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Profiting from Argentina Oil and Gas Incentives

Brian Hicks

Written By Brian Hicks

Posted July 17, 2013

According to Argentina’s official gazette, President Cristina Fernandez de Kirchner is offering incentives for oil and gas development of the Vaca Muerta (Dead Cow) shale formation, which is known as the world’s second largest landscape for shale gas and the fourth largest in shale oil reserves.

One of the incentives calls for a minimum $1 billion investment over the course of five years to export 20 percent of oil and gas commodities abroad without having to return foreign proceeds back to the government. And energy companies will not have to pay export taxes on 20 percent of all production.

There is also room 25-year concession renewals and 10-year renovation.

Energy companies that qualify for the incentives also have the option of selling to domestic markets at international prices, if domestic conditions are not suitable for profitable commerce.

The Kirchner administration is trying to foster more development of the Vaca Muerta through international investment and to reduce surging imports.

Argentina imported $4.6 billion of energy commodities as of May 2013, a 30 percent increase from 2012 levels, according to Bloomberg.

Argentina exported a little over 60,000 bpd of oil in 2011, a 40 percent decline from the previous year due to lagging production and higher domestic demand.

Argentina exports crude oil to the United States, China, Chile and Brazil, but has relied on energy imports to feed its growing economy, running up large deficits in the process. Argentina produced a $2 billion energy surplus in 2010, but followed with an annual $2.7 billion deficit, The Wall Street Journal reports.

And Kirchner certainly hasn’t won over potential investors when nationalizing Argentina’s YPF SA (NYSE: YPF) by attaining a 51 percent stake in 2012, effectively reducing Spanish company Repsol’s (OTCMKTS: REPYY) 51 percent share to a mere 12 percent stake. Repsol has threatened to sue any company that intends to develop Vaca Muerta and is seeking $10.5 billion in compensation.

A blame game has been going on between Argentina and Repsol, with Kirchner blaming YPF’s sputtering output on Repsol’s underinvestment and excessive dividends, and Repsol blames the government for price control of domestic prices and exports. Leading up to the 2012 nationalization of YPF, net profits for the company went down by 8.5 percent in 2011.

Argentina Production

Regardless of the standoff between Repsol and Argentina, this hasn’t stopped energy companies from exploiting reserves in Vaca Muerta and elsewhere.

As of 2011, Argentine oil production reached just under 800,000 barrels per day, according to data from the Energy Information Administration. Domestic oil consumption was around the same level, roughly 750,000 bpd.

YPF is the largest oil company in Argentina. Before nationalization, the company accounted for one-third of total production. YPF also produces 20 percent of natural gas output.

Around half of Argentina’s conventional gas resources derive from the Neuquen province, the same provincial location of the Vaca Muerta, which includes the country’s most prominent natural gas field, Loma La Lata, owned by YPF.

Pan American Energy is the second largest producer, co-owned by BP (NYSE: BP) and Bridas Corporation. Bridas itself is a joint venture between Bridas Energy Holdings, owned by Argentina’s wealthy Bulgheroni family, and China National Offshore Oil Corporation. Pan American plans to spend $3.4 billion between 2013 and 2017 for natural gas production, and agreed to a deal in which the government would establish a base price of $7.5 per million British thermal units (BTU). Pan American has invested over $3.5 billion in the last few years and $7.6 billion between 2001 and 2011.

Other major companies include China’s Sinopec Group (HKG: 0386), Brazil’s Petrobras (NYSE: PBR) and American company Chevron (NYSE: CVX). Chevron has signed a new deal with YPF for a $1.5 billion test program in Vaca Muerta, but the deal could lead to a $15 billion development plan.

French company Total SA (NYSE: TOT) has recently invested $1 billion over the next five years to begin natural gas production.

Sinopec took over assets in 2010 that included 23 exploration and production blocks. Aside from the Middle East, China is on the energy prowl in Latin America.

Pan American is the operator of one of Argentina’s largest oil fields, the Cerro Dragon. Cerro Dragon produces roughly 95,000 bpd of Argentine oil, or roughly 15 percent of national oil production.

As of 2013, Argentina may possess as much as 23 billion barrels of oil. According to research by the EIA and Advanced Resources International, Argentina could be sitting on 774 tcf of natural gas, making the country the third largest in world natural gas reserves.

Argentina produced an average of 4 billion cubic feet of natural gas per day in 2011, and current natural gas production levels hold at 230 million cubic feet of natural gas per day. 13 percent of natural gas production in Argentina is offshore.

Investor Benefit

Despite the ballooning deficit, lagging production and fallout with Repsol, Argentina is still a land ripe with energy growth. Investors and companies may have to deal with tightened government control, but if other energy companies like Royal Dutch Shell (NYSE: RDS.A) can contend with sectarian strife and political corruption in Iraq, there is little to be feared from Argentina. When it comes to investing abroad, no country is perfect.

And despite Repsol’s claims about pursuing lawsuits against any party that chooses to invest in Vaca Muerta, the Spanish company has not gone after every company, and their qualms should be with the government and YPF. Some of the largest heavyweights in the energy world already qualify for the incentive program, and Argentina is worth keeping an eye on to see if more oil and gas companies take the bait.

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