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Argentina Struggles To Save Its Oil Boom

Argentina’s national state oil company YPF just cannot function in a stable and foreseeable manner, an apprehension that was rekindled by Guillermo Nielsen stepping down from his post of company president merely a year after taking its helm. Seemingly, the decision was taken amicably as Nielsen claimed his decision originated in a new challenge offered to him, namely that of becoming Argentina’s ambassador to Saudi Arabia. The circumstances of Nielsen’s departure, however, point to more structural forces compelling the erstwhile Finance secretary to quit YPF – forces that could potentially jeopardize the accomplishments of 2020; a year that was exorbitantly difficult for both the state and oil producers, yet managed to kickstart a couple of genuinely positive policy shifts.

Bloomberg has reported that the main reason behind Nielsen’s ouster is his marginalization from high-level decision making within the company, alluding to Vice President Kirchner expanding her influence again. In many ways, Argentina has long needed to return to normalcy and Alberto Fernández winning the December 2019 presidential elections seemed to be auguring a new era of technocrats where ideological penchants and political proclivities mattered less than competence. This was exemplified by Argentina’s troubled policy making in COVID times when the Fernandez administration managed to breach the ideological gap between the Justicialistas and the Macristas, involving both the Buenos Aires mayor Horacio Larreta and Buenos Aires governor Axel Kicillof into a drastic nationwide effort to halt the spread of coronavirus.

The nomination of Pablo González, a former deputy governer of Santa Cruz and the son of Nestor Kirchner’s closest confidantes, presents a return to the traditional nature Argentinian politics, biased and clannish. The move to swap a widely recognized economist for a politician seems counterintuitive under current circumstances for a variety of reasons. First and foremost, YPF is right in the midst of a debt restructuring that would have seen $6.2 billion dedicated for a bonds for debt swap. The Nielsen ouster has predictably sent YPF down the drain, leaving the question of what exactly would happen to the debt restructuring mechanism. Secondly, the switch seems rather odd considering odd Nielsen was Argentina’s Finance Secretary throughout the 2005 debt restructuring negotiations.  Related: The 5 Best Utility Stocks In 2021

Graph 1. YPF Stock in 2015-2021 (in Argentinian pesos).

Source: Thomson Reuters.

Seeing its stock plummet – YPF shares dropped from 720 ARS on January 07 to 520 ARS on January 21 – the Argentinian national oil company was forced to alter its initial debt restructuring proposal. Initially it wanted to pay no interest on the bonds in their first 2 years (2021/2022), now YPF is already offering limited interest payments (4% for bonds maturing in 2026, 2.5% for 2029 maturity and 1.5% for 2033 maturity). Initially YPF was offering 8.5% interest for 2026 and 2029 maturity bonds, now it has raised the coupon rate to 9%. Interestingly, at the time of this writing (January 28), i.e. a whole week after Nielsen’s announcement that he would step down Gonzalez was still not named as his successor, despite the entire Argentinian political spectrum treating it as an immutable fact.

There is not much available in terms of Gonzalez’s future policy at the helm of Argentina’s national oil company, the little that we have indicates that the new boss would favor a decentralization of the company, perhaps implying a boost to all the mature conventional basins that have been running low in the 2010s. This would dovetail with YPF’s long-mooted plan to introduce secondary and tertiary recovery techniques in its non-shale assets which happen to be located in the south of the country. The Argentine public might be entertained for a certain period of time with stories of YPF selling its headquarters in Buenos Aires (built by Repsol in 2005-2008, then elegantly renamed to Repsol-YPF Tower after the 2012 renationalization), the true story, however, revolves around Vaca Muerta. Related: The Surprising Rise And Fall Of A Shale Superstar

The inopportune timing of YPF sliding back into the left-leaning wing of the Justicialist Party might undercut most of President Fernandez’s efforts to render Argentina more attractive to foreign investors. Confronted with COVID shutdowns and a subsequent decline in both oil and gas production, the Fernandez administration has temporarily scrapped the 8% tax on oil exports (having already decreased from the Macri-era level of 12% in 2019), heralded in a new gas incentive scheme and introduced a currency repatriation regime, longtime a no-go zone for Argentinian energy policy, for companies willing to provide gas to the national electricity providers (to a total of 70 MCm per day, split between various regions).

Graph 2. Argentina’s Crude Exports in 2017-2021 (‘000 barrels per day).

Source: Thomson Reuters.

Last year has witnessed a precipitous drop in Argentinian crude exports, just as they were ramping up to 150-160kbpd in April/May 2020. The decline was closely correlated with the currency repatriation availabilities of Argentina’s legal system and domestic demand crude that usually hovers around 0.5mbpd – in essence, by cutting capital expenses and squeezing drilling strategies to their lowest possible extent. Now, however, when crude prices have bounced above the assumed breakeven level of Vaca Muerta production (around 45 USD per barrel) and the state guarantees the 3.7 per MMbtu gas pricing level, most of market conditions required for a quick rebound are in place. Nevertheless, something is missing still.

Meagre domestic demand for both oil and gas certainly does weigh on heavily on Argentina’s appeal, caused first by the May-to-November shutdown and now the ongoing one, too, yet a sense of long-term insecurity has also added to the concerns of potential investors. Price controls, not to speak of capital controls, remain in vigor despite all the mooted liberalization. Assuming the CEO swap is a fait accompli, Argentina now needs to ensure maximum continuity within the policy charted by the previous YPF top management – any hint of increased political interference would increase the cost of saving the NOC’s long-term upstream prospects. It would be more than regrettable if Argentina were to slip back into irrelevance just as it was ramping up its crude exports and started up its LNG export terminal in Bahia Blanca.

By Viktor Katona for Oilprice.com

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