Energy Investors: Flee Argentina Posthaste

by Aaron Levitt | November 13, 2012 6:30 am

Sometimes in the investing world, the risks outweigh the potential rewards[1].

For energy investors interested in Argentina, “sometimes” is right now.

Despite having some of the world’s largest shale resources, the nation remains a hot bed of resource nationalization[2] and anti-competitive business practices. From its April decision to expropriate control of YPF (NYSE:YPF[3]) from Spain’s Repsol (PINK:REPYY[4]) to its last $2 billion asset seize of integrated giant Chevron (NYSE:CVX[5]), the nation remains a dangerous place for investors to do business.

All in all, the Argentine government’s continued actions could spell trouble for those who remain.

Resource Nationalism & Populist Politics

The problems with Argentina’s energy sector have been known for roughly a decade; high taxes and royalty interests[6] have always been the norm. However, since the election of President Cristina Fernandez de Kirchner, things have gotten much worse.

Bound to populist ideals, Kirchner has undergone a series of moves to “strengthen” Argentina’s oil economy. Despite Argentina’s estimated 774 trillion cubic feet of technically recoverable shale gas and unconventional reserves, its 13.4 Tcf traditional natural gas reserves as well as its numerous oil wealth, the nation continues to be a net importer of energy. All in all, Latin America’s third-largest economy imported around 110% more energy last year[7].

Kirchner’s government blamed Spanish firm Repsol for not investing enough back into its local fields and criticized it for not producing enough oil. With the wind of populism at her back, Kirchner and government officials nationalized the firm’s interests[8] in state-owned YPF. After the exportation, the Argentine government owns and operates 51% of YPF, with Repsol seeing its stake dwindle to just 6%; the remaining assets were divided among federal agencies and provincial governments.

The key takeaway in YPF takeover bill was that Argentina’s whole oil sector is declared to be in the public interest.

Generally, many Argentines continue to remain suspicious of foreign companies and blame the free-market policies of the 1990s for setting the country up for its sovereign debt default in the early 2000s.

The nation’s latest actions are helping play into that notion.

Chevron — the fourth-largest producer of oil in Argentina, which recently signed a memorandum of understanding to develop projects at the shale formation of Vaca Muerta — is finding out just how much of problem working in Argentina can be. Last Wednesday, an Argentine judge ordered the seizure of all the integrated giant’s assets[9] in the country.

The frozen assets stem from the contamination of watersheds[10] for nearly 30 years by Chevron, through its buyout of Texaco. Last year, an Ecuadorean court ordered Chevron to pay $19 billion in spill damages. Chevron hasn’t yet made any payments, as it considers that verdict a product of fraud and brides.

The embargo covers all of Chevron Argentina’s stock — valued at roughly $2 billion — and all of its dividends, its 14% stake in pipeline firm Oleoductos del Valle as well as 40% of the company’s oil sales to refineries and 40% of the funds it has deposited in Argentine banks. The freeze order effectively means Chevron will be barred from investing further in Argentina unless it wants to risk seizure of those assets as well.

While Chevron undoubtedly will appeal — and it remains to be seen just what Argentina will do with those assets — the continued seizure of reserves in the country illustrates just how dangerous it is to do business there.

Skip It & Move On

So where does that leave firms like Apache (NYSE:APA[11]) or Exxon Mobil (NYSE:XOM[12]) that have expressed interest (or already own shale acreage) in the nation?

Not in a good place.

The exportation of YPF set a dangerous precedent, and the recent Chevron seizure helps underscore that fact. I’d be a little concerned if my energy company held any assets in Argentina as long as the government can’t ensure that the rule of law and the sanctity of contracts will prevail.

Overall, Kirchner and the Argentine government continue to signal that it is not a reliable partner for existing or potential international energy investors. Heck, even Chinese companies — which are more willing to play long with resource nationalism — are balking at Argentina’s opportunities. Sinopec (NYSE:SNP[13]) has threatened to halt production if things don’t improve.

When all’s said and done, Argentina’s vast Vaca Muerta shale field, along with its oil assets, will go untapped, and other firms with assets there could see them taken in much the same manner. While Apache or Exxon aren’t a sell solely based on Argentina — they are far too big[14] — it is something to keep in the back your mind as country continues to show it can’t play well with others.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. potential rewards:
  2. resource nationalization:
  3. YPF:
  4. REPYY:
  5. CVX:
  6. high taxes and royalty interests:
  7. imported around 110% more energy last year:
  8. nationalized the firm’s interests:
  9. ordered the seizure of all the integrated giant’s assets:
  10. contamination of watersheds:
  11. APA:
  12. XOM:
  13. SNP:
  14. far too big:

Source URL:
Short URL: