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YPF under assault

YPF is feeling the chill in Patagonia after three provinces in southern Argentina stripped it of licences, and the rift between the firm and the Argentine government continues to grow

The latest move came from Neuquén province, which announced on 19 March that it would transfer YPF’s Chihuido de la Salina and Portezuelo Minas licences to province-owned Gas y Petroleo Neuquén. In revoking the licences, Neuquén officials said that YPF, which is majority owned by Spain’s Repsol, had failed to meet investment targets. Neuquén’s justification echoed a broader case being made by the federal government and other provinces that the company is not investing enough to maintain production at mature fields and bring newly discovered unconventional resources into production.

While the decision in Neuquén is a blow to YPF and its investors, and a sign of the growing rift between the company and the government, it could have been worse. Chihuido de la Salina and Portezuelo Minas are non-producing licences. Neither licence is in areas where YPF has been exploring the highly prospective Vaca Muerta shale. YPF earlier said it plans to invest around $1 billion and drill 20 wells across the Vaca Muerta this year.

Neuquén province’s decision came just days after similar moves from Chubut and Santa Cruz provinces. Martín Buzzi, the governor of Chubut, announced in front of a raucous crowd of flag-waving supporters at a rally last week that his administration had decided to strip YPF of its Escalante-El Trébol and Cañadón Perdido-Campamento Central licences, accusing the company of violating rules governing investment levels contained in the Hydrocarbons Law. Santa Cruz province revoked the Los Monos and Cerro Piedra-Guadal Norte licences.

YPF hit back at the decision, denying that it had violated the Hydrocarbons Law and saying that it would launch legal action to maintain its rights over the licences. The company said that, since 2009, it had increased investment in Chubut by 236% to $350 million. YPF also said that, between 2007 and 2011, it had increased reserves in the province by 24%.

Production at the licences, however, is down more than 5% from 2009, falling from an average of 14,289 barrels a day (b/d) in 2009 to an average of 13,521 b/d for the first 11 months of 2011, according to Argentina’s energy secretariat. In total, production from the four licences accounted for just under 7% of YPF’s total production in Argentina.

YPF will immediately feel the sting of having those licences terminated. But it is the threat of having its leading position in the Vaca Muerta shale compromised that looms largest for YPF and its shareholders. A Ryder Scott survey, carried out for Repsol over an 8,071 square km section of Vaca Muerta, estimated potential resources of nearly 23 billion barrels of oil equivalent (boe). Moreover, the majority of the formation is thought to be liquids-rich, making it the most prized shale plays outside of North America. Vaca Muerta stretches across 30,000 square kms in Neuquén province, and YPF’s net acreage position of 12,000 square kms makes it by far the largest acreage holder.

There are two ways YPF could lose this position. Neuquén province could revoke licences such as Loma la Lata, where the company has focused its shale exploration programme. Or, President Cristina Fernandez de Kirchner’s government could move to re-nationalise YPF.

The Argentine press has widely speculated about nationalisation. Last month, Pagina/12, a left-leaning paper close to the government, sent YPF’s shareholders into a panic with an article, published just days before Fernandez was set to make a major speech to Congress, claiming that government officials had held a series of meetings to discuss nationalising YPF. The subsequent sell-off wiped nearly $2 billion, more than 15%, off YPF’s market value. Fernandez’s speech exhorted YPF and others to increase investment and production to help address the country’s growing fuel import bill, which topped $9 billion in 2011, but did not include measures to increase state control over the company.

It was a brief reprieve, though, as Argentine newspaper El Dia revived rumours of nationalisation with a report that the Argentine government was planning to take over YPF within months. The report, which cited unnamed members of the legislature, said the government was considering outright nationalisation of the company, a watered-down form of “intervention” or the possibility of helping other, presumably more government-friendly, investors buy more shares in YPF.

The idea of nationalising YPF was widely dismissed just a few weeks ago. As Argentine policymaking has become more forceful and unpredictable, though, many analysts have given the idea more credence. But there are still good reasons to believe that, while the Argentine government clearly wants to play a more active role in the energy sector and probably in the management of YPF, it will not nationalise the company.

First of all, raising funds for the takeover remains a major hurdle. YPF’s current market value is just over $10 billion, well below the 52-week high of $18.6 billion, but still a hefty sum for a country that has no access to international markets and still has to keep a close eye on its foreign reserves. The government could bring this value down further by scaring off investors with further nationalisation rumours.

But there is a bigger reason to doubt that an outright nationalisation of YPF is on the cards. Developing the Vaca Muerta shale – the jewel in YPF’s portfolio and Argentina’s best hope for averting an increasing reliance on imported fuels – will be a monumental undertaking. Repsol has said that developing the shale play will require investments of $25 billion a year for a decade, and the drilling of thousands of wells. Moreover, advanced drilling techniques and innovative solutions to complex geological and logistical challenges will be needed to unlock Vaca Muerta’s potential.

The Argentine government is in no position to deploy the resources and technology needed to develop Vaca Muerta. Moreover, any intervention would set a precedent that would make international investors wary if the government then attempted to sell YPF’s assets. A YPF nationalisation, then, would prove self-defeating for the government’s ultimate aim of stoking a short-term boost to production to help stem the country’s rising fuel-import bill.

It is more likely that the government will continue to use threats and possibly further licence terminations to guide decision-making at the company. While that strategy may be successful in pushing YPF to accede to certain government demands, it will have broader negative consequences that run counter to the government’s goal. Repsol, for instance, has already seen a number of potential partners for its Vaca Muerta projects back out of farm-in negotiations because of concerns over the operating environment.

Repsol hopes to find a way through the current predicament, but, as one source close to the company told Petroleum Economist, the unpredictability of policy-making is one uncertainty that all producers could do without.

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