Publish in Perspectives - Wednesday, June 19, 2013
Chevron will invest up to $1.5 billion in YPF's Vaca Muerta field. (Photo: Argentine President's Office)
of Argentina's shale fields restricted by government policies.
BY LATIN AMERICA ADVISOR
On May 15, U.S.-based Chevron Corp. announced an agreement for up to $1.5 billion of investment with Argentina's YPF to develop parts of the country's vast Vaca Muerta field, part of YPF's overall $37 billion development plan. Argentina has the world's third-largest shale reserves, but investors have had doubts about investing in them due to economic uncertainty and the regulation of hydrocarbons in the country, the Financial Times reported. What is the outlook for the development of Argentina's shale oil fields? What factors are shaping companies' investment decisions?
Jose Valera, partner at MayerBrown LLP in Houston: Argentina does indeed have world class shale resources. The outlook for their development, however, remains cloudy. After 10 years of spectacularly bad energy policy, Argentina has fewer oil and gas reserves, less production and ever-increasing imports. Argentina needs tens of billions of dollars to develop its own shale resources and eliminate the need for imports. But the problem is this: the needed money cannot be borrowed because the financial markets are shut to Argentina after the default of 2001. The money can only come in the form of investment and who is going to invest? You have state-owned YPF, on one hand, and the private sector, on the other. YPF is as constrained from borrowing as the country is, and it has not been capitalized by the treasury since the Repsol expropriation. So, YPF is largely limited to developing shale resources through joint ventures such as the one announced with Chevron (still 'preliminary'). In the end, it will all depend on what the private sector does. However, the private sector is not showing signs of being willing to invest at the scale necessary under current business conditions. The disincentives to investment are many: limitations on the ability to import goods and services, restrictions on the right to remit profits abroad in dollars, high labor costs and unavailability of sufficient skilled labor, very high domestic cost inflation, taxes on exports, and regulated prices domestically. These are the factors that are shaping companies' investment decisions. So far, there has not been much investment in shale and this will remain so until government policies take a fundamental turn.
Gianna Bern, president of Brookshire Advisory and Research Inc.: Vaca Muerta represents a significant potential growth opportunity for Argentina. As global oil and gas producers evaluate this developing situation, they will assess this investment across a number of parameters. Shale development is a very high cost and capital-intensive endeavor. Investors will first look for an energy policy that promotes growth. Investors will also evaluate the Argentine shale opportunity and compare it to other global investment opportunities. Essentially, Argentina will have to compete for those investment dollars. Today, many global oil and gas companies are investing in U.S. shales, Canadian oil sands, off the west coast of Africa and in Asian LNG projects, to name a few. Thus, Argentina will have to present a compelling investment case. Investors will also look to invest in countries that support infrastructure development, which is necessary for shales, and those that have relatively stable economies. That said, Argentina will have to assess its ability to promote infrastructure development and road construction. In addition, shale development requires considerable water, manpower and a plethora of related drilling services. This is a very long-term proposition and commitment is needed for success.
Daniel Gustavo Montamat, founder and president of Montamat & Asociados in Buenos Aires: Shale gas in Argentina has a promising outlook for the future, but not in the short-term. Unconventional resources could change the energy picture of an Argentina that is currently importing 25 percent of the gas consumed in the country. But in order to produce a critical mass to compensate the natural decline of the conventional fields, the gas industry needs at least 10 years. There is a learning curve and a huge investment process in the mid-term. Both of those depend on a new institutional and political environment that is more market-friendly for the potential investors. YPF, now under government control, needs to recover access to the international financial markets and to negotiate deals with international players who have capital and technology. So, it needs to negotiate conditions with Repsol to overcome the expropriation handicap. A new energy policy has to recreate incentives in the oil industry in Argentina. It seems difficult to undertake these changes before 2015, when a new government takes over.