The winds are changing in the Southern Cone as investors eye up Argentina’s massive shale gas deposits, with the unconventional sector likely to be up and running by 2015, potentially sooner than Brazil’s deep-water pre-salt oil sector.
The US oil giant, Chevron, has inked a letter of intent with Argentina’s cash-strapped state oil company, Yacimientos Petrolíferos Fiscales (YPF), for the development of the massive ‘Vaca Muerta’ shale gas deposits in the Patagonian province of Neuquén.
The ‘Vaca Muerta’ comprises some of the largest currently known shale reserves in the world outside of China and the US, with some 774 trillion cubic feet of gas and 741m barrels of oil, according to the US Energy Information Administration (EIA), more than enough to allow Argentina to meet its domestic needs and become a hydrocarbons exporter. “Just developing 15% of the Vaca Muerta would balance the country’s energy deficit and end the need for imports,” Juan Garoby, head of YPF’s unconventional resources, told the UK daily, FT, in early November.
Miguel Galuccio, the president of YPF, on 19 December signed a preliminary US$1.0bn deal with Chevron’s Latin America and Africa chief, Ali Moshiri, for a pilot project to drill over 100 shale gas wells in the next 12 months. The expectation on both sides is that the pilot project will lead to a permanent partnership in Vaca Muerta, whose full development costs are estimated at some US$15bn. Chevron will stump up much of the cash in return for an equity share in this potentially lucrative multi-year project.
According to Garoby, in 2013 YPF also intends to invest US$1.5bn to develop up to 132 pilot shale oil wells in the Loma La Lata and Loma La Campana fields, and 16 shale gas wells at the nearby El Orejano field, to test well spacing and other technical factors. YPF intends to be in “factory-mode” from 2014-17, investing some US$12bn – with about half from Chevron – to drill 2,000 shale oil wells.
Industry analysts suggest that Chevron is taking a big leap of faith given the uncertain and ever-shifting business operating environment in Argentina under the current government, with investor nerves newly on edge since the administration led by President Cristina Fernández expropriated a majority stake in YPF from Spain’s Repsol in April.
Repsol is now suing the Argentine government in Madrid and Washington for compensation. It has also sued Chevron in New York in order to prevent it from developing assets in Argentina in partnership with the re-nationalised YPF. As if that were not enough, an Argentine court also recently embargoed Chevron assets in Argentina on behalf of Ecuador, where courts have ordered the US firm to stump up a whopping US$19bn in an environmental damages lawsuit.
Moshiri insisted that the embargo would not affect Chevron’s partnership with YPF, dismissing it as “an issue with lawyers trying to sue everyone and not benefiting anyone”. (Certainly, despite the current very public face-off between the government and the federal judiciary, it is a very good time to be a corporate lawyer in Argentina). He was also dismissive of the Repsol case. “What Repsol did is completely irrelevant and doesn’t harm the relationship we’ve had with YPF…Whatever happens, it won’t block progress”. He added, “YPF is top-notch when it comes to technology and human resources”.
Petrobras struggles to convince
While YPF’s star is rising, Brazil’s Petrobras is no longer shining so brightly. Just days before YPF announced its deal with Chevron, Petrobras confirmed that it had hired Scotiabank to oversee the sale of its Argentine subsidiary, Petrobras Argentina. Of four Argentine suitors, YPF is the most likely purchaser, according to industry analysts. Petrobras has been divesting its foreign assets so as to concentrate on its domestic offshore sector. Two years ago it sold off a refinery and a major chain of gas stations in Argentina. Last April the Petrobras president, Maria das Graças Foster, said that the company would continue to invest in Argentina but in June she announced that the firm was seeking to raise some US$14.8bn through the sale of assets and some restructuring.
In a company statement this week (15 December), Petrobras announced that it would seek to cut its costs by R$32bn (US$15.4bn) in its upstream, downstream and power segments “gradually and progressively”. Petrobras put its estimated annual financing needs at US$16bn-US$18bn in its 2014-2016 budget plan. Moody’s Investors Service recently cut its credit outlook for Petrobras to negative from stable, citing rising debt levels and growing uncertainty over how quickly it can bring the US$237bn pre-salt sector on stream.
However, in a much-needed positive for the company, Finance Minister Guido Mantega signalled this week that the government will allow pump prices to rise in 2013. Petrobras shares rose 2.3% on the local Bovespa index in response. Ordinary shares were trading at about R$20.7 (US$10) on 20 December By way of comparison, on the NYSE Chevron was trading at US$110 on 20 December, with YPF at US$15 and Petrobras at US$20. Colombia’s Ecopetrol, the new market darling, was trading at US$60, which is down on earlier year highs.
- Galuccio
The Chevron deal gives Miguel Galuccio, coaxed from London back to Argentina by President Fernández in May, some critical breathing space. For the past six months he has had to steer a tricky course – trying to stay on the right side of the Fernández administration while at the same time seeking much-needed cash from private investment partners for YPF when the rules of the game are very unclear. On the assumption that the government will not look a gift ‘cow’ in the eye, Galuccio might now be able to convince the likes of Axel Kicillof, the Marxist deputy economy minister with the ear of the president, to take more of a hands-off approach towards YPF moving forward. That might be wishful thinking - Fernández has looted everything from central bank reserves to pension funds to date. With general elections due in 2015, the Vaca Muerta is likely to be served up for dinner – and dessert – sooner rather than later.
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