Some of the world’s largest reserves of shale gas and oil happen to be in one of the world’s more politically backward countries.

No, we’re not talking about Egypt or even China, but Argentina.

Populist politics have made the region one of the worst places to do business, with the energy sector feeling the full brunt of President Cristina Fernandez de Kirchner’s power. Asset seizures, resource nationalism and court battles continue to be the norm for those firms operating in the nation.

Which is why major integrated energy producer Chevron’s (CVX) decision to wade back into Argentina is so puzzling. Even more so when you consider that Kirchner’s government froze some of the producer’s assets last year.

While the opportunity is great, you have to wonder whether the risks are too high.

$1.24 Billion Partnership

Energy production in Argentina has been in the doghouse ever since its April 2012 decision to expropriate control of YPF (YPF) from Spain’s Repsol (REPYY). The original idea behind the seizure was to help spur production in the nation.

Despite Argentina’s estimated 774 trillion cubic feet (Tcf) of technically recoverable shale gas and unconventional reserves, its 13.4 Tcf of traditional natural gas reserves and its rich oil wealth, the nation continues to be a net importer of energy. Fuel imports doubled to $9.4 billion back in 2011 and are expected to rise to $15 billion this year as underinvestment and high taxes/royalty rates continue to stymie production.

Here’s where Chevron comes in.

Argentina recently stated that it will offer energy companies various incentives if they invest $1 billion or more over a five-year period to develop the nation’s vast shale reserves. Among other perks, companies above this investment floor will be able to export up to 20% of the crude and natural gas they produce in the country without paying various taxes and fees.

With these “carrots” now in place, Chevron was the first major to step up to the plate with an initial $1.24 billion partnership with YPF that will drill 100 wells in Argentina’s Vaca Muerta shale. Early daily production estimates are forecast to be around 50,000 barrels of oil and 3 million cubic meters of gas by 2017. The second phase of development will see a 50/50 operating venture and boost the well count up to 1,500.

Chevron seems quite bullish on the partnerships prospects, calling the Vaca Muerta — Spanish for dead cow, by the way — “one of the most exciting shale oil and gas plays in the world today.” Overall, CVX hopes to use the field as a way to boost its production and leap beyond its 2017 target of 3.3 million barrels per day.

While the promise is great, the deal still makes me a bit queasy.

Don’t Forget About Repsol

The deal itself seems a bit rich, according to analysts, who think Chevron might actually be overpaying for the “privilege” of drilling in Argentina. Investment bank Tudor, Pickering, Holt estimates that CVX is paying about $25,000 per acre — pretty expensive considering comparable acreage in places like the Bakken and Eagle Ford are going for. According to those analysts, the only way that acreage is worth anything close to that number is if Argentina’s promise on export duties actually holds up.

And there lies the rub.

This is Argentina we are talking about, and Chevron of all companies should know exactly what it’s dealing with here.

Last year, an Argentine judge ordered the seizure of all the integrated giant’s assets in the country based on a verdict — stemming from contamination of watersheds for nearly 30 years by Chevron — in an Ecuadorean court. Basically, Argentina decided that Chevron needed to pay, and there was some debate about whether the Argentine government would actually hand over ownership of those assets to Ecuador.

Turns out it just held those assets for a bit, and last month, Argentina revoked the seizure of Chevron’s assets. But still, that’s not exactly a great working environment, and Chevron is risking seizure of any additional investment in the nation … which is a real possibility if the Argentine government decides things aren’t progressing as well as it would like. Not to mention that export taxes could be turned back on at a moment’s notice.

With CVX planning on eventually spending between $5 and $15 billion in the nation on E&P activities, that’s some pretty substantial risk-taking. After all, there are plenty of smaller and safer North American-based producers that could be had for that amount of money, and there’s plenty of untapped shale here in the U.S.

Personally, I think I’d take that route if I was CVX’s head of production.

Realistically though, if the deal does go sour, Chevron will be OK. It’s too big of a producer to really get tripped up by this. However, I’d be pretty pissed as a shareholder if Argentina comes back to bite CVX. Mega-cap or not, $15 billion is a lot of wasted money for things like dividends, buybacks and steady Gulf of Mexico production.

How does the saying go? “Fool me once, shame on you. Fool me twice …”

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