YPF sees Argentina reforms drawing billions in shale investments

By Alex Nussbaum, Andres R. Martinez on 9/22/2016

NEW YORK (Bloomberg) -- Argentina’s biggest oil company sees the government removing production subsidies by the end of 2017, a step that may help lure investment as President Mauricio Macri tries to sell his vision of a more competitive economy.

The reforms, including talks with unions and contractors to help reduce costs, may attract some $5 billion to $10 billion in additional investments into the country’s oil and gas industry through the end of next year, YPF SA Chairman Miguel Angel Gutierrez said in an interview Wednesday at Bloomberg headquarters in New York. YPF has also had conversations with “middle-market" energy producers and equity firms as it seeks to pull in even more money, the chairman said.

“We need to demonstrate to the world that we are able to reduce costs." Gutierrez said. “With the right set of conditions, I think the investment will come."

While support for natural gas production should remain in place for another three years after it expires next year, the direction is clear, he said. “We are moving toward a market economy, no doubt. Our industry is not an exception."

Since taking office in December, Macri has devalued the national currency, ended foreign exchange restrictions and cut fuel subsidies, as he tries to revive Argentina’s moribund economy. State-owned YPF, meanwhile, is courting international corporations from Exxon Mobil Corp. to France’s Total SA, as it seeks help to develop the world’s second biggest shale oil and gas reserves.

Bowing to public opinion, YPF will “no doubt" remain controlled by the government, Gutierrez said. Nonetheless, market reforms are making the company and country more competitive, helping to attract investments from major energy companies, private equity firms and other backers, the chairman said.

Contract Negotiations

YPF is negotiating with unions and contractors to lower costs and the national and local governments have spent billions on new roads and other infrastructure in Vaca Muerta, the country’s vast, mostly untapped shale fields, Gutierrez said. The Buenos Aires-based company expects to lower drilling costs below $10 million a well by the end of this year, he said.

Macri ended a 15-year fight with bondholders, who had frozen the nation out of debt markets and trimmed a budget deficit that ballooned under past presidents. He also replaced YPF’s leadership this year, appointing Gutierrez, a former Telefonica SA and JPMorgan Chase & Co. executive, as chairman and Ricardo Darre as CEO.

Vaca Muerta, Spanish for dead cow, has major deposits of both oil and gas. Covering an area the size of Belgium, it has become one of the world’s top shale plays and is considered key to restoring energy self-sufficiency in Argentina. Exxon has designated the formation as one of nine “key activity” areas in the Western Hemisphere.

YPF and Chevron Corp. are jointly developing shale there as well and BP CEO Bob Dudley said on Sept. 14 that the UK producer sees “ enormous potential" in the South American country.

Domestic Focus

While Vaca Muerta could eventually make Argentina a force on the global natural gas market, YPF’s focus for now remains on domestic use as well as sales to neighboring Bolivia and Chile, Gutierrez said. The country will likely remain a net importer of gas for at least the next five years.

Financial index provider MSCI Inc. said in June it would review Argentina, South America’s second-largest economy, for a possible upgrade to emerging market status. Argentina has been classified in the frontier category for the last seven years.

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