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Heads We Win, Tails We Win

By Marin Katusa, Chief Energy Investment Strategist

Hugo Chàvez is undoubtedly one of the most polarizing politicians in the world today. The man who has led Venezuela for 14 years is vehemently anti-American, a proud voice for Venezuela’s poor, a patriot and a poet, and a firm believer that national resources belong to the nation and no one or nothing else.

That final Chàvez mainstay – that resources are best and most appropriately managed by the people for the people – has positioned Venezuela at the head of a group of Central and South American nations that are trying resource nationalization on for size as they struggle to make the most out of their oil and gas bounties. Venezuela is a global oil heavyweight – its 211-billion-barrel reserve is one of the top three national oil reserves worldwide – so Chàvez’s moves to nationalize his country’s massive oil machine gave neighboring countries the confidence to follow suit.

Sometimes national control over oil and gas resources can work well. Saudi Arabia, Brazil, and Kuwait are all prime examples of well-functioning, state-controlled oil sectors. However, resource nationalization is a tricky business, and more often than not the process goes awry.

Venezuela is no exception. Chàvez’s efforts to kick foreign firms out of Venezuela and use oil and gas revenues to fund social programs worked pretty well initially, but despite rising oil prices that early success has slipped away. In recent years Chàvez has demanded too much from the oil and gas sector, expecting ever-increasing revenues despite his reluctance to fund infrastructure and exploration programs. The result has been declining production, an exodus of technical expertise, and a pariah reputation in the international oil and gas industry.

Now, with a presidential election looming and Chàvez struggling with a cancer that it’s rumored will take his life within months, the path forward for the country that has been a firebrand for South American resource nationalization is far from clear.

Venezuela’s Love-Hate Relationship with Resource Nationalization

Venezuela nationalized its oil industry in 1976, at a time when many countries in the southern hemisphere were asserting sovereignty over their natural resources. The transformation of Petróleos de Venezuela SA (PDVSA) into a state-owned company was hailed as a national victory. However, it did not take long for trouble to begin.

In the 1990s global oil prices plunged and Venezuela, having based its budget on a certain level of oil income, found itself in deep economic trouble. PDVSA had 900 to 1,300 billion barrels of oil on its reserve books, but the company didn’t have the money or the technological know-how to tap into these reserves, most of which sat trapped in the geologically challenging Orinoco Belt. Seeing few other options, the country opened its oil sector to foreign investors: PDVSA started seeking out international partners willing to provide expertise and funding in exchange for a share of the profits. Big Oil arrived and started spending billions of dollars to unlock the heavy oil of the Orinoco.

Then Mr. Chàvez won the 1998 presidential election on a populist ticket that promised to use the country’s vast oil wealth to benefit the poor. Venezuela’s experiment with foreign involvement in its oil sector slowly came to a halt. Despite initially adopting “orthodox” economic policies, Chàvez soon started making good on his promise to his people – he gradually closed the door on international investment, raised rents, and changed fiscal agreements to retain ever more oil revenue for Venezuela. Imagine this: at one point the government take on oil contracts was more than 100% – foreign producers would have had to pay Chàvez for the privilege of producing oil in his country.

Chàvez brought a new form of politics to Venezuela. He identified with his supporters because he was one of them, having grown up poor, and he used language they understood, caring not that the elites saw such language as one of many signs that he was a buffoon with limited education and experience. His style stuck and the people grew to love him.

As he gained in popularity and confidence, Chàvez grew bolder in his moves to control Venezuelan oil in its entirety. In 2002 a group of PDVSA executives kick-started a general strike aimed at ousting Chàvez that lasted for a month and cut oil production to about 30% of normal levels; in response Chàvez fired nearly half of the company’s employees – 18,000 people in all – erasing large swaths of technical know-how in one fell swoop but sending a clear message that he would not tolerate dissent against his control over Venezuela’s oil.

By 2007 Chàvez had gained enough confidence to essentially complete his oil renationalization campaign – he expropriated oil assets in the Orinoco by issuing a decree that PDVSA hold at least 60% ownership in all international partnerships. What little was left of Big Oil pretty much packed up and left Venezuela. National oil production immediately fell by 25%.

You could say that was the beginning of the end, or the end of what had been a great beginning. That great beginning was undoubtedly aided by rising global oil prices: when Chàvez came to power, oil prices were sitting near $12 per barrel. By 2006 prices were averaging almost $60 a barrel, Venezuela’s coffers were overflowing, and the Venezuelan president felt unstoppable.

Those rising prices created such a sense of success around Chàvez’s experiment with renationalizing Venezuela’s oil and gas sector that Chàvez was able to convince his compatriot leaders in South America to follow in his footsteps. And it worked – Bolivia and Ecuador renationalized their oil sectors, and the concept of resource nationalization took hold in Argentina. As his geopolitical influence grew, Chàvez also devoted attention to the oil-needy nations in his neighborhood, implementing an oil-transfer program to energy-needy Central American and Caribbean countries. With his oil sector seemingly able to provide for so many, resource nationalization took on new life across South America, and Chavez was the movement’s proudest spokesman.

But here the word “seemingly” is key. As oil prices rose, PDVSA profits also rose, and it seemed that nationalization had been a boon to Venezuelan oil. But the increased profitability stemmed only from rising prices; the company itself was being strangled by a lack of investment – Chàvez spent all of PDVSA’s profits on his domestic fuel subsidies and social programs – and its dearth of technical expertise.

In short, a sector can only provide profits if it is also supplied with investment; and that is where Chàvez went wrong. Like so many other socialist leaders who nationalized resource sectors with great fanfare only to see the sectors wither away because of insufficient TLC, Chàvez failed to put money back into PDVSA.

Now the country’s once-proud oil and gas sector is in disarray. Infrastructure is old and insufficient, and production volumes are declining instead of climbing. In 2005 the company launched a new six-year plan calling for investment of US$239 billion to boost oil production to 5.8 million bpd by 2012. Instead, output has fallen from 2.9 million barrels per day (bpd) to 2.5 million bpd. Things are even worse when you look at Chàvez’s tenure as a whole: from 1998 to today, production has fallen from 3.5 million bpd to 2.5 million bpd, a decline of almost 30%:

Not only has production declined, but PDVSA’s financials have also deteriorated dramatically, its debt increasing from US$2.7 billion in 2005 to some US$33 billion now. Yet PDVSA continues to borrow money at an incredible rate, in large part to fund those domestic oil subsidies that are so very popular among Chàvez supporters. These subsidies cost the company US$15 billion a year.

The view forward is unclear. PDVSA lacks the technical expertise to take advantage of the heavy oil in the Orinoco. With foreign investment – and therefore involvement – in the oil sector banned and PDVSA drowning in debt, the prospects for turning Venezuela’s fading oil sector around are pretty dim.

Unless, of course, the sector is opened up to outside investment… which could well happen if Chàvez ceases to be part of the picture.

The Cancer

Over the last 12 months Chàvez has made regular trips to Havana for cancer treatments. The only official information about these treatments is that two malignant tumours were removed from his pelvic region. The secrecy surrounding Chàvez’s cancer and the fact that Chàvez, who rarely goes a few days without speaking directly to his people, enters radio silence during his trips to Cuba have fueled rumors of his declining health. Several times already these have ballooned into claims that the Venezuelan president had died.

The latest twist in the Chàvez cancer drama came from venerated journalist Dan Rather, the former CBS anchor who now hosts and directs Dan Rather Reports, a weekly news television show on HDNet. In a report he labeled as “exclusive,” Rather revealed on May 30 that he had been told that Chàvez is suffering from metastatic rhabdomyosarcoma, a rare and aggressive cancer that has “entered the end stage.” Rather said the information came from a highly respected source who is close to Chàvez and in a position to know his medical condition and history. This source says the prognosis is dire and that Chàvez is not expected to live “more than a couple of months at most.”

This is not the first time rumors of Chàvez’s pending death have surfaced. However, with his treatment having dragged on for a year already, with his uncharacteristic disappearances to Cuba growing longer and more frequent, and with Rather’s reputation for accuracy lending credence to this new information, it is time to ponder Venezuela – and South America – without Hugo Chàvez.

Chàvez would be incredibly difficult to replace. His rags-to-riches story line, bold governing style, and idiosyncratic mannerisms have earned adoration from the Venezuelan population, especially the poor and working class masses who constitute his prime electoral base. He also enjoys broad support from Venezuela’s military members.

This is a president who announces executive orders between readings of poetry, regularly draws families around their televisions to listen to his lengthy and often fiery speeches, and sings Venezuelan folk songs on a weekly show called Hello President. There are few people in the world who could match his charisma and earn such allegiance from a national population. That is why, even though others from Chàvez’s inner circle bear similar political views, most observers think any Chàvez successor would have a very difficult time maintaining the Chavista movement.

So when Chàvez dies, what might become of Venezuela? In the immediate aftermath, Vice President Elías Jaua would take power, according to the Constitution. In fact, Chàvez recently formed a nine-member State Council headed by Jaua to assist him with executive duties, a move many interpreted as a preparation for his impending demise.

In the longer term, Venezuelan political observers see five potential successors within Chàvez’s Socialist Party. All hold similar views, but none enjoy anything close to Chàvez’s recognition and support. The Party would have to hope that Chàvez’s reputation can carry one of these candidates to the presidency, but such a succession is far from assured.

If Chàvez dies before the October presidential election, opposition candidate Henrique Capriles would suddenly see his odds of winning jump dramatically. Polls show Capriles currently lagging behind Chàvez by roughly 5%, but the same polls found that Capriles would win the race by double-digit margins if he were to face a Chàvez successor instead of facing Hugo himself… unless, of course, the Socialists rig the election. Given that Chàvez has proven that a high regard for democracy is not a required characteristic for someone holding the Venezuelan presidency, this is not unlikely.

Capriles is a veteran politician, having previously served as governor of the state of Miranda despite being just 39 years old. He is a center-left politician who has cleverly focused on issues close to the day-to-day lives of Venezuelans: crime, corruption, declining services, inflation, and jobs. Capriles’ petroleum policies are less clear, but his rare comments on the matter indicate he would keep PDVSA as a national entity while allowing the company to engage in investment partnerships with foreign firms, much like the Brazilian national oil firm Petrobras.

If Chàvez is healthy enough to run, he will almost certainly win the election in October. If he is not, we see two possible paths. The first is that Capriles finds himself president of Venezuela, and South America loses its resource nationalization ringleader. However, a desire to change how Venezuela’s oil sector operates is very different from the actual ability to do so. The biggest obstacle to change: those domestic oil subsidies. If Capriles wants to revitalize PDVSA – indeed, if he simply wants to give PDVSA a chance at economic survival – he would have to significantly reduce the domestic oil subsidies, and likely also reduce social spending to free up some oil revenues for reinvestment into the country’s oil fields. And that would cause riots. We have seen it before, most recently in Nigeria: populations that are accustomed to having access to cheap oil are highly unwilling to let go of that benefit and will riot, often violently and for extended periods, at the mere suggestion that gas prices need to increase.

Oil-related riots in one of the world’s top-ten oil-producing nations would undoubtedly push global oil prices higher.

The other potential path for a post-Chàvez Venezuela is that his successor within the Socialist Party wins the presidency, legitimately or with the aid of electoral fraud. This Chàvez clone would then be stuck trying to fill Hugo’s shoes, a near-impossible task in which he would only have a chance at success by promising even more in the way of social spending. These expensive programs would put even greater strain on Venezuela’s budget, which is funded in large part by revenues from PDVSA. There would continue to be no money available to finance PDVSA’s spending needs, and production would continue to decline.

Guess what? This scenario – of continued production decline in a major world supplier – would also push global oil prices higher. The bottom line is that Chàvez has created a lose-lose scenario for Venezuelan oil. The country has become reliant on a one-way flow of money and cheap oil from PDVSA to society, but after a decade of neglect PDVSA is withering away and the flows are drying up. Even if Chàvez dies and a left-leaning leader like Capriles comes to power, Venezuela will have to convulse through many ugly years before a functional relationship can be reestablished between its oil riches and its social demands. In the meantime, Venezuelans and the world will have to do with only limited access to Venezuelan oil.

So, for those of us positioned to gain from a long-term rising oil price, it’s heads we win, tails we win.


Additional Links and Reads

Oil Prices to Ease Further This Year (Reuters)

The CEO of Royal Dutch Shell expects oil prices to continue easing through the rest of the year, as demand reacts to a slowing global economy and international tensions ease. Peter Voser’s statement came just as Brent crude dropped to a 16-month low – below US$96 per barrel – on the heels of further weak economic news from the US and China. In addition, concerns over the state of the European economy have taken the spotlight away from the lingering tensions between Iran and Western powers, which just three months ago helped to push Brent above US$128 a barrel.

Global Gas Demand to Grow by 2.7% Annually to 2017 (Platts)

Global demand for natural gas will rise by 2.7% annually for the next five years, a faster growth rate than previously expected. China and the United States are driving the additional demand by switching from coal to gas to generate electricity. In China alone consumption is expected to double to 273 billion cubic meters in 2017 from 130 billion cubic meters today, representing an average growth rate of 13% per year.

King Coal Still Reigns Despite Drop in Prices (Vancouver Sun)

Canadian coal companies are not slowing down exploration nor development programs despite a drop in prices in China, their main export market. Companies are generally viewing depressed prices as a transient problem and see demand from Asia remaining strong in the medium term, especially for British Columbia’s high-quality metallurgical coal.

South Sudan’s $4-Billion Question Answered: Oil Revenue Stolen by Corrupt Officials (The Globe and Mail)

It has been a mystery for years: how does South Sudan remain so poor and hungry when it receives billions of dollars in oil revenues every year? The answer is now clear: South Sudan’s president says corrupt officials have stolen $4 billion in oil revenues since 2005. He is asking those officials to return the stolen funds. Any returned funds would be especially useful at the moment, because a dispute with Sudan has shut in South Sudan’s oil production and thereby eliminated about 98% of the government’s official revenue.

Oil Rush in the Arctic Gambles with Nature and Diplomacy (The Guardian)

A small group of international scientists, politicians, and business leaders are gathered in the Ny-Alesund research station on the Norwegian island of Svalbard to discuss the path to a global low-carbon economy. Meanwhile, just outside the station an oil rush looms – one that threatens to spark territorial disputes and saber-rattling as a host of nations compete to claim rights to the Arctic seabed.

Germany Plans Massive Wind Power Grid (The Globe and Mail)

Germany’s utilities have tabled plans to build four high-voltage electricity lines to link wind turbines off the north coast with manufacturing centers in the south. The plan is a boost for Angela Merkel, who has been criticized for announcing an accelerated nuclear-power phase-out a year ago without producing an alternative plan. The lines are expected to cost around €20 billion

Source

Bolivian Soldiers Walked Into This Spanish Power Company, Hung A Flag And Seized Control

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AP

LA PAZ, Bolivia (AP) — President Evo Morales announced Tuesday that his government is completing the nationalization of Bolivia’s electricity sector by seizing control of its main power grid from a Spanish-owned company.

Morales took advantage of the symbolism of May Day, the international day of the worker, to order troops to occupy installations of the company, a subsidiary of Red Electrica Corporacion SA.

The president’s placing of another of what he deems basic services under state control comes as neighboring Argentina moves to take control of the country’s oil company, YPF, from the Spanish energy company Repsol SA, which had held a majority interest.

Spain‘s ambassador to Bolivia, Ramon Santos, told reporters the electric grid takeover “is sending a negative message that generates distrust.”

Red Electrica is the sole operator of the transmission grid in Spain, and the Spanish government holds a 20 percent stake in the company.

Morales did not say how much the company would be compensated, but the nationalization decree says the state would negotiate an indemnization fee.

Morales said only $81 million had been invested in Bolivia’s power grid since it was privatized in 1997.

The government, meanwhile, “invested $220 million in generation and others profited. For that reason, brothers and sisters, we have decided to nationalize electricity transmission,” he said.

Bolivian soldiers peacefully took over the company’s offices in the central city of Cochabamba, hanging Bolivia’s flag across its entry.

Red Electrica had no immediate comment. A security guard reached at its headquarters in Spain said a statement was expected later.

The company owned 74 percent of Bolivia’s electrical transmission network, or 1,720 miles (2,772 kilometers) of high voltage lines.

Two years ago, on May Day, Morales’ government took control of most of Bolivia’s electrical generation, nationalizing its main hydroelectric plants.

Morales, Bolivia’s first indigenous president, has moved to put energy, water and telecommunications under state control.

But analyst Joao de Castro Neves of the Eurasia Group said the president has been far more pragmatic and less radical than the leftist leaders of Venezuela or Argentina.

“He knows his limits,” Castro Neves said. “The Bolivian state doesn’t have the capacity to take over all these sectors (including mining) and maintain the high levels of investment they need.”

He noted that Morales still hasn’t come to terms for taking over several small mines whose nationalization he announced last May Day.

Bolivia’s government also has not been able to negotiate compensation for the power plants taken from GDF Suez of France and Rurelec PLC of Britain.

Morales continues to deal with multinational companies such as Brazil’s oil company, Petrobras, and Repsol, whose president, Antonio Brufau, he met with on Tuesday after announcing the power grid takeover.

The two men inaugurated a $528 million natural gas plant in eastern Bolivia that represents the single biggest foreign investment in the country under Morales. It is designed to triple the amount of gas sent to Argentina and the local market to 9 million cubic meters a day, said Carlos Villegas, president of Bolivia’s state energy company, YPFB.

In the case of electricity, the government is following a policy of returning to the public domain a sector privatized during the 1990s.

“Just to make it clear to national and international public opinion, we are nationalizing a company that previously was ours,” Morales said.

The 20 percent of the industry the government does not own is in the hands of small companies serving cities in the eastern lowlands that are not connected to the national grid.

In his first year in office in 2006, Morales announced he was “nationalizing” the oil and gas sector. He began extracting concessions from multinational energy companies, renegotiating contracts to give Bolivians greater control of and a bigger share of profits from the natural gas industry, the country’s biggest ahead of mining.

In 2008, he used May Day to announce the completion of the nationalization of Bolivia’s leading telecommunications company, Entel, from Telecom Italia SpA

The nationalizations have not saved Morales from widespread criticism by Bolivians upset over rising consumer prices, lower domestic oil production and discontent over government plans to build a highway through a lowlands nature preserve inhabited by Indians.

Morales’ approval rating is down to about 40 percent from 69 percent when he began his second term in January 2010.

Read more: BI

Incensed Spain threatens Argentina after YPF seizure

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MADRID – An incensed Spain threatened swift economic retaliation against Argentina on Tuesday after it announced plans to seize YPF, the South American nation’s biggest oil company, in a move which pushed down shares in Spanish energy giant Repsol, the controlling shareholder.

Madrid called in the Argentine ambassador in a rapidly escalating row over the nationalization order by Argentina’s populist and increasingly assertive president, Cristina Fernandez, a move which delighted many of her compatriots but alarmed some foreign governments and investors.

Promising action in the coming days, Spanish industry minister Jose Manuel Soria said: “With this attitude, this hostility from the Argentine authorities, there will be consequences that we’ll see over the next few days. They will be in the diplomatic field, the industrial field, and on energy.”

“Argentina has shot itself in the foot,” said Foreign Minister Jose Manual Garcia-Margallo.

Despite the rhetoric, Spain appeared to have little leverage over Buenos Aires – any action to be taken will be determined at a cabinet meeting on Friday – and Argentina has proven impervious to such pressure in the past.

Repsol said YPF was worth $18 billion as a whole and it would be seeking compensation on that basis, but the Spanish oil major’s shares fell by 7.5 percent in Madrid on Tuesday. The company said it could raise money in the bond market and sell some assets to help its cash flow.

Repsol described Argentina’s move as “clearly unlawful and seriously discriminatory” and said it would take legal action.

“This battle is not over,” Repsol Chairman Antonio Brufau said. “The expropriation is nothing more than a way of covering over the social and economic crisis facing Argentina right now.”

But Fernandez dismissed the risk of reprisals. “This president isn’t going to respond to any threats … because I represent the Argentine people. I’m the head of state, not a thug,” she said.

European Commission President Jose Manuel Barroso said he expected Argentina to uphold international agreements on business protection with Spain. “I am seriously disappointed about yesterday’s announcement,” he said in Brussels.

But action against Argentina appeared limited in scope. The EU Trade Commissioner would write to Argentina’s trade minister to “reiterate our serious concerns” while an EU-Argentine meeting this week would be postponed.

“It’s absolutely shameful considering everything that Spain has done for Argentina,” said a woman called Domi, who was filling her tank at a Repsol petrol station in Madrid.

“I hope the government takes measures and does something serious. They’ve pulled our leg long enough!”

Spanish media condemned the Argentine action, believed to be the biggest nationalization in the natural resources field since the seizure of Russia’s Yukos oil giant a decade ago.

La Razon newspaper carried a photograph of Fernandez on its front page in a pool of oil with the headline: “Kirchner’s Dirty War”, referring to her full name. The business newspaper La Gaceta de los Negocios called the takeover “an act of pillage”.

El Periodico spoke of “The New Evita”, pointing out that Fernandez had announced the nationalization in a room decorated with a large portrait of Eva Peron, the actress who was married to a president and revered by many Argentines as a populist mother of the nation and champion of the poor.

Repsol’s Brufau said he suspected nationalization of YPF was imminent when he tried to contact Fernandez last Friday and was told that the president “was angry” and did not want to speak.

YPF has been under pressure from Fernandez’s centre-left government to boost oil production, and its share price has plunged in recent months on speculation about a state takeover.

Spanish investment in Argentina may now be at risk after the move on YPF. In the “reconquista” or reconquest, of the 1990s, newly privatized Spanish businesses bought Latin American banks, telephone companies and utilities, much as their armor-clad ancestors had conquered the region 500 years earlier.

Through its latest nationalization move, Argentina runs the risk of frightening off foreign investors, key to contributing money to help develop one of the world’s largest reserves of shale oil and gas recently discovered in the Vaca Muerta area.

ACE UP ITS SLEEVE?

This led some analysts to question whether Argentina might have an ace up its sleeve in the form of a new partner such as China Petrochemical Corp (Sinopec Group).

Repsol has, however, identified Vaca Muerta as “the cause of the pillage”, or the reason Argentina went after its YPF share.

A Chinese website said Sinopec was in talks with Repsol to buy YPF for more than $15 billion, although other sources said the nationalization move would probably get in the way of such a deal. Sinopec dismissed the report as a rumor.

Fernandez said the government would ask Congress, which she controls, to approve a bill to expropriate a controlling 51 percent stake in YPF by seizing shares held exclusively by Repsol, saying energy was a “vital resource”.

“If this policy continues – draining fields dry, no exploration and practically no investment – the country will end up having no viable future, not because of a lack of resources but because of business policies,” she said.

YPF’s market value is $10.6 billion, although an Argentine tribunal will be responsible for valuing the company as part of the takeover. Central bank reserves or state pension funds could be used for compensation.

Fernandez, who still wears the black of mourning 18 months after the death of her husband and predecessor as president Nestor Kirchner, stunned investors in 2008 when she nationalized private pension funds. She has also renationalized the country’s flagship airline, Aerolineas Argentinas.

Such measures are popular with ordinary Argentines, many of whom blame free-market policies such as the privatizations of the 1990s for the economic crisis and debt default of 2001/02.

Her announcement of the YPF takeover plan, however, drew strong warnings from Spain, Mexico and the European Union, a key market for Argentina’s soymeal exports.

Mexico’s President Felipe Calderon said Fernandez’s plan would damage chances for future foreign investment in Argentina and hurt Repsol, in which Mexico’s state oil monopoly Pemex holds a 10-percent stake.

Venezuela, where socialist President Hugo Chavez has nationalized almost all the oil industry, applauded her move.

The row over YPF comes as Fernandez heaps pressure on Britain over oil exploration off the Falkland Islands, over which Argentina claims sovereignty.

Source

Argentina’s shale potential at risk

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April 14, 2012 10:27 pm by Jude Webber

Any hostile moves on YPF, the Spanish-controlled oil company, by the pro-nationalisation government in Buenos Aires could have implications that go way beyond the companies and investors at the heart of this bitter tug-of-war.

Why? Because Argentina is sitting on what geologists and energy experts widely agree is one of the world’s most attractive reserves of unconventional gas and oil – known as shale – which are trapped deep in the bedrock below ground.

Shale is potentially a very big deal indeed. It turned the US from energy importer to exporter – something that Argentina, which spent $9bn importing fuel last year, ought to take note of.

Argentina has about a third of the US shale reserves, but they are less deep (which makes them cheaper and easier to access), seams are two to three times thicker than in the US and, for now at least, Argentine shale is concentrated in the Vaca Muerta (Dead Cow) formation, rather than being spread out across the country.

So all other things being equal, shale producers should be brushing up their Spanish and heading south. Several big players – including ExxonMobil, Total and Apache – and smaller companies already have. But it is YPF which has the biggest acreage, and it estimates that as much as $250bn will be needed to develop a viable shale industry over the next decade.

No one’s pockets are that deep, so partnerships are the way to go. Except that regulatory concerns are raising red flags before investors’ eyes now.

YPF has been publicly criticised, stripped of a string of concessions after being accused of underinvestment and now the government is analysing how to give the Argentine state a bigger role in the company – something that, according to some proposals circulating in the government, could translate into the expropriation of as much as 50.01 per cent of the company.YPF is currently controlled by Repsol of Spain, which has 57.43 per cent, and 25.46 per cent is in the hands of the Eskenazi family’s Petersen Group. Just over 17 per cent is traded on stock markets.

So enthusiasm among potential new players in the shale sector – where some were prepared to invest as much as $10,000 to $12,000 per hectare, according to industry sources – is screeching to a halt. “This is damaging shale (prospects), of course,” Alieto Guadagni, a former energy secretary, told beyondbrics.

The government has been berating YPF for what it perceives as a failure to invest enough, yet the concerns its nationalization dream are raising risks reducing investor appetite – which is perverse. And if concerns over contracts were not enough to dampen investors’ spirits, the prospect of partnering with a state that likes fast results and dislikes repatriation of dividends may give pause for thought.

What is worse is that the shale prospects represent energy that Argentina badly needs. Underinvestment in the sector, analysts and industry players say, is the direct result of a regulatory regime that keeps prices in Argentina well below the international market.

As Guadagni put it, Argentina pays domestic gas producers some $2.8 per million British Thermal Units, yet shells out some $11 per million BTU for gas from Bolivia (produced, ironically, by Repsol YPF), and some $17 for liquefied natural gas to plug its huge energy deficit.

Meanwhile, the cost to Argentines for their domestic gas is about 50 US cents per million BTU of gas, and drivers of vehicles that run on compressed natural gas pay around $1.

“The big question is whether these plans for YPF will improve or worsen Argentina’s prospects for recovering its energy self-sufficiency,” Guadagni said.

Argentina had a $3bn energy surplus in 2006. This year, Guadagni reckons the deficit will be $6bn to $7bn, ballooning to $12bn in 2013. Argentina’s policy of cheap domestic energy to stoke demand and economic growth worked well after the country’s default of nearly $100bn in 2001. But it isn’t working now.

Source

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