Argentina Shale Investing

Brian Hicks

Written By Brian Hicks

Posted May 20, 2013

Chevron Corp. (NYSE: CVX) and Argentina’s YPF (NYSE: YPF) may finally have reached an agreement about developing the Vaca Muerta basin.

Why is this important? Well, for starters, Chevron has gone on record saying that the Vaca Muerta basin may very well be the second-largest unconventional oil reserve in the world.

shaleChevron, as Forbes reports, plans to invest as much as $1.5 billion into the first phase of development. That works out well for Argentina, which faces an energy crisis and is importing energy for the first time in nearly two decades.

YPF was actually nationalized by the Argentine government in a moment of crisis brought on by errant inflation and general pressures on Argentina’s economy. Spain’s Repsol got the short end of that stick, when the Argentine government essentially tossed it out of the country.

The fact that Chevron is wading into such murky waters may be read as an indicator of how eager the company really is to get its hands on the Vaca Muerta reserves.

Reuters quotes Chevron’s Ali Moshiri, president of Latin American and African operations:

“You look at Argentina from the geological point of view, and it is No. 2 Some people say China is number two, but really if you look at the geological and volumetric from the shale oil, Argentina is number two.”

Argentina Oil and Gas

Argentina has recently been featuring prominently in the major oil and gas discussions. The U.S. Energy Information Administration has indicated that Argentina could have in excess of 770 trillion cubic feet of recoverable natural gas. That puts it right behind China and the U.S. in terms of natural gas reserves on a global scale. According to YPF, the Vaca Muerta basin accounts for around 22.8 billion barrels of oil and gas.

Chevron’s big first-phase investment is likely to increase the existing well count (around 50) to over 100 within a year. Another 25 exploratory wells are to be drilled, covering the Vaca Muerta and Cachueta formations.

YPF has indicated that it needs around $15 billion to wholly develop the Vaca Muerta. To that end, the company has entered into agreements with Bridas (an Argentinian company) and China’s CNOOC (NYSE: CEO). The Chevron deal is expected to be finalized sometime this July.

There are possible repercussions to Chevron’s move. Repsol, still smarting from its treatment by the Argentine government, has vowed to initiate litigation against anyone trying to partner with YPF (looking at you here, Chevron).

Moreover, Repsol continues to press its demands for 8 billion euros (around $10.3 billion) in restitution from Argentina. And, of course, Repsol actually owns part of YPF – around 6 to 11.9 percent.

Overall, YPF is hoping to drill around 132 oil wells in total at the Vaca Muerta over 2013. Meanwhile, the Repsol threat remains, and it is in fact yet another of Chevron’s headaches. After all, the company remains embroiled with the aftermath of its offshore oil spill near Brazil. And then there’s the long-running brawl over alleged rainforest pollution and environmental damage on a massive scale in Ecuador.

At any rate, the markets appeared fond of the YPF/Chevron news. Word of the deal caused YPF shares to rise 1.7 percent (up to 121 pesos), while Chevron gained 0.07 percent to reach $123.09, reports Bloomberg.

The aforementioned Ecuadorean problem has actually caused 40 percent of Chevron’s Argentinian accounts to be frozen. Despite that, the company aims to spend around $150 million annually. The Ecuadorean drama ended in a $19 billion verdict for pollution, which Chevron continues to contest.

It’s unclear what action Repsol may take as retaliation for the YPF deal. However, it will undoubtedly add to a very stressful operating environment for Chevron.

According to YPF, some 7,000 barrels of oil are being pumped each day in the Vaca Muerta. That’s up from January’s average of 4,000.

This whole Chevron/YPF deal very nearly never happened, actually. Until very recently, the Eurnekian family, Argentina’s second-wealthiest, was working hard to beat Chevron to the punch with a pledge of $700 million in two separate deals with YPF. The pledge included $500 million for the Vaca Muerta and another $200 million for the Cia.

At the time, Chevron’s position was a lot more uncertain; an embargo placed upon Chevron’s assets by an Argentine court would have had to be lifted in order for Chevron to move ahead with YPF. Fortunately, that did happen, and Chevron took the lead once more. 


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