Sleep with the enemy
The seizure of YPF may not be the end of it. Argentine President Cristina Fernandez could easily embark on an overhaul of the entire energy sector. Even so, the country’s vast shale reserves are too important in the global scheme of things. The nationalization is bad, but Big Oil can’t afford to shun Argentina.
It isn’t just Buenos Aires that’s inhospitable. From Baghdad to Moscow and beyond, the risks of extracting such resources run high. Oil majors have learned to live with many of their unfriendly hosts and still make a buck. The increasingly difficult task of replacing reserves means Argentina’s Vaca Muerta basin, which could supply some four centuries’ worth of the country’s consumption demands, isn’t easy to abandon.
Four more years with Fernandez won’t be much fun for these companies. Up till now, YPF’s returns haven’t been terrible. It achieved a 26 percent return on invested capital in 2010, against a 17 percent cost of capital, according to Credit Suisse. That was before Fernandez forced oil companies to repatriate off-shore holdings and eliminated the sector’s fiscal incentives. She’s now declaring the production chain fair game for potential takeovers.
Oil companies have seen this movie before, in Venezuela. President Hugo Chavez has restructured his country’s energy legislation, hiked taxes and royalties and forced foreigners to accept less beneficial partnerships. Exxon Mobil and ConocoPhillips fell out with his regime and now lack a presence in the largest heavy oil patch in the Western Hemisphere.
But Chevron’s skilful handling of Venezuela’s leftist government may be the example to follow. It shrugged off the president’s ideological bent to forge a relationship with the administration and remains a major player after 13 years of Chavez. And if his government should eventually fall to a more business-friendly opposition, Chevron’s tenacity could pay off even more.
Exxon, for one, has already seen value from its 1 million acres in the Vaca Muerta formation, which, at nearly 7.5 million acres, is slightly larger than America’s Eagle Ford. And it stands ready to invest over $50 million more. Apache and Chevron also have a presence in Argentina. Of course, there won’t be 20 percent-plus returns any time soon. But these companies know their business is about the long game.