Tag Archives: Argentina

An Update: Should Chevron be nervous?

The major news services are reporting that the Argentina has served a 10 days eviction notice on Latam Airlines Group  (Latam) to vacate its  Buenos Aires hanger. According to the reports there does not seem to be any legal reason for the eviction. Commentators do not think that the two-year old airline has breached the terms of the rental agreement. Upon being questioned about the eviction notice airport officials state that its issuance was motivated by national interests concerns. I think it is clear that this action is another attempt to bully an international company that is more competitive than its Argentine counterpart. Latam executives promise legal action if the eviction is actually carried out. Any lawsuit file in Argentina’s court will probable not be successful.

The eviction notice demands the removal of  the continent’s largest air carrier from its hanger at Buenos Aires airport. Though the actual terms of the rental agreement have not been made public its is generally known that the airline pays $20,000 monthly for 

From the Company's Webpage
From the Company’s Webpage

the hanger. The company invested about 5 million dollars into refurbishing and maintaining the facility. The rental agreement runs until 2023. It is not clear if the rental agreement has any options, though I would believe that it does have a procedure for extending itself. 

We would be correct in concluding that this is the latest attempt by President Fernandez to strip a foreign company of some of its assets without compensation or due process. Remember how Repsol was treated a year ago? As unsettling as this action is I do not think that this action should cause Chevron’s Argentina subsidiary to pause drilling in the Vaca Muerte shale-oil fields. The American company should not pause its operations or reconsider its in-country strategy.  I am sure that Chevron executives understand that their development-agreement would not prevent Argentina from taking precipitous actions like those taken against LaTam. Analyzing this incident in the larger context of Argentina’s economic and financial policies, I believe that the country continues to make decisions that are politically popular, but have disastrous consequences on the economy. Chevron’s posturing itself for an Argentina economic collapse is a wise strategy.

The government’s eviction of Latam is being undertaken to bolster its economically challenged state-owned airlines, Aerolineas Argentina (AA.) Latam competes directly with AA on domestic and, to a lesser degree, international routes. Most airline industry experts say that the Latam simply offers superior service at a more competitive price on the domestic routes than Argentina’s premier carrier.

AA began operations in the early 20’s as a state-owned carrier. Over the years the airline never proved itself as a profitable and well-run entity. In 1990 the struggling airline went private. By the end of the decade AA was hemorrhaging cash and losing millions every year. Finally,in 2001 the company declared bankruptcy. There had been extended periods of time when the carrier’s planes did not streak across the skies. Not surprising; after assuming office President Fernandez nationalized a second time the airlines amid a spirit of nationalism and self-political interests. Just like other rationalizations of businesses or industries, Argentina has not established any record of successful turnarounds. The nationalized businesses are anything but models of success and efficiency.

Argentina is now determined to improve the brand of its flagship carrier. AA has undertaken a campaign to re-brand itself so that citizens see a different and vibrant company. Yet, under the slick advertisements and government rhetoric is a company on economic life support. In my opinion the average Argentine who is struggling to support a descent station in life will sooner or later blame the government for his or her economic woes. People will open their eyes and simply conclude that Latam is a better run company than AA. These same citizens will conclude that Chevron is a better run and financed company than their country’s state-run oil company. 

Argentina, for political reasons, attempts to control market forces in favor of its businesses. In January 2012 fifteen foreign airlines executives were called to a meeting with Home Trade Secretary Guillermo Moreno.  The Secretary proposed (demanded) that the airlines reduce their overseas US dollars remittances. Specifically he requested that the airlines use local suppliers and contract services to support their in country operations. Clearly, if local businesses could provide a reliable and cost effective product the airlines would be inclined to contract the businesses. Yet, though this is not the fact, most foreign airlines would rather not be subjected to Argentina’s chaotic and unpredictable economic policies. Since Argentina cannot earn foreign reserves it is trying to legislate the creation of the hard currency it craves.

Also,the foreign airline executives understand that even if their companies have a legal agreements with Argentine businesses the government could step in to alter, amend or abrogate the agreement without offering any compensation. Just like Chevron; the foreign airlines believe that their patience with the present Argentina government will be rewarded when President Fernandez’s economic policies are ultimately rejected and a new government comes to power.

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.