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Chevron Regains Foothold in Argentina’s Oil Sector

What a difference a year makes. Fiercely nationalistic Argentina is again allowing foreign oil firms back into the country.

On 16 July Chevron and state energy firm Yacimientos Petroliferos Fiscales (YPF) signed an agreement to develop the Patagonian Vaca Muerta shale oil and gas deposit formations in Neuquén’s Loma La Lata and Loma Campana. Before the deal is finalized Neuquén’s provincial government must first analyze the joint venture. Neuquén’s Energy Minister William Coco told journalists that the agreement was signed in the YPF offices in Puerto Madero by YPF’s Miguel Galuccio, and Chevron President John Watson.

The agreement represents a stunning policy turnaround by Buenos Aires. The Vaca Muerta discovery was announced in December 2010 by Spanish firm Repsol’s Argentinean subsidiary Yacimientos Petroliferos Fiscales YPF Argentina. Two years later President Cristina Kirchner’s government nationalized it, leading to Repsol, which had majority ownership of YPF since 1999, about six years after YPF was privatized, filing a number of massive lawsuits. Foreign investment in the country’s oil and natural gas sector promptly dried up, and Cristina Kirchner’s government, unable to fund Vaca Muerta’s development, is now seeking substantial foreign investments.

Chevron’s stake - $1.24 billion. Following the announcement of the contract Argentina YPF’s shares rose 3.53 percent on the Buenos Aires Stock Exchange (BCBA) and 2.33 percent on the New York Stock Exchange. One unanswered question – how will Repsol view the deal?

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On 16 April 2012, in a spasm of populist nationalism Kirchner introduced legislation for the partial renationalization of YPF, under which the state would purchase a 51 percent share, with the national government controlling 51 percent of this package and ten provincial governments receiving the remaining 49 percent. Ten days later the Argentinean Senate approved the takeover with 63 votes in favor of the measure, three opposing it and four abstentions. Buenos Aires alleged that Repsol was underinvesting in Argentina’s hydrocarbon sector, which the government believed contributed to the decline in the country's total oil production. Prior to the expropriation, some provinces had rescinded exploration and production licenses from YPF claiming underinvestment as well.

The agreement is a pragmatic marriage of convenience for both parties. According to a June 2013 report by the U.S. Energy Information Administration, Argentina has 2.5 billion barrels of proven oil reserves and technically recoverable shale oil reserves of 27 billion barrels. While Argentina produces more natural gas than any other country in South America, its output has declined over 10 percent from peak levels in 2006 and it is now the continent's largest natural gas consumer. While earlier Argentina was a net exporter of natural gas to neighboring countries, it became a net importer in 2008. Buenos Aire’s conundrum is how to revive its energy exports, and the past 16 months have proven that the country and YPF lack the resources to develop their energy reserves.

Protests over the agreement started immediately.

Guillermo Pereyra, secretary general of the private oil and gas workers union of Río Negro, Neuquén and La Pampa, which has been pressuring the government for a 30 percent profit sharing scheme increase in their members’ salaries immediately denounced the agreement, describing it as "unconstitutional" and emphasized that the arrangement needed to be ratified by the Neuquén legislature, asking that the "secret clauses" of the agreement be made public before ending by noting that the hydrocarbon resources belong to the provinces rather than the state.

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Clearly put on the defensive, Neuquén governor Jorge Sapag defended the agreement by noting that the nationalized YPF "can do no more and needs partners to provide capital."

Argentina is undoubtedly taking a leaf out of neighboring Colombia’s playbook of the past decade, when the government overhauled its fiscal investment terms, which stimulated foreign capital to enter the country’s energy sector, helping nearly double production to its current level of approximately one million barrels of oil per day.

The consequences of the government's abrupt policy change may surface in October's mid-term elections, a vote that will determine whether Kirchner maintains control of Congress. Political blood is in the water, as her opponents are already accusing her of “flip-flopping” by ceding too much to Chevron. One constituency that she will undoubtedly lose is the members of the country’s fiercely nationalistic unions. Should be interesting - and don't forget those lawsuits.

By. John C.K. Daly of Oilprice.com

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