Argentina: Even With All That Oil, It’s a Tough Sell
By Michael J Economides
Last month, YPF SA’s CEO Miguel Galuccio took his dog and pony show on the road, seeking US and European energy partners whose engineering expertise and financial resources are indispensable in its $37.2 billion plan to develop Argentina’s vast unconventional energy reserves. But after 40 meetings with 70 businesses and investors in Houston, Los Angeles, Boston, New York and London, there were no new investors to be found.
This week, Fernando Giliberti, the head of strategy and business development for YPF, is back in Houston trying to persuade an ambivalent investment community that Argentina is a reliable partner. It’s a tough sale.
Argentina has grabbed lots of headlines lately – but not for good reasons. Among the most notorious were reports of its re-nationalization of YPF in May, which provoked censure worldwide. Since then, Moody’s downgraded Argentina’s outlook and the International Monetary Fund threatened more serious sanctions by the end of this year if Argentina fails to produce reliable inflation statistics. Recently, Chaco region ran out of hard currency and had to make its bondpayments to creditors in pesos.
Against this backdrop of financial instability, YPF must find foreign investors to develop the vast Vaca Muerta shale reserves. It’s quite an urgent matter. Years of mismanagement, coupled with a lack of access to international credit markets following a massive sovereign debt default in 2001 and failure to normalize relations with global creditors, have left the country a net oil importer. After forcing out the Spanish firm Repsol from its largest energy producer YPF, it must find multiple energy partners to provide the capital and engineering know-how to develop its unconventional oil and gas reserves.
This will prove very difficult for several reasons. The first obstacle is political. Argentine President Cristina Fernández de Kirchner continues to signal that her government is an unreliable partner for existing or potential internationalenergy investors who require a partnership that affords a transparent and stable market-based regulatory framework.
The investment climate in Argentina is clouded by the Kirchner government’s public policy of cancelling debts to US creditors, refusing to pay awards through the World Bank’s court, and aggressively pursuing resource nationalism.
Many of the country’s actions are making it even more difficult for investors to take Argentina seriously. Earlier this month, a court in Ghana seized the Argentine Navy’s training frigate, A.R.A. Libertad, because of the country’s refusal to repay its lenders after its record debt default in 2001. It also took almost three weeks for President Kirchner to decide to evacuate the crew. As The New York Times put it, “The embarrassing crisis has put the country’s isolation on display.”
The second obstacle is either incompetence or deceit. Mr. Galuccio’s estimate of the investment needed to develop its unconventional resources is shockingly low. As calculated in my paper, Argentina’s Re-Nationalization of the Energy Industry and What it Means, the Argentine government and YPF have underestimated (by a factor of 7-to-10) the capital requirements to develop the Vaca Muerta. To develop gas wells alone, YPF would require an investment upwards of $250 billion – some 62.5 percent of Argentina’s current GDP, and a far cry from the $37.2 billion estimated in its 5-year plan.
The third barrier has to do with the messy legacy of the Repsol expropriation, which complicates future investment prospects. Repsol is seeking $10 billion in compensation from Argentina following the formal expropriation of its majority stake in YPF in May and has sent warnings to other large international oil companies that it “does not plan to let third parties benefit from illegally confiscated assets.” The legal cloud hovering over YPF significantly raises the risk premium for potential outside investors.
Argentina has proven time and again its willingness to break international contracts. It has a dreadful record of complying with international judgments and about a quarter of all pending cases at the World Bank’s International Centre for theSettlement of Investment Disputes (ICSID) are with Argentina. Can Argentina be trusted? Here there iscertainty. The answer is no.
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