Step 3: Make them an offer they can't refuse
Most oil company nationalizations aren't outright seizures -- governments at least go through the motions of compensating the former owners for their lost assets. Surprisingly, the United Nations has even weighed in on the reimbursement issue: A General Assembly Resolution passed in 1962 decrees that in cases of nationalization carried out "on grounds or reasons of public utility, security or the national interest ... the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law."
Of course, no one really listens to the United Nations and there's generally disagreement as to exactly how much the previous owner's stake is worth. Repsol estimates the value of what was its 57 percent share in YPF at around $18 billion. The Argentinean government is required by law to compensate them, but the exact amount will be determined by a government tribunal, which could take years to decide, and will likely be substantially less than the company feels it is owed.
Beyond the legal ramifications of just booting out the old owners, it can sometimes be useful to allow them to continue to play some role in your country's oil industry -- after all, they probably know what they are doing. After Venezuela's state-owned PdVSA took over several multi-billion dollar projects in the oil-rich Orinoco belt in 2007, Chevron, BP, Total, and Statoil signed agreements that allowed them to continue operating in the region as minority stakeholders. Conocco Phillips and Exxon Mobil refused.
Oil productivity fell by nearly a quarter following Chávez's nationalization.
Step 4: Put the boot down
It's always preferable to handle these sorts of things with a boardroom handshake, but sometimes a firmer hand is needed. In 2009, Chávez mobilized troops to assist in the seizure of 60 oil service companies as part of his gradual takeover of the oil industry.
In 2006, Bolivian President Evo Morales ordered foreign oil companies -- including Repsol -- to renegotiate their contracts with the government within six months or leave the country. Just to make his point clear, he sent troops to occupy 56 oil and gas sites throughout the country.
Argentina has wasted no time. The government representative on YPF's board reportedly arrived at work early today with a list of Spanish executives who had been banned from the company's headquarters.
Step 4a: The Putin method
Another, often cheaper, method of nationalization is to build a criminal case against the management team of an oil company and take it apart, bit by bit. In the case of the Kremlin's prosecution of former Yukos CEO Mikhail Khodorkovsky, this had the added benefit of removing a troublesome political rival.
Yukos had been the first fully privatized Russian oil company of the post-Soviet era. But following a number of disputes between Khodorkovsky and the Kremlin -- over state control of the pipeline industry, the planned sale of big shares to American oil companies, as well as his own political ambitions -- he was arrested and charged with tax evasion in 2003. Over the next two years, Yukos was ordered to pay billions of dollars in back taxes and forced into bankruptcy.
The last of its assets were seized in 2005 and eventually acquired indirectly by state energy monopoly Gazprom.
Step 5: Don't get overthrown
Seizing international companies may score populist points with voters, but it can also make some powerful enemies in a hurry. Two years after Iran nationalized the Anglo-Iranian Oil Company, Prime Minister Mohammed Mossadegh was overthrown in a CIA-backed coup, returning the Shah Mohammed Reza Palavi to power. The Shah's government paid $70,000,000 in compensation to Anglo-Iranian in 1954.
Chávez survived a coup attempt just months after the passage of his controversial hydrocarbons law.
Fernández's nationalization of YPF seems like the latest in a series of provocative international gestures, including efforts to reassert control over the Falkland Islands. While she's clearly counting on the political benefits of these bold movements making up for the international backlash, she's entering very dangerous waters.
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