Chevron’s Gamble in Argentina

Not everyone is rejoicing in Argentina over the Chevron deal. The opposition party complained that the Fernandez government failed to allow proper parliamentary debate on the transaction. The politicians have a valid point in saying that the Fernandez quietly and quickly put the deal together.  A year ago the President seized the same assets from Repsol that it now gives to Chevron, though at a price. The average Argentine has good cause to question the Fernandez administration’s actions. Protests popped up at the proposed drilling site in Muerte Vaca. Indigenous Indians demonstrated in support of voiding of the agreement. They believe that the drilling will contaminate the land and cause irreparable environmental damage. Environmentalists and advocates for national self-identity claim that the government is allowing the United States to unfairly take advantage of the country’s resources. It is understandable that there is substantial opposition to the deal with Chevron. For years the Fernandez government has rode a wave of stoked up nationalism to deflect attention from the country’s economic problems that have mostly be caused by governmental policy and incompetency.  I believe that the deal can best be understood in terms of Argentina’s need for hard currency and foreign investment. The country’s political motto of “us against them and we do not need anyone” has caused its economy to sputter along.

CNN Money ran an interesting post about the Chevron deal on July 19, 2013. The piece was entitled “Chevron is Making a Mistake  in Argentina,” It was written by Cyrus Sunati. The author concedes that the American company might make a fortune in the future as a result of its agreement with Argentina. Yet he postulates that the deal might not be worth all the accompanying drama. It is possible that Argentina could again go into expropriation mode and take Chevron’s interests. Further complicating Chevron’s intentions Repsol could make good on its threat to protect its interests via the courts. Mr. Sunati believes that the deal will eventually cost Chevron millions.

Some commentators have suggested that Chevron made a deal with the devil. The multinational oil companies adhere to an unwritten code, which is universally respected. The code of conduct requires the use of the strategy of “us versus them.” The oil companies must stick together in opposition to the client states that are always looking for ways to use their sovereign powers to take more economic benefit then their contracts permit. By stepping into Repsol’s shoes Chevron failed to follow the oil companies’ creed that demands that each company protects its follow company’s economic interests. Repsol already sued Chevron in the U.S. District Court for the Southern District of New York.  In my opinion Repsol’s legal action has not proceeded as well as hoped. The company did not obtain any injunctive relief to prevent the Argentina-Chevron deal.  Chevron does not appear worried about the outcome of any Repsol litigation, whether prosecuted in the U.S. or Argentina.

As long as Argentina’s inflation remains stubbornly high and its foreign reserves dangerously low Chevron’s deal is safe from unilateral alteration or amendment. As the winds blow in Patagonia; the political situation in Argentina could quickly change. Local political concerns could trump the policy of fostering more foreign investments, thus, leaving the international oil companies again in the cold. For the moment Chevron has the support of its investors  who see the deal as providing new and lucrative sources of income.

As a result of Argentina’s massive debt default (2001) many of the nation’s creditors were forced into accepting new debt. Others received a small percentage of their original investments. Unfortunately for the former South American economic powerhouse some of the bond holders simply sued to recover their full investments. In earlier posts I have discussed  the status of the lead case ( NML Capital Ltd v. Argentina) in which Argentina has been trying to avoid paying the non-exchange bondholders. It appears that the Appellate Court is going to approve a payment scheme that most experts believe will result in another Argentine debt default. Since the 2001 default the international business community has been very reluctant to do business with the country or its businesses. If Argentina again defaults on its sovereign debt it is very possible that the economy will crash. At that point Argentina’s need for hard foreign currency would become insatiable. It is likely that the country would start selling off its nationalized assets to raise cash. 

I believed that Chevron made a calculated decision in signing the development agreement. The company has to be betting that Argentina’s economic and political situation is going to change in favor of the foreign investor. If the economy crashes it is possible that Argentina will sell, at a considerable discount, its stake in YPE to Chevron. Repsol’s lawsuit against Chevron, which is being heard in the Federal Court, New York City, does not appear to be progressing in the favor of the Spanish oil firm. There is no doubt that Repsol will not find any success in the Argentine courts. Chevron’s legal and financial exposure under the development agreement is limited. The company stands to profit handsomely even if the Argentine economy does not crash. The company’s stockholders should be pleased with management’s decision to become involved with the Vaca Muerte shale-oil reserves.

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