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Independents stay the course after YPF nationalisation

Independents operating in Argentina have adopted the mantra “keep calm and carry on” in the wake of the government’s nationalisation of Repsol’s stake in YPF last month

The decision sent shockwaves through Argentina’s energy sector and provoked much criticism from abroad.

The nationalisation of YPF, the nation’s largest oil and gas producer, has cast doubts on the future of Argentina’s energy sector, and in particular the future of the highly prospective Vaca Muerta shale play.

The Vaca Muerta shale, which covers around 30,000 square kms in Neuquén province in southern Argentina, holds nearly 23 billion barrels of oil equivalent (boe) of recoverable resources, Spain’s Repsol said in a report earlier this year – making it one of the most attractive shale plays outside North America.

Developing Vaca Muerta could double Argentina’s oil and gas production within a decade, Repsol said in its assessment, but developing that potential would require investment of $25 billion a year. Fuel refined from Vaca Muerta’s tight oil shales would help eliminate Argentina’s growing fuel trade deficit, which the government has said is the main reason it intervened in YPF. It also presents an opportunity for an industry that has struggled to find new major sources of untapped resources.

“It is obvious that the YPF affair has harmed the whole industry and capital markets in Argentina,” Claudio Larotonda, chief executive of Azabache Energy told PE Unconventional. “However, it is still not clear how this move will affect the medium- to long-term,” he added.

Most companies have pledged to press ahead in the meantime, partly in an attempt to remain in the government’s good graces and partly because, government intervention aside, Vaca Muerta remains a very attractive prospect.

“We don’t foresee a major impact on our operations because this is primarily a dispute between the government and Repsol. We continue to invest,” a spokesperson from US independent Apache told PE Unconventional.

Apache drilled the first horizontal, multi-stage hydraulically fractured well in the Vaca Muerta formation last summer. The company plans to spend $250 million in the country this year and has given no indication that they plan to pull back as a result of the government’s nationalisation of Repsol’s assets.

That sentiment has been echoed by others. “We intend to expand our exploration and development with the objectives of increasing production and increasing reserves in both our conventional and unconventional oil and gas blocks,” the head of Americas Petrogas, Barclay Hambrook, recently said in a statement. 

Americas Petrogas, which signed a farm-in deal with ExxonMobil in August last year to explore the company’s shale acreage, said on 23 April that it was pressing ahead with its immediate drilling plans. The company is preparing two shale wells, one with ExxonMobil at its Los Toldos Block and another along with Neuquén province-owned Gas y Petroleo at the Totoral Block. The company has said that it could drill as many as 10 shale-focused wells this year.

Gran Tierra, another independent with a shale acreage position, has also pledged to stay the course. “The nationalisation of Repsol’s stake in YPF has not impacted our plans in Argentina.  We feel the action that was taken by the government was very specific to Repsol’s stake in YPF. We continue to invest in Argentina in an effort to grow production and create wealth for the country,” a spokesperson told PE Unconventional.  Of its $367 million capital expenditure budget for this year, Gran Tierra plans to spend $53 million in Argentina.

The question hanging over all these companies is whether the decision to take over YPF is the end of nationalisations planned for the energy sector or just the start.

The government has sent mixed signals. On the one hand, President Cristina Fernández de Kirchner has hinted at broader plans for the sector. “We need to have sovereign control of our resources, I am absolutely certain that this is the only road possible for us,” Fernández said shortly after the YPF nationalisation.

However, Planning Minister Julio De Vido and Deputy Economy Minister Axel Kicillof, who have been put in charge of YPF, have more recently stressed that the company will need foreign partners to access capital and technology.

The uncertainty, and heavy-handed approach to the YPF nationalisation, has served to reinforce foreign investor’s perception of Argentina as a difficult place to do business. That will pose problems for independents that rely to a large extent on foreign capital markets to fund their operations. Azabache Energy’s Toronto-listed shares, for instance, have fallen by nearly half in recent months, from just over C$1 ($1.02) in mid-February to C$0.58 on 2 May.

But, as ever, the industry has adopted the long-term view. “My opinion is that there are not many resource plays like Argentina’s shale right now and that the industry will remain interested in exploring and developing these resources. Let's wait and see if this expropriation is constrained to YPF or broader, and wait for the next announcements by the government and the provinces,” Larotonda concluded.

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