It’s been a long time since the Repsol fiasco in Argentina, and the oil-rich nation has been making steady efforts to encourage foreign investment in its energy sector. Bill Newman, vice president of international oil and gas with Mackie Research Capital, insists investors should focus less on political risk and more on the world-class Vaca Muerta shale play. In this interview with The Energy Report, Newman names oil and gas majors and junior explorers making progress, and recommends a few names that are taking advantage of Argentina’s production incentives.
The Energy Report: Let’s talk about the macro-economic picture for Argentina in terms of energy. What is the story there with the country’s growing deficit, the devaluation of the peso and the reliance on energy imports?
Bill Newman: Production of both oil and natural gas in Argentina has been declining for years. At the same time, demand has been increasing. This is accelerating Argentina’s energy deficit. The Argentina government understands that in order to slow production declines and eventually return to energy self sufficiency, a substantial increase in investment will be required, and a large portion of that capital will have to come from foreign investment. The bottom line is that the government knows it needs to attract capital, and that could translate into modest improvements to the energy sector in order to promote that investment.
In January 2014, we saw a rapid devaluation of the peso. The peso has subsequently stabilized but there is still some risk of further devaluation. Oil and gas is priced in U.S. dollars, which somewhat mitigates the impact of the falling peso. Producers could have lower operational costs in the short term, as most expenses are paid in pesos. Inflation remains a problem in Argentina, and the government is actively taking measures to prevent social unrest by negotiating with unions for higher wages to compensate for the weaker peso. But the government understands that increased foreign investment is one tool that could help to resolve the issue.
TER: Is Argentina increasingly attractive to foreign investors?
BN: It’s no surprise that the expropriation of Repsol’s 51% holding in Yacimientos Petrolíferos Fiscales (YPF:NYSE) in April 2012 jolted investor confidence. But ever since then, the government has been trying to repair the damage by introducing new incentives to promote investment by energy companies. Argentina has also been working toward improving its reputation on the international stage through negotiations with the debt holdouts, and successfully negotiated a compensation settlement with Repsol (REP:MC) for the expropriated shares. This really is a complete turnaround from the direction the government was taking in early 2012. We think these efforts have reduced the perceived investment risk of Argentina, and that is starting to be reflected by increased investment. If Argentina holds the course, investors should start to focus less on political risk and focus more on the world-class Vaca Muerta shale play.
TER: What is the significance of the YPF $5 billion ($5B) settlement with Repsol?
BN: A large portion of the land that is prospective in the Neuquén Basin of the Vaca Muerta is held by YPF, so major oil companies looking for a meaningful position in the play might have to complete a deal with YPF. Before the settlement, most companies that were hoping to joint venture with YPF put their plans on hold. The $5B settlement is a signal to the market that the government is serious about repairing its reputation on the world stage, and the move should open the door for new joint ventures in 2014. With the improving outlook, many companies have announced expanded plans for Argentina. Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) plans to invest $500 million ($500M) into the unconventional shale plays in Argentina in 2014, which is approximately three times the amount the company invested in 2013. Also, Petrobras no longer has its Argentina subsidiary up for sale and instead now expects to make a large investment in Argentina this year.
TER: What is the story behind the $1.6B joint venture Chevron Corp. (CVX:NYSE) recently announced with YPF?
BN: The $1.6B investment is the second stage of the joint venture between Chevron and YPF to develop the Vaca Muerta shale play on the Loma Campana block. The first phase, which was a $1.24B investment, was completed early this year, and production from the Vaca Muerta shale is now about 20,000 barrels per day (20,000 bbl/d). The second investment includes 170 wells, and longer-term plans could include up to 1,500 wells and an increase in production up to 50,000 bbl/d and 100 million cubic feet per day (100 MMcf/d) of natural gas. We see the second Chevron/YPF investment as another vote of confidence for the Vaca Muerta shale play in Argentina.