Argentina: Chevron And YPF Announced Their Intentions To Discuss A Strategic Alliance For The Exploration Of Shale Resources In Argentina

Last Updated: 14 August 2013
Article by Carlos E. Alfaro, Pedro Mazer and Natalia Artman

Argentina's state-controlled oil company is holding important meetings with California-based Chevron Corp. to share strategies for developing the world's third-largest unconventional oil and gas reserves.

YPF CEO Miguel Galuccio is calling his talks with Chevron's Latin America chief Ali Moshiri the first step toward a strategic alliance with Chevron, Latin America's leading private energy investor. He says YPF needs partners with Chevron's power and experience to develop Argentina's shale reserves, which trail only the U.S. and China in potential.

The encounter between the two executives did not lead to any specific investment news, but sets the stage for Galuccio's formal presentation next Thursday August 30 of a five-year plan for the company Argentina expropriated from Spain's Grupo Repsol.

YPF said Mr Moshiri had expressed interest "in associating with YPF on an unconventional cluster ... in Vaca Muerta" and the talks with Chevron were "the first concrete step towards an alliance that will be strategic along the path that YPF's president and CEO is leading".

Chevron said it would not comment "on any confidential discussions we hold with officials".

Mr Galuccio in June unveiled a taster of his five-year strategic plan that called for investment of $7bn a year to reverse falling production. Partnerships will be key to funding what he called the "ambitious but realistic" plan, which includes drilling 1,000 wells.

Argentina is believed to be home to the world's third-biggest reserves of unconventional oil and gas, largely in the Vaca Muerta formation in the western province of Neuquén. To develop them, the company has appealed for deep-pocketed partners – and they have proved hard to find amid a toughening regulatory environment.

YPF is expected to seek to test investor appetite soon and has filed plans to sell $760m under a previously announced bond sale program. No details have been released.

Chevron, with large investments in Latin America and plenty of experience in shale, would be an ideal partner for YPF. The US major is already involved in shale in Argentina and plans to drill three wells in the Vaca Muerta formation this year and 120 conventional wells in the Neuquén basin over the next three years.

The two executives also discussed co-operation in projects to squeeze more production out of mature fields in Argentina. Mr Galuccio presents his strategic plan for YPF on August 30.

The CEO of Argentina's state-controlled oil company says he'll personally defend any investments made by foreign partners willing to place long bets on developing the country's huge shale oil reserves.

Mr. Galucccio told the audience at the Council of the Americas conference last week in Argentina that companies can profit from helping Argentina become an oil exporter, and that he will personally defend their investments.

Xstrata Analyzes Producing Shale Gas In Neuquén

Xstrata has begun analyzing partnerships to extract unconventional gas in Vaca Muerta. It needs the fluid to feed the Bajo La Alumbrera mine in Catamarca and the future construction of Agua Rica.

Xstrata Copper, the largest producer of minerals in Argentina, began to study the possibility of partnering with an oil company to extract shale gas (unconventional) in Neuquén. A manager of the mine, visited the Latin Oil & Gas Summit 2012 last June, a meeting of the region's oil producers, to internalize the potential of Vaca Muerta, the formation of bedrock of the Neuquén Basin, identified as an important reservoir of unconventional hydrocarbons.

A similar initiative took Brazil's Vale last year, which associated with YPF to get gas from Neuquén to meet the energy needs of Potasio Rio Colorado, a potassium megaproject in the south of Mendoza.

Xstrata Copper satisfies most of its energy consumption through diesel because it does not have access to a distribution network of the fluid near Bajo La Alumbrera. But it also demands a significant amount of liquefied petroleum gas (LPG). And medium-term expectations provide an increase in energy consumption from the start-up of Agua Rica, another important cupriferous venture in Catamarca that was delayed due to problems with environmental groups.

Bajo La Alumbrera mine is operated by a joint venture between Minera Alumbrera -a consortium composed of private miners Xstrata Copper (50%), Goldcorp (37.5%) and Yamana Gold (12.5%) - and YMAD, state company property of Catamarca and the University of Tucumán.

The mine produces 150,000 tons of copper in concentrate, 400,000 ounces of gold in concentrate, 50,000 ounces of gold doré and 1,600 tons of molybdenum concentrate. It is the country's largest project above Cerro Vanguardia (AngloGold Ashanti) and Veladero (Barrick Gold). Xstrata Copper is the fourth largest global copper producer.

More Funds For YPF

The Government will advance in the next weeks on a strategy that will tend to provide more resources to YPF to solve a part of its large investment plan, of around USD 7 billion per year over the next five years. This was confirmed last week by the governor of Neuquén, Jorge Sapag, during a meeting organized by the Council of the Americas.

In this line, a new reference price to be paid by Cammesa, the company that manages the electricity market, to the producers for the new gas production obtained from the subsurface, is expected.

The Committee on Strategic Planning and Coordination of the Federal Hydrocarbon Investment Plan (CPCE), created by Decree 1277, which gave a new regulation to the oil sector headed by the Vice Minister of Economy Axel Kicillof is in agreement with this investment plan.

Since the establishment of the Commission, the Government has implemented two measures to favor YPF: the first one was an increase in the wellhead gas intended to supply the CNG market. The price increased 300%, from 15 to 60 cents per cubic meter. This means about $900 million a year for production companies. YPF will be one of the major beneficiaries.

On Friday 10th this month, meanwhile, the government announced an increase in export duties for biodiesel from 14 to 32 percent (the nominal increase reaches 24%). This will benefit YPF as well as the other refiners that sell gasoline and diesel because they will cut costs.

YPF Will Invest U$D 277 Million For New Exploration

President and CEO of YPF, Miguel Galuccio, announced last week the launch of a plan of "frontier exploration" -so called in the oil sector the regions about which there is little geological knowledge-, which will require investments of USD 277 million, mainly destined to regions which are not productive.

This is a work plan that demanded USD12 million and allowed to explore new basins with 25 observation wells, 5850 square kilometers of 2D seismic and 1,600 square kilometers of 3D seismic surveys, in which the oil company will seek to re - launch the exploration in Argentina .

Several non-oil provincial governors attended the meeting. Among them: Sergio Urribari, Entre Rios, Gildo Insfran, Formosa, Luis Beder Herrera, La Rioja , Maurice Closs, Missions, Juan Manuel Urtubey, Salta, Jose Luis Gioja, San Juan, and José Alperovich, of Tucumán. Also Daniel Peralta, governor of Santa Cruz.

The President Of YPF Announced At The Council Of The Americas Meeting Of August 23, 2012 That YPF Will Partner With International And Local Operators

"In the epilogue of his presentation, former executive Schlumberger said: "We need partners, and we are open to partnerships, they are welcome to work in this country. Believe me, as a head of the leader oil company of Argentina I will defend your investment. Believe me, we can grow making money. We need strategic partners; we need them to bring the equipment, but we are also open to financial partners to develop the unconventional [oil] in a profitably way".

Among the various collaboration options that the company is willing to receive there are partnerships with other oil companies, with service companies (like Schlumberger, his previous work), strategic partners "because of their knowledge" and financial investors.

Turning the country into an exporter of oil is a very important message, as it announces that there will be availability and international price of crude oil, two crucial issues requested by foreign oil companies to co-invest.

YPF Could Achieve The First Strategic Agreement With Chevron.

YPF could achieve the first strategic agreement with Chevron to exploit unconventional oil and gas in the Vaca Muerta deposit; Galuccio and Moshiri, presidents of YPF and Chevron, held a meeting last week. The two leaders shared views about the situation of the energy sector worldwide, the reality of both companies, and agreed to cooperate in the recovery projects in mature fields and the development of unconventional oil and gas.

Moshiri expressed interest in joining YPF in the unconventional cluster project that the Argentine company will develop in Vaca Muerta. Galuccio also stressed that Chevron is a global leader with a unique expertise in recovery projects and shale, and that "understands and believes in Latin America."

During the conversation, the two leaders agreed that the great challenge of the future is the development of unconventional oil. "YPF's success is the success of the industry", Moshiri started his presentation, adding: "The unconventional oil can revolutionize the energy paradigm in Argentina as in the United States."

The talks with Chevron, the second US oil, which won 13,681 million dollars in the first half of 2012, are part of a campaign seeking international investment for the new Argentina's state-controlled oil company YPF.

Miguel Galuccio emphasized the need for leader partners. "We have the natural resources, human capital and technological and operational capacity. We are after China and the United States the third largest Shale potential in the world; we only have to open the door to the future," said Galuccio.

Chevron Announced The Drill Of 120 Wells Over The Next Three Years

"Chevron will drill 120 wells over the next three years in Neuquén and we are open to other opportunities," confirmed Ali Moshiri, president of Chevron Exploration and Production for Africa and Latin America at the meeting of the Council of the Americas in Argentina on August 23rd, 2012. He added: "The challenge is not the lack of resources but the ability to develop oil and gas reserves in the country."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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