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Chevron, YPF sign $1.5 billion accord for shale exploration

BUENOS AIRES -- Chevron has agreed to fund most of a $1.5 billion joint venture with YPF to develop the South American country' s vast shale oil and gas deposits.

The deal is the first significant investment by a major international oil company in Argentina since President Cristina Kirchner expropriated a 51% stake in YPF from Spain' s Repsol just over a year ago.

It also marks Chevron' s most aggressive effort to date to tap oil from shale outside the United States, illustrating the American oil giant' s willingness to shoulder both geological and political risk in pursuit of promising reserves.

This week' s announcement represents the culmination of almost seven months of complicated negotiations involving challenges such as Argentine price controls, export taxes and a ban on sending profits abroad and Chevron' s legal battle with Ecuadorean indigenous groups, all of which influenced the final agreement.

As part of the deal, Chevron will initially invest $1.24 billion in a pilot project to develop shale deposits in the famed Vaca Muerta, or "dead cow," formation in the arid Patagonian province of Neuquen, Chevron and YPF said in statements. YPF has already invested another $260 million in the project.

The first phase of the pilot includes plans to drill more than 100 wells through 2014; a second program would entail drilling 1,500 wells in hopes to raising production to 50 Mbbl of oil and three MMcm of natural gas a day.

YPF currently produces around 10 Mbpd of shale oil in Neuquen, up from 4,000 at the beginning of the year.

YPF didn' t say how much Chevron might invest in a second stage.

Vaca Muerta is a world class asset and it fits in perfectly with our solid portfolio of unconventional resources, Chevron President John Watson said in the statement. "This is consistent with our strategic goal of getting into new and attractive areas early on in the process."

YPF is betting on the development of Vaca Muerta to wean Argentina off costly imported fuels, with the hope that one day it will once again become a major oil and gas exporter.

For Chevron, the partnership with YPF is an aggressive attempt to replicate the success of tapping shale in the U.S. and Canada. The company has begun to explore shale deposits from South Africa to China, and holds leases to thousands of acres in Canada and several million overlying shale across eastern Europe.

Chevron executives have characterized these bids to find oil and gas as part of a long term strategy of applying techniques honed in the United States, but said it would take years to result in commercial levels of production.

In South America, Chevron has shown a willingness to embrace political risk. It has continued to ply heavy oil fields in Venezuela as a minority partner with the country' s state owned company, Petroleos de Venezuela.

In Brazil, Chevron is restoring offshore production that it had sealed off during an investigation into two underwater oil leaks caused by its operations. The spills, though involving relatively minor amounts of oil, provoked a firestorm in Brazil, leading to criminal charges against 11 local employees, and a federal prosecutor filling two lawsuits each seeking about $11 billion in damages. The criminal charges were dismissed in February.

Chevron previously expressed concern about an Argentine court order that froze some the cash flow of its local subsidiary, which was lifted in June. The order was in response to an effort by Ecuadoreans to collect a $19 billion environmental verdict in their country by seizing Chevron' s assets in countries where it operates, including Argentina.

We need to have satisfactory resolution of those above ground complications before we proceed in a material way on Vaca Muerta Patricia Yarrington, Chevron' s chief financial officer, told analysts in April.

Argentina became a net energy importer in 2011 after declining oil and gas production combined with booming economic growth and rising demand for energy. Indeed, Mrs. Kirchner said she decided to expropriate YPF from Repsol because the company had failed to boost output just when demand was rising.

The deal gives Chevron a foothold in a region that one day could be a major source of unconventional oil and gas.

Argentina ranks second in the world, behind China, in potentially recoverable shale gas reserves, with 802 Tcf, according to a study last month by the United States  Energy Information Administration. Argentina also ranks fourth in shale oil with an estimated 27 Bbbl.

The deal also comes just a day after Argentina announced a package of incentives for oil and gas investors.

Companies investing at least $1 billion will eventually be allowed to sell 20% of their production abroad without paying export taxes. They will also be able to keep related profits.

Argentina currently taxes oil exports and forces companies to repatriates earnings in US dollars and change them into Argentine pesos on the local foreign exchange market.

Under the Kirchner administration, Argentina has struggled to attract investment during a decade of price controls that have severely crimped investment in oil and gas.

YPF Chief Executive Miguel Galuccio has pledged to reverse declining output and has been criticized for not doing so during his first year in office. But company officials and analysts note that the oil industry is a long-term business and that it can take years to substantially change production trends.

Economist Enrique Szewach said the new tax and export incentives represent a partial return to the more market friendly regulatory environment that prevailed in Argentina in the 1990s, when the government did more to attract investment.

Those who already want to invest in Argentina will take advantage of the new framework, but this alone is probably not enough to attract more investment Mr. Szewach said.

Meanwhile, Argentina' s dispute with Repsol, which has not been compensated for the expropriation of YPF, could continue to dissuade some companies from investing.

As significant as the Chevron deal is for YPF and the Kirchner administration, analysts and industry executives say at least $7 billion in annual investment is needed for Argentina to fully tap its unconventional energy resources.

Dow Jones Newswires

07/17/2013

 

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