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News Extra: Chevron signs high-risk shale deal with Argentina

29 June 2013

US oil major Chevron agreed in mid-May to invest $1.5 billion in Argentina's large shale development project in Patagonia, despite energy industry scepticism over Argentine President Cristina Fernandez keeping promises made to the group during negotiations.

Chevron signed the deal with Argentine oil group YPF, the energy company seized from Spanish oil major Repsol without compensation last year by the government of President Cristina Fernandez de Kirchner.

Repsol is currently fighting the expropriation before the World Bank's arbitration body ICSID, and has said it will sue any company that works with YPF, which is leading the programme to exploit the extensive Vaca Muerta shale formations in Patagonia’s Neuquen Basin. The Spanish group is seeking more than $10.5 billion in compensation for the nationalisation of its assets, which the Argentine government has said it will not pay.

YPF earlier secured investment pledges in Vaca Muerta from Bridas, an oil company owned by Argentine billionaires Carlos and Alejandro Bulgheroni and China's state-run CNOOC. The Eurnekian family, one of the foremost investors in Argentina, has also pledged  $700 million

Exxon Mobil and Apache are active in Argentine shale development on a smaller scale, but many other companies are avoiding involvement because of the risk of their own investments being confiscated at some future date by the populist Argentine President.

This is despite the massive potential of Vaca Muerta, which a Ryder Scott report for YPF says holds resources of at least 23 billion barrels of oil equivalent. Estimates by the US Energy Information Administration suggest Argentina may have more than 770 trillion cubic feet of recoverable shale gas, more than the whole of Europe, which would make Argentina's shale reserves the third largest in the world after China and the United States.

With Chevron’s $1.5 billion, total well count will go from today’s 50 to above 100 in 12 months, according to YPF, while 25 additional exploratory wells in both the Vaca Muerta and the Cacheuta formations will be drilled.

YPF wants to raise $15 billion for Vaca Muerta, which will involve finding many more international partners. Unconventional energy fields need greater investment than conventional resources due to the complexities of extracting the natural gas and crude from rock formations.

Fernandez hopes the YPF investment program will help her fight inflation and keep the economy ticking over in the face of spiralling inflation and an economic slump. Despite the country’s massive hydrocarbon reserves, the country was forced to import energy for the first time in 17 years in 2012.

It has struggled to meet domestic energy requirements following a fire at YPF's La Plata refinery about 40 miles south of Buenos Aires.

Chevron says its decision to invest in YPF is subject to further agreements on terms and conditions of the deal but both sides say Chevron's involvement is part of a pilot project in a long-term strategic development. YPF says the final deal should be signed in July.
In a critical article, the US business magazine Forbes called Chevron's deal with Argentina a "pact with the devil," saying the biggest threat to the oil major could be the Fernandez administration itself. 

And the deal was made even more complicated by a Buenos Aires court ruling in late 2012 that $19 billion worth of Chevron assets in Argentina would be frozen to settle claims in a long drawn out battle over environmental contamination in northern Ecuador. The court order froze up to 100% of Chevron's capital and dividends in Argentina, all of its stake in a local pipeline operator, 40% of oil sales and 40% of the cash the American company has or may eventually have in Argentine banks. 

Argentina’s Senate finally revoked the seizure of assets on June 5, clearing the way for Chevron's investment programme. 
Chevron Chief Executive John Watson had said that it needed access to its capital in Argentina and would not move forward with YPF without it.

Chevron is still under threat from Repsol because of the latter’s claim over YPF. The Spanish company recently brought a case against Bridas Group after the Argentine company bought rights to a $1.5 billion shale project expropriated from Repsol.

But Chevron’s Latam chief Ali Moshiri obviously thinks the risks are worth it and a deal can be reached. He has said that Argentina in fact comes ahead of China in terms of recoverable shale reserves, and has praised YPF's exploration work in the Neuquen Basin, a statement from the Argentine company said.

Moshiri failed to explain how Chevron intends to operate in Argentina without its funds being seized, only stating that “at the end of the day the right decision will be made by the people in Argentina, the government and the judiciary system.”

Certain industry observers think some kind of overarching deal is being negotiated, with Argentina dropping its claims against Chevron in exchange for large-scale shale gas investment, and perhaps even Repsol receiving significant shale development rights if it agrees to drop its YPF compensation claims.

Certainly, the potential involvement of companies such as Norway’s Statoil, which YPF recently said it was also in talks with, would most probably mean that a resolution was at least on the horizon. But for large-scale involvement by international oil and gas companies, the Argentine Government will have to offer cast-iron guarantees that their investments and assets will be safe in Argentina into the future, unlike in the past.

Other high-profile legal battles for Chevron in South America include its year-long tussle in Brazil following an offshore spill there, and the two-decade fight over rainforest pollution in Ecuador.


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