Good news at a discovery of a big natural gas field in Argentina turns into government trouble for YPF–and now Petrobras has been sucked into the mess
For a moment it looked like the discovery of a shale formation with huge quantities of natural gas in Argentina was good news for YPF (YPF). The oil company, 57% owned by Spain’s Repsol (REPYY), had discovered the Vaca Muerta reserve with an estimated 23 billion barrels of oil equivalent. That was enough to double Argentina’s oil and natural gas production over the next decade.
But then the excitement at the find turned into a battle over who would control the oil and under what terms. Argentine provinces have withdrawn 12 of the 104 concessions that YPF has in Argentina as a whole since the dispute broke out. Chubut province has revoked concessions responsible for more than 10% of YPF’s production. And Santa Cruz province is considering revoking three more permits that are the source of 11% of the company’s production in Argentina.
Investors aren’t sure what the government of President Cristina Fernandez wants. More investment? In revoking the permits under its control, Santa Cruz province cited a belief that YPF is unlikely to invest enough to halt a decline in production form the fields.
More production? Natural gas production in Argentina has fallen to 35.3 million cubic meters in 2010 from 45.4 million in 2001, according to the Argentina Oil and Gas Institute. That’s not surprising given that the government has capped export prices at $42 a barrel.
Increasingly, it looks like the government’s real goal may be to take control itself of more of Argentina’s oil and natural gas assets. That belief moved closer to conviction when the pressure on YPF expanded to include the Argentine assets of Brazil’s Petroleo Brasileiro or Petrobras (PBR). (Petrobras is a member of my Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ .) Neuquén province has revoked the Brazilian company’s concession at the Veta Escondida field. (YPF and Petrobras are both exploring for oil off Argentina’s South Atlantic coast.)
And that could cause problems at multiple levels. Argentina, which is still locked out of international financial markets after it defaulted on $95 billion in government debt in 2001, doesn’t have the money or the expertise to develop the YPF shale find on its own, according to Deutsche Bank. The bank estimates that the development of the initial phase of the Vaca Muerta field will cost around $20 billion and that the country doesn’t have the homegrown technology to tackle this geology. Rumors in Buenos Aires speculate that the government would use assets from Argentina’s pension industry to buy a stake in YPF at currently depressed prices. The company’s New York traded ADRs (American depositary receipts) have plunged 44.9% from their January 23 local high through the close on April 9. Argentina’s government nationalized its pension industry in 2008.
Argentine newspaper El Cronista has reported, citing unnamed sources, that the government will announce its plans for YPF (and by extension Petrobras in Argentina) on April 12 when President Fernandez is scheduled to meet with governors of the oil producing provinces.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Petrobras as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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