Between An Argentine Shale Rock And Hard Place

You must admit there is a certain irony in reports out of Argentina by none other than the newly named CEO of YPF, (NYSE:YPF) Miguel Galuccio, that his company has found a significant shale deposit waiting to be developed and if he can do so, it will make Argentina a significant exporter of oil and natural gas.

What’s the irony?

YPF is the company that Argentina recently seized from Spain’s Grupo Repsol and nationalized. The action created a huge international dispute and Repsol’s demand for payment of $10.5 billion for confiscating its assets three months ago.

SOURCE: USGS

Argentina shale gas reserves exceed its 13.4 trillion cubic feet (tcf) conventional proven gas reserves. The largest shale play is the Neuquen basin with more than 250 TCF. YPF discovered 4.5 TCF of shale gas in the Loma de la Lata Field of Neuquen in December 2010.

Gas transportation and field services infrastructure are already in place making it attractive for further development. There are also additional Argentine shale deposit reserves in Chubut and Santa Cruz provinces near the Golfo San Jorge in the Atlantic southeast part of the country. The U.S. Energy Information Administration (EIA) says Argentina’s technically recoverable shale gas reserves are the third largest in the world after the United States and China at 774 trillion cubic feet (Tcf) with more than half of that in the Neuquén Basin on the western side of the country.

Mr. Galuccio used his press conference to dangle the prospect of opportunities for 50-50 partnerships with YPF for investors in the projects. He said foreign oil companies partnering with YPF could reasonably expect a 15 percent to 20 percent return on their investments.

The YPF CEO said he wanted to invest $37.2 billion through the end of 2017 to begin development of the shale resources and wanted an initial tranche of $4.6 billion of that total amount to come from outside investors. Three fourths of the capital would be used for production and the remaining capital would be used to improving refinery capacity and 4 percent for new exploration.

The numbers reveal the Argentine dilemma—finding shale resources is a long way from developing them and bringing them to market. And that is the rock and hard place Argentina faces. To exploit its shale potential Argentina needs the active participation and assistance from large international oil field services companies and deep pocket investors.

After Argentina’s economic crisis it put price controls on energy which scared away investors and developers. It new plan has begun to turn that around and make it more likely that E&P can be profitable again. But its habit of regulatory overreach and confiscating investors’ property are still significant problems.

Argentina’s shale resource potential is large enough to attract the biggest companies. But in the rapidly changing world of global shale development there are many places where investors can participate in the growth of shales without the risk Argentina presents.

Today, the United States is actually one of the most attractive markets in the world for shale because more than 96% of the development is taking place on private lands beyond the reach of Federal regulators. Investors have opportunities not only to buy positions in shale E&P developments but also gain access to the technology, skills and expertise needed to develop other shale resources around the world.

China is expected to be one of the largest investors in US shale development eager to scale its capabilities and then use them to develop China’s own enormous shale resource potential. This should be sobering news to the Argentine Government.

There are plenty of big international oil and gas companies working in Argentina including ExxonMobil, Chevron, Apache Total and Halliburton but the trade press suggests that Argentina will first have to settle its dispute with Grupo Repsol and pays up for its confiscatory ways.

The fierce global competition for energy is attracting capital to the best opportunities. Argentina will not be able to dictate terms for its shale development in isolation so the right balance of price and terms will be required to make it attractive enough from among the options to warrant the risk. Beyond that the risk premium Argentina can expect to pay to play in the shale game will almost certainly eat into its margins or delay its development.