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Argentina Wants On the Shale Bandwagon

In May of last year, Argentina’s President Cristina Fernández took control of the Argentinian oil company YPF by expropriating shares from the Spanish oil major Repsol. Now, more than a year and a half later, Fernández is offering to pay Repsol $5 billion for the expropriated shares. That’s less than half of what Repsol was seeking, but it’s better than nothing. And for Argentina, it could kick-start drilling in the country’s vast shale oil and gas reserves. Reuters reports:

“We are building a path that will allow for an increase in hydrocarbon exploration and exploitation,” [Argentina’s new cabinet chief Jorge Capitanich] 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 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.

According to the EIA, Argentina has the world’s fourth largest reserves of shale oil, and is second only to China in technically recoverable shale gas. While Argentina lacks the pipeline network or established services industry that has complemented and enabled America’s shale boom, it does have plenty of water—a key resource in fracking—and its geology lacks the complexity that has stymied Chinese efforts.

Attracting investment may be the single best move Argentina can make toward developing its shale resources. Deloitte insists that “[m]aintaining a favorable investment climate” is necessary for any meaningful shale production to take place. But we won’t be holding our breath for a second (South) American shale revolution; Argentina is very good at squandering its resource bounty.

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  • Kevin

    The paradox is the more power the government has the worse off it is. What Argentina needs to be able to do is credibly tie the hands of future governments not not expropriate investments and to pay its debts.

    The Netherlands, UK and US have spent 300-400 years building institutions including legal and political frameworks to tie future government’s hands and make sure this can’t happen (though the present administration seems to be trying to squander that inheritance). Spain and her offspring gave spent 400+ years building the opposite sort of reputation which makes selling long term government debt more expensive for them and attracting long term investments vastly more difficult. Can Argentina find some clever way to bind future governments’ hands?

    • Andrew Allison

      History suggests not.

  • Kevin

    Credibly renouncing the sovereign right to expropriate investors is what they need to do? But how can a government with unlimited power make this promise? This is why the Hapsburgs and the Bourbons found themselves at a disadvantaged against more limited governments in the UP and UK. The more power the government gas the weaker it is.

  • AD_Rtr_OS

    Argentina needs to be able to assure investors that their funds are safe – unlike what they’ve done to REPSOL and others. Their history works against them on this.

  • Jacksonian_Libertarian

    Would you trust them not to just steal everything you’ve just built? With decades worth of other profitable shale oil fracking plays around the world, why would any driller with its “proprietary” fracking skills, take the risk on the untrustworthy Argentines? At the moment the fracking skilled drillers are in the catbird seat, and they have more than enough very profitable opportunities, that they don’t have to risk dealing with greedy corrupt governments, or labor gang monopolies.

    • Andrew Allison

      While I couldn’t agree more in principle, practice (e.g. technology companies falling over themselves to make deals with China for short-term profit) suggests otherwise.

  • bigfire

    Those company that’s dumb enough to do business in Argentina deserved to be ripped off. It’s as much of a guarantee as Bernie Madoff’s investment (not).

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