YPF SA (ADR) (YPF), Chevron Corporation (CVX): Life at Last for the “Vaca Muerta” Shale Area

Argentina’s YPF SA (ADR) (NYSE:YPF) finally sealed a deal with Chevron Corporation (NYSE:CVX) regarding YPF SA (ADR) (NYSE:YPF)’s huge shale oil and gas reserves. It has not been easy to find a partner for the currently state-controlled Argentinean oil champion (the government controls 51% of YPF SA (ADR) (NYSE:YPF)’s shares), but the huge potential of the Vaca Muerta shale formation plus relevant concessions from the Argentinean government made the closing possible.

The deal

The final agreement, which the companies started on last December, will give Chevron Corporation (NYSE:CVX) 50% control of a joint company that will own 96,000 acres of the Vaca Muerta formation (3% of the total acreage) in exchange for a $1.24 billion investment. The US oil company would be the first international oil company to invest in the country since the government nationalized YPF SA (ADR) (NYSE:YPF) in 2012, taking its current 51% from the hands of Spanish oil group Repsol and from the Eskenazi family (Repsol still controls 12% of YPF’s shares.)

According to the deal, Chevron Corporation (NYSE:CVX) and YPF will share investments and proceeds equally after Chevron Corporation (NYSE:CVX) pays $740 million for the acreage, $240 million to compensate YPF SA (ADR) (NYSE:YPF) for the works already completed on those acres and the rest on further investments. The initial plan is to drill 100 wells on 5,000 acres of the Vaca Muerta formation and then to expand that figure up to 1,500 wells in order to reach a production of 50,000 barrels of oil and 30,000 barrel equivalents of gas per day.

The deal also allows Chevron Corporation (NYSE:CVX) to export 20% of the produced oil and gas tax free and also lets the company send home the export’s proceeds. This is a 180 degree change in Argentina’s current energy policy. This very same deal shall be available for any company offering to invest more than $1 billion over a five-year period.

Not an easy sale

Making an international oil group invest in Argentina was not an easy task, even when the country owns the third biggest shale gas reserves in the world and the fourth largest shale oil reserves (according to the US Energy Information Administration.) There are two main reasons for these difficulties. Argentina’s government expropriated 51% of YPF from Repsol and the Eskenazi family without compensation. As a result, the Spanish group is now demanding Argentina to pay $10.5 billion in cash or liquid assets through a court of international arbitration; Repsol has also threatened to sue anyone who would invest alongside YPF SA (ADR) (NYSE:YPF). Argentina also has strong currency restrictions and harsh government requirements to reinvest most profits into production.