Argentina's YPF Move Risks Deterring Investment In Its Oil Sector
April 27 2012 - 3:09PM
Dow Jones News
President Cristina Kirchner's nationalization of oil company YPF
SA (YPF, YPFD.BA) has exacerbated concerns about Argentina's energy
industry and its ability to develop vast unconventional oil and gas
deposits.
Exploiting those resources will require billions of dollars a
year in foreign capital, and Kirchner's no-holds-barred
expropriation of a 51% stake in YPF from Spain's Repsol YPF SA
(REP.MC) could jeopardize those investments.
Deputy Economy Minister Axel Kicillof, the intellectual
architect behind the YPF nationalization, hinted last week in
congressional testimony that Repsol might not get any financial
restitution once YPF's alleged liabilities are considered, and
derided Repsol's demand for $10 billion in compensation.
Nomura Securities strategist Boris Segura said Argentina is
sending "a very bad message regarding the rule of law and the
sanctity of contracts. This is going to deter foreign direct
investment in the energy sector, where Argentina has huge
potential."
That investment is crucial to Argentina's future. Argentina
ranked third in the world, behind China and the U.S., in
potentially recoverable shale-gas reserves, with 774 trillion cubic
feet, according to a study last year by the U.S. Energy Information
Administration.
In February, YPF said it would require $25 billion a year for a
decade to put its estimated 23 billion barrels of shale oil and gas
resources into production, a bill that no single company, let alone
Argentina's cash-strapped government, can afford to pay.
The nationalization of oil companies hasn't always deterred
producers from investing in risky parts of the world, as was seen
in Venezuela when Chinese, Indian and Russian oil companies
invested there after President Hugo Chavez expropriated assets from
ConocoPhillips (COP) and Exxon Mobil Corp. (XOM).
But Venezuela is a major oil exporter, while Argentina's
priority is to provide cheap energy to its domestic market.
To drum up investment, Kicillof and Planning Minister Julio de
Vido have met recently with executives from Exxon Mobil, Chevron
Corp. (CVX), ConocoPhillips, France's Total SA (TOT, FP.FR),
Brazil's Petroleo Brasileiro SA (PBR), and Apache Corp. (APA).
The expropriation has left executives at several oil companies
thinking twice before committing more money to Argentina, while
others plan to tread cautiously.
Exxon Mobil spokesman Patrick McGinn said the company is
prepared to make the necessary investments in Argentina to expand
oil and gas production if its exploration efforts for
unconventional resources in Neuquen Province are successful.
"However, given the long-term nature of our business, our
investment must be supported with fiscal terms and product pricing
that provides a return commensurate with the risk we are
undertaking and must be underpinned by stable fiscal and regulatory
policy," he said in an email.
Government critics have said onerous price caps and
unpredictable policies--such as the recent suspension of tax breaks
for drilling--have discouraged investment in the sector.
While local natural-gas producers can charge only $2 to $3 per
million British thermal units, the government pays around $16 per
MMBtu for imported liquefied natural gas, or LNG.
Such policies have led to declining production and reserves,
turning Argentina into a net energy importer for the first time in
17 years. This year, Argentina's energy deficit is set to more than
double to $7 billion.
Even if investment pours in and the government manages YPF well,
these problems are "irreversible in the short and medium term,"
said the Argentine Energy Institute. The institute described YPF's
expropriation as "confiscatory" and said it will likely spur
lawsuits and "discredit Argentina internationally."
Some oil companies are more sanguine.
Barclay Hambrook, president of Americas Petrogas Inc., a junior
Canadian exploration company operating in Neuquen, said in a phone
interview that his company is moving "full-steam ahead."
The company and its joint-venture partners plan to drill 30
conventional wells and 10 shale wells mainly in the Vaca Muerta
formation, home to massive shale oil and gas resources.
Paal Kibsgaard, chief executive of oil services giant
Schlumberger Ltd. (SLB), which moved "a fair bit" of capacity into
Argentina in the last 12 months, is upbeat.
"We are still quite positive on the medium to long term on
Argentina and I think that whatever way they are going to develop
these resources--and they will--there is going to be a strong need
for our expertise and our products and services there," he said
during a conference call last week.
-By Taos Turner, Dow Jones Newswires; 5411-4103-6728;
taos.turner@dowjones.com
--Ken Parks contributed to this article.
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Aug 2024 to Sep 2024
Exxon Mobil (NYSE:XOM)
Historical Stock Chart
From Sep 2023 to Sep 2024