Argentina's 'Chavez' Risks Shale Potential
Investing in a capitalist enterprise is one thing, investing in a state-nationalized enterprise is quite another – as Argentina’s increasingly Chavez-esque President Cristina Fernandez de Kirchner is about to find out. Strong-arming Spanish Repsol out of its YPF assets, as the president did in April, may prove a populist move at home, but it has put the realization of Argentina’s shale gas wealth at serious risk.
President Kirchner’s increasingly volatile and state-centric regulatory policies, including the imposition of price controls, export tariffs and consumer subsidies, have already colluded to slow to a crawl investment in the country’s energy sector. And last month’s nationalization of Repsol-YPF, Argentina’s largest energy company, may see investment in the country’s shale industry evaporate.
The EIA estimate Argentina’s technically recoverable shale gas amounts to a mammoth 774-trillion cubic feet (Tcf). That puts the country third in rank behind only the United States (862 Tcf) and China (1,265 Tcf). Before receiving the Order of the Boot in April, Repsol estimated that it would take an investment of around $250 billion over a decade to make Patagonia’s Vaca Muerta shale gas development viable; money Argentina doesn’t have. Argentina has yet to return to the global credit markets after its almost $100 billion debt default in 2002 – the biggest sovereign debt default in history. And last year the country’s energy trade balance went into the red for the first time with YPF having to import gas to make up what is a growing national shortfall. Kirchner cited the need to increase productivity as the chief reason for ousting Repsol. Meanwhile Argentina’s monetary reserves, according to Bloomberg, stand at $47.3 billion. According to Barclays, with government plans to expand production costing around $40 billion, that leaves Argentina almost exclusively dependent on massive foreign investment.
ExxonMobil is already developing known reserves in the Neuquin Basin, having committed $120 million last year. In September 2011, President Kirchner met the CEO of ExxonMobil in New York where she was informed that ExxonMobil, and its partner AES, planned to invest a further $800 million to develop Argentina’s shale gas. And it’s in this same Neuquin region of Western Argentina that YPF’s vast Vaca Muerta field holds the promise of significant shale gas wealth. But government energy policies are not helping to attract investors. While the government pays domestic gas producers around $2.10 per million BTU, it pays around $11 per million BTU for gas from Bolivia and around $17 for LNG to make up a growing domestic energy shortfall; hardly an incentive for investors. Yet the cost at the pumps in Argentina is kept to a mere 50 US cents per million BTU at a time when international prices are a more realistic $4 to $5 per million BTU.
It is not clear how the energy majors already active in Argentina, including Chevron, Total and Petrobras, will react to the YPF nationalization when it comes to committing further investment. However, given the sheer scale of investment needed, rumors that China’s cash-rich Sinopec, a long-term suitor for Repsol’s YPF holdings, could be in talks with YPF makes sense. In 2010, 40 percent of all China’s Latin America investment went to Argentina.
For Argentina, however, there’s still the fallout from the Repsol ousting to deal with. Not only is it demanding $10 billion in compensation, but Repsol sent out letters in May to its competitors, including ExxonMobil, Chevron and ConocoPhillips, warning that they would be sued if they attempted to invest in YPF or its assets. And the nationalization has seriously ruptured relations between Buenos Aires and Madrid.
Neither is there any sign of a let up in the political rhetoric and sabre-rattling in the renewed spat with Britain over the Falkland Islands. Even though Argentina has never held sovereignty (it was held by Spain prior to the creation of Argentina), Kirchner’s populist rhetoric against Britain has ratcheted up since five UK deepwater drilling companies began exploration in the Falklands Basin. According to oil analysts, the Falklands could generate $180 billion in royalties and tax for the UK Government. Buenos Aires has already tightened shipping restrictions in the region, insisting that ships travelling to and from the Falklands need permission from the Argentine Government. In January, Britain despatched HMS Dauntless by way of ‘sending a message’ to Argentina.
Just last week, Argentina’s embassy in London sent a letter to 15 banks, including Goldman Sachs, threatening civil and criminal action if they continue working with the five London-listed companies drilling off the Falklands. But it’s debateable whether President Kirchner’s aggressive international policies would boil over into Galtieri-style over-reach plunging the country into a second Falklands War. That would prove a self-defeating economic catastrophe. But neither can Argentina afford to foster a climate of instability and uncertainty that frightens away investors with the kind of deep pockets Argentina’s shale industry needs.
A spokesman for London-based Capital Economics has told Reuters, “The evidence from recent episodes of resource nationalism does not suggest that FDI (foreign direct investment) suffers post-expropriation” adding that the YPF move had “clearly done nothing to improve Argentina’s reputation.” Argentina may rank third in terms of global shale gas resources, but, in terms of economic clout and diplomatic reputation, it also ranks alongside the world’s basket cases.