Argentina's Vaca Muerta, a world-class shale play, received renewed interest after Chevron's (NYSE:CVX) announcement in April. "The Vaca Muerta-specific pilot investment was $1.24 billion," states the first article about the emergent opportunity. In 2014, Chevron added $1.6 billion of investment, signing an accord with Argentina's state-run YPF SA (NYSE:YPF). The joint venture, with plans that equal a $15 billion investment, is targeting daily output of 50,000 barrels of shale oil and 3 million cubic meters of gas." Generally, in the Vaca Muerta, Chevron expects production to grow to 80,000 boe/d by 2017, half of it Chevron's, according to its investor day presentation. With the unconventional oil and gas production investment in the U.S., and increasingly in Canada, Argentina is also on investors' radar.
Importantly, the investment climate and political risk inherent in Argentina concerns investors most. In order to gain more insight into Argentina's political economy and the prospects for the Chevron-YPF partnership, Alex Arellano, originally from Argentina and an attorney at Winstead, agreed to be interviewed. Arellano has extensive business and legal experience in Argentina and Latin America. He has served as primary U.S. counsel on a multinational legal team in negotiations with various regulatory government authorities and labor unions in Argentina, among other advisory capacities for firms entering Argentine and Latin American markets. His insights offer a longer view for the prospects of Chevron's investment in Argentina.
"In general, there is a general feeling within Argentina that a period of growth and prosperity is near. A change in administration could help the business climate significantly. The challenge for a new administration will be to set clear and predictable policies to help gain the trust of the Argentine investor followed by the foreign investor. This has not always been the case with the current government." Alex Arellano, Winstead, Argentine expert
Jennifer Warren: In 2015, new elections will be held for President in Argentina. Given Argentina's economic frailty, how do you see political directions playing out for large investors such as Chevron? Do you see any political push-back in upcoming elections, anti-fracking protests, etc.?
Alex Arellano: For the last eleven years, the Kirchners, for the most part, have set the country's policies through their "party" FPV (Frente Para la Victoria). FPV belongs to the Peronist party, so it is technically not a full political party but an alliance. Because the FPV has been in power for 11 years, even if the FPV loses the elections in 2015, it will take some time for policies to change. I would expect the current policies to stay in place for some time even if there is a change in the elections. To my knowledge, Argentina does not have a large anti-fracking movement, probably because most of the energy resources in Argentina are found in regions with little to no population. For example, Vaca Muerta is in the middle of the Patagonian desert.
JW: How would you characterize the government's foreign investor policy? Is it more investment friendly post-Repsol expropriation resolution or unpredictable in different ways?
AA: As everyone that has worked in Argentina knows, the government's foreign investor policy is generally difficult. The general business climate for local companies has also been challenging. However, post-Repsol the government has made considerable efforts to negotiate energy deals with companies such as Chevron. I believe the biggest agent for change will be the elections.
JW: Chevron has pledged an additional $1.6 billion for additional wells beyond the original $1.2 billion tie-up with YPF. "YPF owns 40% of the total acreage in Vaca Muerta, which is estimated to have as much as 21 billion barrels of prospective oil equivalent, but YPF's 2013 capital expenditure budget was only 29.8 billion pesos, or $3.72 billion using current exchange rates." This was noted in a recent news reporting.
Is there anything that would concern you from a political or economic risk point of view for Chevron or other oil-related services firms targeting Argentina? Is there anything unforeseen that typical market players could not perceive or predict relative to the way things work in Argentina?
AA: I am not sure if I would say there are unforeseen issues. Chevron is a sophisticated player and I am sure they have seen it all before. I think all energy companies (service or exploration etc.) negotiating deals with YPF and the energy companies owned by Argentine provinces (such as Neuquén) should proceed with caution. If the FPV loses the elections in 2015, the new administration will carefully review and scrutinize every single agreement entered into by the current administration. Inevitably, there is a risk that a new administration would void or want to renegotiate certain deals if they feel the deal terms are so unfavorable to Argentina as to make the agreement unconscionable.
JW: A wiki post noted the following regarding YPF concessions in Argentina: "Vaca Muerta is divided into different development blocks. Consortium of YPF (50%) and Chevron (50%) develops General Enrique Mosconi concession, including Loma La Lata Norte and Loma Campana fields."
Do you have any insight about YPF that would indicate a vote of confidence as a partner or to the contrary? Given its concessions, would you imagine that the YPF blocs would be most prolific or advantaged in terms of prospectivity?
AA: Miguel Galuccio, the current CEO of YPF (and ex-Schlumberger executive), is taking steps in the right direction. He is good for YPF. Mr. Galuccio is a petroleum engineer by trade with extensive international experience. He also has not held a government post prior to his YPF position. Galuccio is not an FPV member. YPF is part of the government and that brings certain risks because the government has not always followed the agreements it has entered into. It is hard to tell whether YPF has the best blocs. However, certainly the Vaca Muerta seems to be the best bloc right now and as you point out that was purchased by YPF.
JW: Do you have any thoughts on the general direction of shale resources development in Argentina? What it means to Argentina's economy? How it positions them relative to other Latin American countries that produce oil and gas?
AA: In terms of size and output I don't know exactly where the recent finds will place Argentina relative to other Latin American countries. Argentina is currently experiencing an energy crisis and high energy costs are negatively affecting the Argentine economy. The government is importing a lot of energy so increased internal energy production would likely lower energy costs and help the economy (i.e. manufacturing and others). Lower energy costs are particularly important for Argentina, not just to manufacturing but also for transportation and labor. Argentina's goods are primarily transported by trucks and geographically Argentina is a large country (about 1/3 of the US).
The government and the people of Argentina want to develop shale and conventional resources in the country. Everyone knows that it will benefit the country at various levels. The challenge will be in the implementation of policies and whether the government can create a stable economic and political climate that will attract foreign investment. Without foreign investment (and outside technology) Argentina does not have the capacity to fully exploit the shale resources.
JW: Do you see blue skies with this Chevron-YPF announcement of a deepening financial commitment or any thunderclouds?
AA: As everyone that has studied Argentine history in the 20th-21st centuries knows well, making predictions about Argentina is extremely difficult. I think the fact that YPF-Chevron have entered into certain agreements and have made commitments to each other is a step in the right direction. Without a doubt, Vaca Muerta (and other opportunities) have the potential for profit but those profits will only be realized if the government can generate business friendly policies and a political climate that attracts foreign investment and promotes internal re-investment.
Also see related article "Three Shale Basins in the Americas Important for Chevron."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.