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Argentina seeks to jump-start shale drilling with Repsol deal

Hugh Bronstein
Tuesday, 26 Nov 2013 | 9:10 AM ET

BUENOS AIRES, Nov 26 (Reuters) - Argentina said on Tuesday that a pending deal with Spanish oil major Repsol is aimed at kick-starting shale drilling in the South American country, putting an end to the long stand-off between energy investors and President Cristina Fernandez.

Nineteen months after seizing control of Argentina's main energy company YPF from Repsol, Fernandez's government announced a preliminary deal late on Monday to pay Repsol for its nationalized shares.

The accord, expected to be approved by Repsol on Wednesday,

could help Argentina repair a relationship with global investors left in tatters after the country's 2002 sovereign default. Tapping its vast shale reserves would also shore up central bank reserves drained in part by expensive oil imports.

The Repsol deal showed new flexibility on the part of Fernandez, whose policy model, marked by long-running feuds with private-sector investors from farmers to sovereign bondholders, was rejected by voters who shunned her candidates in the Oct. 27 congressional midterm.

The accord - in which Spain's government was proposing Repsol receive $5 billion in compensation from Argentina - could set the stage for a radical increase in unconventional energy exploration.

Early on Tuesday, Argentina's new cabinet chief Jorge Capitanich said the government was out to attract investment in Vaca Muerta, the country's massive shale oil and gas formation.

"We are building a path that will allow for an increase in hydrocarbon exploration and exploitation," he told a press conference, adding that Argentina has a "very ambitious" energy program scheduled for the years ahead.

Already the world's No. 3 corn and soybean exporter, Argentina stands to become a major oil and gas producer as well if the government can attract the tens of billions of dollars it needs to exploit the Vaca Muerta (Dead Cow) shale formation.

The Repsol-YPF deal is set to be voted on at a Repsol board meeting scheduled for Wednesday in Madrid.

Argentina's oil and natural gas output has declined since 2006 while families take advantage of subsidized energy, turning the country into a net oil and gas importer.

Central bank reserves have meanwhile sunk 27 percent this year to $31.5 billion. Shunned by the global bond market, Fernandez uses the reserves to pay government debts, finance the Treasury and prop up an overvalued currency.

Fernandez has long railed against orthodox prescriptions for Argentina's economy, which is ailing from one of the world's highest inflation rates and low confidence caused by heavy trade and currency controls. Her interventionist policies have kept investment out of Latin America's No. 3 economy.

But that could change if international energy companies see enough market-friendly signals to tempt them into Vaca Muerta.

"The understanding with Repsol shows that the government, when in need, can show a remarkable degree of pragmatism. An understanding with Repsol should facilitate YPF negotiations with other oil companies interested in Vaca Muerta," said Ignacio Labaqui, an analyst with Medley Global Advisors.

"Argentina not only needs investment to increase oil and gas production and reverse the loss of its energy self-sufficiency, but also needs foreign currency inflows to strengthen central bank reserves," he said.

FERNANDEZ TRANSITIONING OUT

YPF is the biggest stake-holder in Vaca Muerta. The company estimates the field contains 661 billion barrels of oil and 1,181 trillion cubic feet of natural gas, making it one of the biggest shale reserves in the Western Hemisphere.

Last month's midterm election slammed the door on Fernandez's chances of clinching a constitutional change to let her to run for a third term in 2015, as had been proposed by her allies in Congress.

Even before the midterm and the Repsol deal, the local market caught an intoxicating whiff of change in the air. Since the August midterm primary showed Fernandez losing influence, the Merval stock index has leaped more than 50 percent.

Despite Vaca Muerta's vast potential, investment in the formation has come slowly so far.

Dow Chemical Co has signed on to invest up to $120 million in 16 Vaca Muerta gas wells and oil giant Chevron Corp has agreed to invest $1.24 billion in the area.

To clinch the deals, Argentina has allowed the companies to export tax-free up to 20 percent of what they produce. Export revenue of companies that invest at least $1 billion over five years is exempt from government foreign exchange controls.

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