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YPF courts Chevron for shale development

YPF has started talks with Chevron as it continues its search for foreign partners to help it develop the multi-billion barrel Vaca Muerta shale

Argentine explorer YPF has started talks with US supermajor Chevron as it continues its search for foreign partners to help it develop the multi-billion barrel Vaca Muerta shale, thought to be one of the largest shale discoveries outside North America.

Miguel Galuccio, the head of YPF, Ali Moshiri, the head of Chevron’s Latin America business, held fruitful talks over a potential agreement to form a strategic alliance to invest in unconventional oil and gas development as well as redevelopment of the country’s mature fields, YPF said in a statement.

“We talked specifically about different alternatives for cooperation. Chevron is very interested in coordinating joint projects, and we want partners with the weight and experience of this world-class company,” Galuccio said.

YPF was brought back under state control earlier this year two decades after its privatisation when Repsol’s majority stake in the company was nationalised by Cristina Fernandez de Kirchner’s government. Fernandez blamed a lack of investment from the Spanish company for Argentina’s sharp decline in oil production and a growing fuel import bill that has been a drain on the company’s foreign currency reserves.

Since the nationalisation, YPF has announced an ambitious $40 billion, five-year investment plan aimed at restoring Argentina’s energy independence by boosting output from its mature fields and establishing production clusters in the Vaca Muerta shale formation. The company, however, has said that it does not have the resources to carry out the plan on its own and needs help from foreign investors.

In January this year, Repsol released a Ryder Scott reserves assessment that estimated recoverable resources of more than 22 billion barrels oil equivalent in YPF’s 30,000 square km section of the Vaca Muerta shale. It estimated that Argentina could produce enough from the Vaca Muerta shale to satisfy domestic demand in less than a decade, provided an accelerated development plan, involving drilling thousands of wells and investing billions of dollars across a relatively small section of the shale play was put in place. 

YPF first appeared to turn to Chinese firms, which have been pouring money into energy assets in Latin America and beyond in recent years as the country looks to secure resources for its growing economy. China’s prime minister, Wen Jiabao, visited Buenos Aires in early August where he reportedly held discussions over potential joint energy development deals with YPF. No agreements were announced after the talks, but YPF’s Galuccio and deputy economy minister Axel Kicillof, which has been a central player in the nationalisation of YPF and reorientation of Argentina’s energy policy, are reportedly planning a trip to China in September where they are expected to push for an agreement with one of China’s state-run companies, most likely Sinopec.

Argentina also recently announced a strategic alliance between YPF and Venezuela’s state-run PdVSA to evaluate opportunities for joint unconventional and offshore development in Argentina as well as for YPF to take a stake in a heavy oil project in Venezuela.

Chevron, however, in some ways might be a better fit for Argentina. It has the technology and capital that YPF needs. More importantly, though, a deal with a western major such as Chevron would go further towards allaying some investor fears over the direction of Argentina’s oil and gas sector that were raised in the wake of the Repsol nationalisation.

Chevron, which is already exploring a small section of the Vaca Muerta shale, has not commented on the talks, but Moshiri sounded optimistic on Argentina and hinted at a potential deal with YPF at a conference in Buenos Aires a day prior his discussions with Galuccio.

“We are committed to be in Argentina. We believe there is enough resources in Argentina. We believe it is the right environment to work... and we are very open to other opportunities,” Moshiri said.

He later told reporters that Chevron is “open to strategically partnering with YPF”.

Chevron plans to drill three wells targeting the Vaca Muerta shale at its El Trapial concession this year, which if successful will lead to an expansive three-year, 120-well drilling programme in the area, Moshiri said.

But in expanding its operations and working alongside YPF, Chevron would be taking on a number of risks. Firstly, Repsol has threatened to launch legal action against any company that teams up with YPF to develop assets that it still considers its own. Moreover, the recently announced hydrocarbon sovereignty law requires companies to submit their investment plans to a newly constituted energy panel for approval, apparently giving the government a much more direct role in company operations in the country. Price controls, labour disputes and high inflation, issues that foreign companies have long lamented, also continue to make Argentina a challenging place to do business.

But Chevron may decide that access to a potentially vast unconventional resource base is worth those risks, as it has done in other parts of the world such as Venezuela. “If (exploration is) successful it would transform our company. We are betting on it. It is a risk we are going to take,” Moshiri said.

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