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Argentina – striking the right balance

Released during the second quarter of 2011, a US Department of Energy (DOE) report estimated that Argentina may have 774tnft3 of technically recoverable shale gas resources. Right now, exploration in Argentina is still in its early days but if that DOE reserve number proves to be correct, exceeded or even close then the South American nation is sitting on more shale gas than is currently present in the whole of Europe. Signs and portents of recoverable resources could be the harbinger of the emergence of another game-changing energy supplier.

Calgary-based Americas Petrogas (AP) seems to be pushing ahead strongly in its Argentinean shale plays, announcing at the end of November 2011 that it had agreed to purchase an additional 40% working interest in an Argentinean property for US$29.3m to bring its stockholding up to 90%. The holdings in question are in the Loma Ranqueles block, which is located to the west of the Neuquen Basin along the northern plunge of the Chihuidos High. The purchase is being made through the company’s subsidiary Americas Petrogas Argentina SA (APA), which will continue to operate the block. The acquisition is subject to government and other approvals which are expected either by the end of 2011 or early 2012. The Loma Ranqueles block is close to the Los Toldos I and II blocks where APA has a 45% working interest as part of a farmout to ExxonMobil. “We believe the Loma Ranqueles block is highly prospective for shale oil and shale gas from the thick Vaca Muerta formation, in which other companies have reported large discoveries,” said AP’s president and CEO, Barclay Hambrook in a statement, “Additionally, this block offers several prospective conventional oil and gas targets.” A bonus for AP is the presence of a major gas transmission pipeline close to the Loma Ranqueles block, which, in the event of success, would make further development quicker and less costly.

For BP however, Argentina is not such good news as the company’s US$7.1bn sale of its 60% stake in Pan American Energy LLC (PAE) to the Argentinean Bridas Corporation (Bridas), which was agreed in November 2010, was terminated adding to the woes of under pressure BP CEO, Bob Dudley. Reportedly, Bridas, which is part-owned by Chinese energy giant CNOOC terminated talks and pulled out of the deal. BP announced that the deal was terminated on 7 November 2011 and in a statement said, “The closing of this transaction had been delayed because the Argentine anti-trust and Chinese regulatory approvals required to satisfy the conditions precedent to closing of the transaction had not been obtained by Bridas Corporation. Under the terms of the agreement, Bridas Corporation had exclusive responsibility for obtaining these approvals.” Although BP has said that it is happy to return to long-term ownership of Bridas, which may well work out nicely in the future, the company will be smarting from the financial consequences as it will have to repay the US$3.53bn deposit it received in 2010, not to mention missing the balance of the sale. “This repayment will not affect BP’s level of gearing, which stood at 19% at the end of September,” said BP. After the Gulf of Mexico, the failed Rosneft deal in the Arctic and now Bridas BP and especially Dudley could certainly do with some better news in 2012.

Other companies are active in Argentina too, including one the largest independent oil and gas companies in the US today, EOG Resources Inc. The company has exploratory oil shale acreage in Argentina consisting of around 100,000 acres in the Vaca Muerta shale basin and says that it is planning to drill its first well soon. Speaking at the Jefferies Energy Conference recently EOG’s CEO, Mark Papa reportedly said, “From the preliminary testing, it looks pretty good. We think it could be bigger than the Eagle Ford shale, in Texas.” EOG’s property is reportedly close to where Repsol Argentine YPF SA (Repsol) says it has discovered approximately 1bnbbl of oil and gas in Neuquen province. “The Vaca Muerta is at the top of every E&P company’s list right now,” said Papa. Indeed, Repsol’s discovery pushed its shares up 5% when it was revealed. The Madrid-based company said that the Argentinean oil discovery was the largest that it had ever made and that it has high hopes for more to come. The company said that it has begun to explore another 500km2, also in the Vaca Muerta formation, where Repsol believes there is significant potential for large volumes to be developed in the future.

When something looks too good to be true, it usually is. In the case of Argentina, it would appear that oil and gas resources are there in abundance so where could a problem arise? It is probably more apt to describe it as diplomatic, regulatory and political challenges rather than a problem. However, tough new regulations imposed and possibly to be imposed to the commodity sector, including the oil and gas industry, by the Argentinean government may take some working with or around. For instance, effective on 26 October 2011 decree 1722 reinstates the requirement that hydrocarbon and mineral exporters return 100% of their sales proceeds to Argentina. This and other regulation that may come is presumably aimed at preventing capital flight from Argentina but could quite conceivably put a damper on investment. Mining company Argentex believes that the decree is not an obstacle, “Our interpretation of this decree is that mining and oil and gas companies will still be able to send profits abroad,” said Argentex’s president, Ken Hicks in a statement. The company assumes that all of its export revenues would simply have to be converted to local currency first.

Regulation and protection of the resource nation’s assets are important but sometimes too much can kill or postpone investment altogether. Hopefully, the Argentinean government can strike the right balance and look towards the bigger picture for oil and gas from its reserves, which must almost inevitably mean exporting not just self-sufficiency.

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