A little more than a year ago, the Argentine government expropriated Spanish firm Repsol’s shares in oil company YPF, making Argentina the majority stakeholder. The move, together with other unorthodox economic policies, unnerved foreign investors.
Last night, however, American oil giant Chevron ended 10 months of negotiations – and a foreign investment chill – by signing a $1.2 billion deal with YPF, now state-run, to develop Argentina’s vast shale reserves. The pact came just a day after another government decree granting significant benefits to companies who invest in oil and gas in Argentina. But analysts question whether the decree is enough to make others follow Chevron and end distrust of President Cristina Fernández de Kirchner’s left-wing administration.
“The Chevron deal is a step in the right direction, but what Argentina really needs is to overhaul the way it handles itself internationally,” says Alieto Guadagni, a former energy secretary here. “That would bring a flood of investment.”
'Investment is essential'
The Vaca Muerta shale formation in the southwest of Argentina holds most of the country’s 770 trillion cubic feet of recoverable shale gas. Only the US and China have larger volumes, according to the US Department of Energy.
YPF, meanwhile, has estimated there are 23 billion barrels of oil and gas in the Vaca Muerta. Its joint venture with Chevron, which will initially see the companies dig 100 wells across 5,000 acres of the formation, is the first that has been struck since the expropriation in April last year.
But given the risk of investing in Argentina, the government had to make important concessions: Monday’s decree allows energy firms that put up more than $1 billion to export 20 percent of their production tax-free after five years (all oil exports are currently taxed). Furthermore, the government will not oblige them to repatriate those earnings.
“The decree represents a strong contradiction with the government’s nationalist discourse,” says Horacio Lazarte, an economist that specializes in oil and gas at Abeceb, a Buenos Aires consultancy. “But YPF’s needs are more important than rhetoric. The investment is essential.”
The renationalization of YPF was colored by the nationalist rhetoric of President Kirchner and Axel Kicillof, her deputy economy minister. They accused Repsol – which has still not been paid the $10.5 billion compensation it seeks – of failing to invest in production, and said expropriating its shares would result in Argentina’s “energy sovereignty.”
YPF says it requires $37 billion over the next four years to achieve energy independence. This year, it will spend an estimated $13 billion on energy imports.
Given the Argentina's volatile economic policies under Kirchner, raising the money to reach Argentina's energy goals has proved difficult.
It is effectively shut out of international capital markets because of high borrowing costs, a result of its $100 billion default a decade ago, and its battle with holdout creditors is ongoing.
Meanwhile, Brazilian mining company Vale recently abandoned a $6 billion project in Argentina because of the difficult economic climate. Inflation is estimated at 24 percent, though the government says the rate is much lower; currency controls have resulted in a black market for the dollar; and import restrictions have brought a slew of complaints from the US, Japan, and the European Union.
Mr. Lazarte says the rushed decree is a sign of the government's long-term instability. And international analysts believe it will do little to alter investors’ negative view of the Kirchner administration. Taking into account government restrictions on the remittance of profits abroad, which forces foreign companies to reinvest here, overseas investment dropped by 10 percent in Argentina between 2011 and 2012, according to the United Nations Economic Commission for Latin America and the Caribbean.
“Until Argentina normalizes relations with trading partners and global capital markets […] there’ll be no meaningful change in foreign direct investment,” says Josh Rosner, managing director of Graham Fisher & Co in New York and an analyst who follows Argentina’s debt restructuring.
“[The decree] looks pragmatic,” says Claudio Loser of the Inter-American Dialogue, a policy group in Washington. “But companies won’t be rushing into Argentina just yet.”