Chevron’s Gamble in Argentina

According to the company’s website Chevron is in the business of providing energy that drives human progress.By anyone’s standards this is a lofty claim. Chevron does business through several companies that operate in many countries.  The American oil giant has extensive interests in exploration and production of oil and natural gas. Chevron operates and manages several businesses related to its core operations. Chevron is a major player in today’s global petroleum industry. By producing 3.5 million barrels a day Forbes lists the company as the world’s 9th largest oil company.

In 2010 Chevron purchased Atlas Petroleum to gain access to that company’s rights to shale oil reserves. At the time of the acquisition of Atlas Petroleum  many knowledgeable commentators and financial experts believed that Chevron would buy other companies. The depressed gas market is forcing companies to focus on more lucrative operations. Recently the company concluded another transaction that will give it access to the world’s second largest known shale oil reserves in the world.

On April 17, 2012 Argentina renationalized YPF. In the process the Argentines ousted its partner, the Spanish business group Repsol, as majority shareholder. The action was felt by the shareholders of the Spanish oil conglomerate; the value of their shares fell by a precipitous 8%. Back in Argentina President Fernandez appeared on television to address the nation about her government’s most recent expropriation. In the nationally televised speech she brushed aside Spain’s and the international community’s condemnation of the taking to applaud the sanctity of national pride and sovereign interests. Her blaming Repsol for Argentina’s woeful energy sector’s performance did not surprise to anyone. Repsol and Spain demanded billions in compensation for the illegal taking. Argentina talked about compensation but offered no specific dollar amount and at times simply stated that it would pay “no pesos.” Repsol has taken steps to secure some compensation for its lost, but to this day has not collected any meaningful amount.

Once the political and diplomatic efforts failed to bring about some immediate compensation Repsol threatened legal action against Argentina and any company that tried to exploit its seized Argentine assets. I always thought that this threat along with Argentina’s reputation for seizing foreign companies’ assets would scare away any future investment partners. Argentina does not have the technical expertise nor the disposable  capital to exploit Repsol’s reserves in the country. Argentina’s oil officials approached many large international oil companies about exploiting the seized assets and reserves. For  several reasons I thought that no company would step into Repsol’s vacant shoes and partner up with the Argentines. I was wrong and have to admit it; Chevron recently concluded negotiations with Argentina that will allow it to step into Repsol’s shoes. Upon first hearing about Chevron’s agreement I thought that the company had made a colossal mistake. I now believe that Chevron’s actions were shrewd and calculated to put it in an advantageous position if Argentina’s economy weakens further. 

On July 16, 2013 Argentina and Chevron signed a development agreement for the Vaca Muerte shale reserves. This was the first time that a major oil company had made a significant investment in Argentina since the Repsol taking. The pilot program will include the drilling of about 100 well in a 5000 acre tract, which sits

Reaching a Deal
Reaching a Deal

in a concession of 100,000 acres. Argentina hopes that this agreement will help it become, once again, an exporter of oil. Regardless of this agreement the country might never again become a net exporter of oil. Argentina’s monetary policies scare away foreign investment. Also, many international businesses are reluctant to take a risk of losing their investments to governmental expropriation. In my opinion Argentina will have difficulty finding investment partners.

The question that most commentators and oil industry experts asked is why Chevron would risk more exposure in Argentina. The American oil company was already doing business in Argentina through one of its subsidiaries. Importantly, sources report that the company signed an agreement that contained very favorable terms. Under a new national law oil companies that invest more than a billion dollars will receive several lucrative benefits . From the fifth year of exploitation the companies can sell 20% of the production in foreign markets at tax-free rates. The oil concerns will be able to keep profits from these exports and use the money in any way deemed fit. Importantly the country’s strict capital controls will be relaxed for the multinational oil companies. It is clear that Argentina has adopted a policy to attract foreign oil company investment.

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