The Cow Is Alive: Argentina’s Oil Industry – YPF SA (ADR) (YPF)

Argentina’s energy sector, now dominated by the state through its 51% stake in YPF SA (ADR) (NYSE:YPF), has not only been shocked by the government’s seizure of YPF from Repsol of Spain almost a year ago, but also by huge shale oil/gas discoveries in the Patagonia Region. The Vaca Muerta (Dead Cow) formation in the province of Neuquen constitutes one of the biggest high quality shale formations in the world and is regarded as the cornerstone of an incoming energy revolution in the country. Besides, Vaca Muerta is not the only relevant high quality shale formation in Argentina. Further discoveries in Chubut (mainly the D-129 formation located in the Golfo San Jorge basin) are making Argentina an unavoidable region for any big player thinking of developing shale reservoirs in the coming decades.

Politics are the “only” problem.

Argentina’s erratic energy policies took the country from being a net energy exporter to becoming a net importer (with energy imports running above $11 billion a year). The government decided ten years ago that natural gas prices should be frozen at very low levels and oil exports should face huge taxes with the aim of lowering internal energy prices. Naturally, results were not great: Argentina’s proven oil and gas reserves fell sharply during the last decade. Besides, prices for gas imports (from Bolivia and Venezuela) are increasingly high (at $11 per million British thermal unit (Btu)) against what local producers were receiving until last year ($2.5 per million Btu). Nevertheless, after its seizure of YPF SA (ADR) (NYSE:YPF), the government is making changes in its energy policies to help attract new investments in the sector. YPF is increasing oil prices sold internally to sustainable levels taking the whole sector to a much more profitable position. On the natural gas side, the government is also making drastic changes by increasing the prices that local producers receive by almost 3x in order to encourage local production. The seizure of YPF still weighs heavily on the sector since Repsol is threatening to sue any investor who would seek a joint venture with YPF – the main owner of Argentina’s promising shale areas. As a result of this, YPF’s new CEO, Mr. Galuccio, a former Schlumberger top executive, is said to be seeking to close a deal with Repsol through sharing some valuable exploratory areas with the Spanish company (which is looking for a $10.5 billion compensation). I am sure many chapters are left before Argentina receives all the multi-billion dollar investments its huge natural resources need to be fully exploited. Nevertheless, some companies such as Chevron of the US and Sino-Argentine group Bridas are already showing interest into closing partnership deals with YPF SA (ADR) (NYSE:YPF).