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Argentina's YPF struggling to find investors

With most of its oil and gas producing fields maturing, Argentina's oil company needs to find investors for the Vaca Muerta to change fortunes

A little more than a year ago, Argentina's president Cristina Fernandez de Kirchner nationalised Spanish company Repsol's 51% stake in YPF. As the country's fuel import bill soared, Fernandez accused the Spanish company of milking its Argentine subsidiary for profits while allowing reserves and production to slide. Renationalising YPF (it was privatised in the early 1990s) also gave Fernandez's waning public support a short-term boost.

YPF's raison deatre under the expropriation legislation is to restore Argentina's energy self sufficiency. It is a tall order. Although Fernandez blamed Repsol for much of the deterioration of her country's energy industry, the company can hardly be blamed: Argentina's conventional oilfields have passed their peak.

The company recognises this, even if the government has not acknowledged it publically. YPF said earlier this year in an annual report filed with the US Securities and Exchange Commission: "most of the company's oil- and gas-producing fields in Argentina are mature and, as a result, our reserves and production are likely to decline as reserves are depleted".

Total oil and gas production declined 10% between 2010 and 2012, from 510,000 barrels of oil equivalent a day (boe/d) to 459,000 boe/d, continuing a long downward trend. Analysts at Fitch, a credit-rating agency, have said the company's low production-to-reserves ratio is now just 5.5 years. At the same time demand, has been strong, buoyed by robust economic growth, though there are signs that the Argentine economy is slowing.

The company's best hope for reversing its fortunes lay in developing the Vaca Muerta shale formation. A recent US Energy Information Administration survey estimated that the play holds 16.2 billion barrels of recoverable oil and more than 300 trillion cubic feet of recoverable gas, dwarfing the country's conventional reserves. YPF holds licences that cover about a third of the shale play, and has put forward an ambitious plan to spend billions of dollars to develop the field.

That plan, though, hinges on finding foreign partners to contribute cash and technology to the effort. Despite the nationalist rhetoric used during YPF's nationalisation, the company almost immediately started looking for new partners - from overseas. In July, it signed its first post-nationalisation joint-venture deal with Chevron. The US supermajor has agreed to spend $1.24bn by the end of 2014 to launch a pilot development programme. Whether that opens the door for other investors to follow remains to be seen. Before nationalisation, Repsol said it was in talks with 15 companies, including Chevron, which had voiced an interest in taking a stake in Vaca Muerta.

The Argentine government has tried to tempt foreign investment by raising strictly controlled domestic oil and gas prices and easing some foreign exchange requirements. But it has retained a tight grip over the industry and is far less attractive to foreign investors than other markets, such as nearby Brazil.

It has also become clear that for YPF to prosper, the Argentine government must settle its dispute with Repsol over compensation for the nationalisation - and quickly. Until Repsol's claim is resolved, many will - rightly - be wary of making large-scale investment in the country. 

Table 1: YP by the numbers
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