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Chevron Corporation (CVX), YPF SA (ADR) (YPF): Argentina Will Not Become Venezuela

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Chevron Corporation (NYSE:CVX) is in advanced negotiations with Argentinean state owned YPF SA (ADR) (NYSE:YPF) to develop Vaca Muerta basin, considered by Chevron Corporation (NYSE:CVX) the second largest reservoir of unconventional oil in the world. This looks like a potentially huge opportunity, but the risks are also enormous. It looks like Chevron may be making a bet on the Argentinean political and institutional outlook with this decision.

Chevron Corporation (NYSE:CVX)

According to the US Energy Information Administration, Argentina owns the third largest shale gas reservoirs in the world behind China and the U.S., and Chevron estimates it may be even bigger when it comes to shale oil. Ali Moshiri, Chevron’s head of Latin America, Middle East and Africa, told reporters in Buenos Aires that the company calculates that after the U.S., Vaca Muerta holds the largest shale oil in terms of reserves.

The specific terms of the agreement are not yet disclosed, but Chevron Corporation (NYSE:CVX), is expected to start with $1.5 billion in the first phase, and the total investment could reach as much as $15 billion over the next years. According to press reports, Chevron will be drilling nearly 100 wells in 12 months; in addition to that, 25 exploratory wells in both the Vaca Muerta and the Cacheuta formations will be drilled.

YPF SA (ADR) (NYSE:YPF) is working on a similar deal with Bridas, an oil company owned by Argentine billionaires Carlos and Alejandro Bulgheroni and China’s CNOOC Limited (ADR) (NYSE:CEO), to invest another $1.5 billion to develop around 130 wells of nonconventional oil.

It´s easy to see why global corporations may be interested in investing in Argentina´s shale reservoirs, we are talking about huge assets in strategic area of the energy business. Besides, since competition is limited due to economic and legal uncertainty, those willing to run the risks may be able to obtain some remarkably favorable conditions.

Oil companies are used to investing in the most uncertain scenarios, dictatorships, military conflicts and all kind of erratic economic policies are usually very tangible risks in areas where global oil companies operate. If the risks are worth taking, these corporations are willing to assume them, and in the case of YPF SA (ADR) (NYSE:YPF) and Vaca Muerta, the potential return is certainly compelling.

In Argentina, though, there is one risk which may be particularly important. The government has implemented a strict capital control system, which means that no corporation has any guarantee of being able to bring its money back home once it´s invested in the country. When it comes to taking your money out of Argentina, it ultimately depends on a discretionary decision by government officials.

Speaking about this potential problem with Bloomberg, Moshiri sounds quite confident:

“Chevron will continue reinvesting all the money it makes in Argentina,” Moshiri said, declining to elaborate how the company will avoid having its funds seized. “At the end of the day the right decision will be made by the people in Argentina, the government and the judiciary system.”

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