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ARGENTINA: Massive Potential, Bad Politics

Bottom Line: Argentina has one of the largest gas and oil deposits in the world, but politics makes this a conundrum for foreign investors. Political mismanagement, especially on the part of President Cristina Fernandez de Kirchner, is damaging the economy and ruining the investment appeal of Argentina, leading investors to de-risk their assets by taking on concessions in neighboring countries.

Analysis: Despite the 2010 discovery of the Vaca Muerta formation in Neuquén, a deposit that reportedly holds up to 774 trillion cubic meters of shale gas and 23 billion barrels of oil equivalent, Argentine production is slowing, forcing a spike in imports to keep up with demand.

Liquid natural gas (LNG) imports almost doubled from March 2012 to March 2013, rising from 6.6 cubic meters per day (m3pd) to 12 m3pd. Overall, natural gas imports rose from 16.3 m3pd to 28.4 m3pd in that period. Low government mandated prices contributed to the high consumer demand. Coupled with political pressure for domestic producers to invest heavily, and sell at the low local prices, Argentina is struggling to attract investors despite the massive Vaca Muerta fields.

Argentina Natural Gas Plays

President Cristina Fernandez de Kirchner was forced to raise the price for gas from less than $3 per MMBtu to $7.5 in November 2012; most of the unconventional shale gas is not profitable until you reach a price point of $6 per MMBtu. Gas prices recently crept up to $1.37 per liter for gasoline, and on 10 February 2013, the government froze gas prices at the 9 April level, partly as an attempt to slow overall inflation (inflation is almost certain to surpass 20% in 2013). According to Resolution 35/2013 retailers cannot raise prices for at least six months (at which point the October legislative elections will conveniently have passed). President of Shell Argentina Juan José Aranguren criticized the move, warning that it would scare off investors. YPF shares dropped in the wake of the announcement from $14 a share to $12.75 on 29 April.

Yet investors remain, fixated on the tremendous potential of Vaca Muerta. Investors in Argentina’s Patagonia must walk a fine line: no one wants to wind up like Spain’s Repsol, the previous majority owner of YPF, which discovered the gas and oil bonanza in Neuquén. In April 2012, Fernandez de Kirchner nationalized the company, citing a lack of investment. ExxonMobil, Total and other investors hope to ride out the current administration and hope for a more business-friendly candidate in the next go-round.

Recommendation: YPF CEO Miguel Galuccio needs to find investors--preferably with US dollars and expertise in shale gas extraction--to bring Vaca Muerta on-line. YPF needs at least $5 billion a year for the next five to seven years to develop production there. It is doubtful that YPF will be able to execute its plans in that timeframe, but the gas and oil beneath the Patagonian soil will still be there, long after the current crop of politicians are gone. (The next president will take office in December 2015.) For investors confident they can avoid government scrutiny today, there is potential for a lucrative pay-day in the long term. But de-risk with additional assets in Paraguay, for instance, an up-and-coming scene.

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