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YPF faces fresh Argentina assault

Renationalisation rumours cloud news of fresh Vaca Muerta find

YPF’s fortunes continue to fluctuate in Argentina. Within the last week, the company has been buoyed by the announcement of another major shale discovery in the Vaca Muerta formation only to be sunk by subsequent reports of an imminent government takeover and the loss of further production licences.

YPF, which is majority owned by Spain’s Repsol, announced on 29 March that it had extended the Vaca Muerta shale play to the north into Mendoza province with the discovery of an estimated 1 billion barrels of oil equivalent (boe) across a 2,000 square km area in the region. That figure adds to the 22.8 billion boe of shale resources the company has estimated are held in a 30,000 square km area to the south in Neuquén province.

The company drilled two wells across two blocks – the Payún Oeste and Valle del Río Grande – in Mendoza. The Fija X-1 well, drilled in the Payún Oeste block, flowed at a strong initial average rate of 427 barrels of oil equivalent per day (boe/d) of 36° API gravity oil after two hydraulic fractures were carried out. That flow rate compares favourably with the first raft of around two dozen wells drilled in Neuquén in and around the Loma la Lata Block, which flowed at between 180 boe/d and 600 boe/d, according to YPF.

The second well, Malal del Medio-94 drilled in the Valle del Río Grande licence, was less promising. It flowed just 55 barrels per day (b/d) of heavier 27° API gravity oil after one fracture, YPF said. That well aimed to test the northern part of the basin.

The wells were a positive step forward in YPF’s Vaca Muerta exploration campaign and further bolstered the plays potential. Moreover, the company plans to drill a further three shale exploration wells in the coming months in Mendoza province.

Under fire

But the finds have done little to take the heat out of the YPF’s standoff with the government. Energy Secretary Daniel Cameron called the announcement of the discoveries “ridiculous” in a statement released on the federal planning ministry website. “It is clear that they’re only interested in media attention because these findings represent less than 1% of the company’s daily production in [Mendoza] province,” Cameron said in the statement, apparently referring to the initial flow rates from the wells in comparison to existing production.

The comment underscored the fundamental divide that is fuelling the row between Repsol and the government. From Repsol’s point of view the Vaca Muerta formation presents a major new resource base that will take years – and tens of billions of dollars – to develop and turn into a major producer, but will provide returns for the company and Argentina for decades to come.

The Argentine government, on the other hand, is facing a short-term crisis as plummeting domestic oil and gas production from the country’s depleting mature oil and gas basins has seen the country become a net fuel importer. President Cristina Fernández de Kirchner has said that the country’s fuel bill rose to more than $9 billion in 2011. Those are precious dollars leaving an economy that still doesn’t have access to international debt markets and has to keep tight controls over its foreign reserves.

As a result, the Argentine government is far more interested in a short-term boost to oil and gas production that will help reverse its growing import dependence than discoveries that are likely to take years to bring into production.

Bearing the brunt

And as Argentina’s largest oil and gas producer, YPF has borne the brunt of the government’s crackdown on the industry. Two days after announcing the Mendoza shale discovery, Pagina 12, a government-friendly newspaper, reported that the Fernández administration had already decided to take over YPF, with the only question remaining how to go about it.

“There will be no going back on this. Repsol has an extractive model for YPF that isn’t working for us. Company thinking doesn't consider the reinvestment of profits and putting capital towards exploration and production based on what the country needs,” the report quoted an anonymous government source saying.

The Pagina 12 story was the latest in a series of reports in government-friendly newspapers floating the idea of nationalising YPF. Publicly, government officials have refused to deny that it is contemplating plans to nationalise the company, which has only further fuelled speculation.

Meanwhile, Argentina’s provincial authorities, the owners of the country’s mineral resources, have carried out a threat to revoke licences from companies – including YPF – which, they claim, have not fulfilled the terms of their concession agreements. The move is aimed at pressuring the industry into increasing investment and production at mature fields. Since mid-March, YPF has lost a total of 13 licences across six provinces.

For the most part, the loss of those licences has not had a major effect on YPF’s output. But Martin Buzzi, the governor of Chubut province and the leader of an organisation of governors from oil and gas producing states, threatened to escalate his state’s actions against the company. In a statement on the province’s website on 31 March, Buzzi said his administration could strip the Manantiales Behr licence because YPF had proposed to cut investment at the block by 70% in 2012 from 2011 and drill 59% fewer wells. Buzzi said that the licence accounts for 10% of YPF’s oil production in the country, though he didn’t provide any specific figures.

The government threats have spooked investors. YPF’s New York-listed shares are down by about a third from the start of the year, having fallen from $35.45 a share to a closing price of $23.15 a share on 3 April. Repsol’s shares have been hit hard as well, falling by more than 20% on the Spanish market from €23.78 ($31.22) a share at the start of the year to €18.30 a share on 3 April.

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