Thursday, October 30, 2014

Argetina Seeks Its Own Shale Boom

October 30, 2014 3:35 pm

Argentina seeks its own shale boom

An aerial view is seen of a shale oil drilling rig in the Patagonian province of Neuquen in this July 11, 2013 handout photo. After years of nationalist rhetoric and protectionist policies, Argentina is seeking to lure foreign investment to its Vaca Muerta shale oil and gas field in an bid to jumpstart the country's energy sector and reverse a decline in output. Just a year after stunning the market by seizing the country's biggest energy company, YPF, the government eased regulations to sign a $1.24 billion production contract with U.S.-based Chevron Corp.The deal was seen as a breakthrough for Argentina as it tries to regain energy sufficiency and could be a turning point for investment in a country that has been locked out of the international capital markets since its 2002 sovereign default and has not yet compensated Spain's Repsol for the nationalization of YPF. Photo taken July 11, 2013. REUTERS/Prensa YPF/Handout via Reuters (ARGENTINA - Tags: ENERGY BUSINESS) ATTENTION EDITORS - THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY IT IS DISTRIBUTED, EXACTLY AS RECEIVED BY REUTERS, AS A SERVICE TO CLIENTS FOR EDITORIAL USE ONLY. NOT FOR SALE FOR MARKETING OR ADVERTISING CAMPAIGNS - RTX11WI8©Reuters
Argentina’s congress on Thursday approved reforms to a hydrocarbons law that are aimed at replicating the shale boom in the US by luring foreign investment into its vast but largely undeveloped Vaca Muerta shale reserves.
But critics say the law fails to solve the underlying problem of a poor business climate thanks to heavy-handed government intervention in the economy. Investors are still skittish after the nationalisation in 2012 of Repsol’s majority stake in YPF, Argentina’s biggest energy company, and are perturbed by the government’s ongoing dispute with its “holdout” creditors.
The law will extend drilling concessions and cut the minimum investment needed for companies to be exempt from import and capital controls. It will also provide a national framework for regulations, limiting the role of provincial governments, but enhancing the position of state-controlled YPF in the sector.
Although oil majors such as US-based Chevron, Malaysia’s Petronas, Royal Dutch Shell and France’s Total all have a foothold in Vaca Muerta, which contains the second largest reserves of shale gas in the world after China and the fourth largest reserves of shale oil, so far investments have been limited.
But a widening energy deficit that is draining central bank reserves – a situation complicated by Argentina’s second debt default in 13 years last July – has sharpened incentives for the government to seek energy self-sufficiency. Still, officials admit this could take a decade, and that it would require $20bn of investment in the energy sector a year, compared to current levels of around $5bn.
“It will take longer if we don’t do things right, and this law isn’t the answer,” said Daniel Montamat, a former energy secretary. “We need a change in the economic context, an energy plan, and to rebuild investor confidence,” he added, underlining the importance of respect for “the rules of the game”.
Companies complain of a tangled web of state controls and restrictions on imports, access to hard currency and energy prices that make investing in Argentina uncertain, as well as powerful trade unions, high inflation and a generally hostile attitude from the government towards the private sector.
We need a change in the economic context, an energy plan, and to rebuild investor confidence
- Daniel Montamat, former Argentine energy secretary
Few expect a significant improvement until President Cristina Fernández leaves power in December 2015, when most observers expect that she will be replaced by a more market-friendly administration.
The reforms will cut the minimum investment needed for companies to be exempt from import controls to $250m from $1bn, while investments of at least $250m will allow producers to keep 20 per cent of the hard currency generated by exports.
The reforms will also lengthen concessions to 35 years for unconventional energy, which can easily be extended, while companies already holding concessions will be able to renew them automatically. The principal beneficiary will be YPF, since it owns about 75 per cent of the current exploration permits.
Since the government took control of YPF over two years ago and appointed Miguel Galuccio as its chief executive, the company has reversed a declining trend in oil and gas production, increasing profits while also ramping up investments, especially in Vaca Muerta, where it has established the first commercial development of unconventional resources outside the US.
But Mr Galuccio recognises that YPF cannot develop Vaca Muerta’s resources successfully alone, and has been actively seeking partnership with foreign companies.
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