Tax from 2013
Indonesia is reported to be planning new taxes on exports of coal and base metals this year, which will initially be set at 25% and will rise to 50% by 2013. Jakarta is also rumoured to be considering regulations requiring majority local ownership of mining projects.
These developments come hot on the heals on plans announced earlier in the year to ban exports of unprocessed copper, gold, silver, nickel, tin, bauxite and zinc by 2014.
The rationale for the proposed export taxes and ban is to encourage further downstream investment in refinement in Indonesia and to deliver associated economic benefits to Indonesians. This clearly makes some sense from a policy perspective in relation to base metals. However, given the lead time for development of new smelters and refineries, the short time frame for introduction of the taxes and ban is questionable. It is also difficult to understand how the rationale applies to Indonesia's abundant supplies of thermal coal,where the scope for domestic use or upgrading is more limited.
Russia – A Windfall Tax on Oligarchs?
For years the circumstances surrounding the privatisation of some of Russia's most prized industrial and natural resources assets have been questioned by foreign commentators and Russians alike; the common criticism being that a relatively small number of businessmen were able to gain control of the state's finest assets for relatively little.
The issue again came to prominence in the run up to the 4 March 2012 presidential election in Russia; an election that was easily won by current prime minister and former president, Vladimir Putin. In short, the suggestion by Mr Putin in the lead up to the poll was that the way to finally resolve the privatisation issue might be to levy a one-time charge or windfall profits tax on those who have benefited from the privatisations.
Details of how such a charge might operate remain scant, yet the prospect of such a move is clearly one that may have implications for foreign investors in Russia. Query whether certain assets could become subject to tax, how the tax might affect the balance sheets of Russian business partners and whether the tax might extend to gains made by foreign investors. That said, the election having now been run and won, it may also be the case that the issue again retreats into the background for some time.
Australia – Carbon and Mining Taxes to Commence 1 July 2012
In our last edition of ENeRgize, we provided an overview of the new Australian carbon and mining taxes. Both taxes have now been passed into law, following the passage of the mining tax through the Australian Senate on 19 March 2012. The carbon tax was passed on 18 November 2011.
Both taxes commence on 1 July 2012 and will have a substantial impact on the energy and natural resources ("ENR") sector, even with the concessions contained in the final bills. For further details, please see the last edition of ENeRgize.
Managing Risk
As Repsol's experience to date demonstrates, ENR companies can find themselves in a very difficult place when governments decide to nationalise assets. That said, tax and nationalisation risks are not risks that you cannot seek to manage and, as discussed in our July 2011 edition of ENeRgize, there are a number of things ENR companies can do to protect their interests. These include:
- entering into Investment Agreements with host governments to lock in benefits for, and manage expectations of, the company, the host community and the host government;
- structuring investments through appropriate countries to take advantage of available treaty protections; and
- using contractual pass-through mechanisms to share the pain of undesirable developments with customers.
A further consideration for listed ENR companies is how nationalisation and taxation developments should be dealt with when raising funds and otherwise keeping the market informed. Typically, ENR companies will include appropriate risk factors in any prospectus or other fundraising document dealing with sovereign risk. However, the issue of whether or not to disclose certain developments to the market is often more nuanced and can require more detailed analysis and consideration on a case by case basis
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
