Argentina hopes that a new deal with oil major Repsol will help to increase confidence in President Christina Fernandez de Kirchner's government and repair damaged relationships with energy investors, as it looks to encourage a shale boom and reverse its declining domestic output.
In April 2012 Christina Fernandez orchestrated the seizure of control of the Argentinian oil company YPF from the Spanish oil company Repsol, and now, after nineteen months of legal battles that have damaged Argentina's reputation amongst oil companies and investors across the world, it seems that Fernandez is willing to pay Repsol the money it is owed for the nationalised shares in YPF.
It is hoped that the deal will show Argentina's willingness to be flexible, helping to reassure foreign investors who have mostly avoided the country since the 2002 sovereign default, and creating a platform for a huge increase in investment to finance a boom in unconventional energy exploration and production.
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Jorge Capitanich, the country's new cabinet chief, explained that Argentina has an ambitious energy program that it wishes to implement over the coming years in order to build "a path that will allow for an increase in hydrocarbon exploration and exploitation."
Since 2006 Argentina's levels of oil and natural gas production have fallen, turning Latin America's 3rd largest economy (after Brazil and Mexico) into a net energy importer. However with the planned investment that the government hopes to attract, Argentina has the reserves, waiting to be extracted from the Vaca Muerta shale formation, to turn it into a major oil and gas exporter.
Ignacio Labaqui, an analyst with Medley Global Advisors, said that "the understanding with Repsol shows that the government, when in need, can show a remarkable degree of pragmatism. An understanding with Repsol should facilitate YPF negotiations with other oil companies interested in Vaca Muerta.
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Argentina not only needs investment to increase oil and gas production and reverse the loss of its energy self-sufficiency, but also needs foreign currency inflows to strengthen central bank reserves."
The Spanish government has suggested that Repsol receive $5 billion in compensation for its loss. Repsol's board will meet to discuss the offer on Wednesday.
By. James Burgess of Oilprice.com
James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also… More