Argentina’s resource-rich province tries to develop gas fields

May 25, 2012

For wildcatters here, it was a major affirmation when the U.S. government, in a 365-page report issued last year, signaled that Argentina might just have the third-largest shale gas and oil deposits in the world.

Then the Spanish energy giant Repsol, busy drilling wells in this rocky patch in Patagonia, reported that a source rock known as Dead Cow could hold nearly 23 billion barrels of oil and gas. The oil majors, among them ExxonMobil and Royal Dutch Shell, acquired stakes.

“All this has generated big expectations in the oil industry,” said Luis Pedro Stinco, a geologist and vice president for exploration for the Argentine arm of the Chinese company Sinopec. “Those who want to be in Dead Cow are now paying a fortune in acreage for a concession.”

Even so, bringing Dead Cow — so named by prospectors who apparently came upon a dead cow amid gullies and dry rolling hills — to life will be full of geological hurdles and political obstacles.

Energy officials here in Neuquen province who manage the oil and gas industry are scrambling to assure oil companies from Brazil to Canada that their investments will pay off, just weeks after Argentine President Cristina Fernandez de Kirchner shook oil markets by abruptly expropriating a Spanish-owned oil company, YPF.

The hostile takeover of a company that had been drilling in a remote corner called Loma La Lata only added to the challenges and uncertainties faced by companies here, which include price controls on gas and oil and burdensome financial regulations.

In a modest office building in this small city that houses the offices of Neuquen’s energy ministry and the local provincial oil company, executives talk about the importance of finding a middle ground between state control of the energy sector and creating a climate in which deep-pocketed private partners provide the gargantuan investments needed to develop Dead Cow.

“Everyone is convinced that the only way to advance is with foreign investments,” said Guillermo Coco, the energy minister of Neuquen province. “What companies ask is, what will be the conditions? What price will I receive for gas and oil? Will I be able to buy currency? Will I be able to take earnings out of the country once I am making money?”

Stringent regulations

American and foreign companies such as Petrobras, Chevron, Total and Apache have been discreet about their position on Argentina’s management of the energy sector. But state regulations, particularly governing what companies can charge for the oil and gas they produce, has been a central concern.

ExxonMobil, which has interests in several potentially lucrative junctures in this province, said it is prepared to make the necessary investments to develop its concessions. But the company noted in a statement that “our investment must be supported with fiscal terms and product pricing that provides a return commensurate with the risk we are undertaking.”

Argentina, which is heavily dependent on natural gas to power everything from factories to homes to cars, has some of the world’s most stringent pricing restrictions.

That has meant cheap natural gas prices for consumers. But it led companies, among them YPF, to hold off on exploring new fields. As a result, production has plunged nationwide over the past decade, forcing Argentina to import $10 billion worth of fuel last year, which was secured at market prices and then sold cheap inside the country.

“We are increasingly importing from more places, like Bolivia,” said Daniel Montamat, an energy analyst and former president of YPF. “That is where our energy problem comes from, those imports.”

Ruben Etcheverry, chief executive of Gas and Oil of Neuquen, a provincial energy producer, said he believes that the government’s pricing structure needs to be reviewed. He noted that some companies have been able to negotiate supply deals at prices above those set by the government, a policy that could be revised and expanded to lure more companies.

Etcheverry also said that Argentina, with a history of shifting policies that unnerve investors, needs to ensure that clear rules are established and not changed.

“Companies are accustomed to risk – business, geological, commercial risk,” Etcheverry said. “But what investors and foreign companies worry about is the uncertainty, not the risk. Risk is accepted and is part of doing business – not uncertainty and unforeseen changes.”

Though the provincial government is an ally of President Fernandez, the position taken by officials here is at odds with the nationalistic approach favored by some of the energy officials in the central government in Buenos Aires.

Planning Minister Julio De Vido has suggested the government would not end subsidies that keep natural gas prices low. And Axel Kiciloff, vice minister of economy and an architect of the YPF takeover, has signaled that the government would pay far less for the expropriation of YPF than its former owner, Madrid-based Repsol, is demanding.

Carlos Pagni, a columnist for the Buenos Aires newspaper La Nacion who is critical of Fernandez’s policies, said that the YPF takeover has taken away the leverage the Neuquen provincial government had on running the energy sector.

“Because of their culture there, they understand better than anyone the energy issue,” said Pagni, noting that Neuquen has long been an energy stronghold. “They talk the language they talk in the rest of the world. They are very pragmatic centrists.”

Now, instead of the province directly negotiating with a privately run YPF, it will be the central government controlling nearly all facets of energy policy. And Fernandez’s government, Pagni said, can use its hold over YPF and the control it exercises over the country’s purse-strings to ensure loyalty from provincial officials.

“It’s the worst partner you can have,” Pagni said of the state.

Trying to compete

Still, in the aftermath of the April 16 expropriation in which YPF executives were forced from their executive offices in Buenos Aires, Fernandez’s government has shown signs of softening its populist approach.

Earlier this month, the government appointed Miguel Galuccio, a well-respected engineer who had been a high executive at the oil services giant Schlumberger, to head YPF. The company’s shares spiked on the New York Stock Exchange as word filtered out that Galuccio would be named.

“The idea is essentially to create a YPF that is absolutely modern, competitive, with professional people,” the president said at the ceremony where Galuccio was presented to the Argentine public.

Just the logistic hurdles to developing Dead Cow will be a huge challenge for Galuccio, as well as for the oil majors that Argentina hopes will work alongside YPF. Shale oil and gas requires hydraulic fracturing – blasting water, chemical and sand to make “tight” rock formations porous for oil and gas to flow – and that means technical know-how and substantial investments.

Montamat, the former YPF president, estimates that for Argentina to take advantage of the riches under the ground here will require 2,000 wells a year for the foreseeable future, which will cost tens of billions of dollars.

Still, for Coco, the provincial energy minister here, the lure of what’s underground will trump the regulatory obstacles.

“The oil market is special,” he said. “And we have always said, if the world invests in countries at war, as in the Middle East, or Asia or other places, then why wouldn’t they do so in Argentina?”

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