March 6 (Bloomberg) -- Explosions tear through the Vaca Muerta shale oil deposit, 3,100 meters beneath the desert in western Argentina, cracking open underground rock formations.
Oil workers, braving 40-degree-Celsius heat and vicious swarms of horseflies, operate a battery of massive pumps that roar into action. They force a gelatinous sluice of water, chemicals and sand into the openings created by the explosion, so they can tease out the oil.
“Success!” yells Osvaldo Alarcon, who’s supervising the hydraulic fracturing -- or fracking -- for the site’s owner, YPF SA, Argentina’s state oil producer. His workers cheer. “The center of the earth is ours,” he says, Bloomberg Markets magazine will report in its April issue.
The crew of Shale Oil 28, or SOIL 28, as this tract is known, is on the frontline of a push by some of the world’s largest energy companies to unearth Vaca Muerta’s hidden riches.
The Belgium-sized layer of underground rock, which is named for a nearby mountain range and means dead cow, gives Argentina the planet’s fourth-biggest shale oil reserves, behind the U.S., China and Russia.
The government of President Cristina Fernandez de Kirchner has invited foreign oil companies to help the exploration efforts by YPF, a company her administration seized from its Spanish parent, Repsol SA, in 2012.
In 2013, Chevron Corp. agreed to invest as much as $16 billion to drill 1,500 wells across 290 square kilometers (112 square miles) of Vaca Muerta owned by YPF--starting with the area around SOIL 28. Royal Dutch Shell Plc, BP Plc and France’s Total SA plan to invest billions of dollars to search for and produce oil in Vaca Muerta.
Ernesto Lopez Anadon, chairman of the Argentine Oil and Gas Institute, says Argentina could become the world’s fourth-largest shale oil producer if it makes smart decisions.
“Argentina is sitting on a potential energy bonanza,” Lopez says. “If it could just get its act together and not squander it.”
Twenty-five kilometers west of SOIL 28, another Vaca Muerta field above shale oil waiting to be tapped has been sitting idle for most of the past six years. On a February afternoon, a junked car and a sun-bleached goat’s skull sit on a gravel road leading into the tract, which is known as Mata Mora. There are no rigs, no trucks and no heavy equipment in sight.
The lease for oil exploration at Mata Mora, which means blackberry bush, is owned by Andes Energia Plc. The biggest individual shareholder in the London-based company is Jose Luis Manzano, who served as majority leader in the lower house of Argentina’s National Congress from 1989 to 1991, when he was appointed as interior minister under President Carlos Menem.
The government of Neuquen province granted a Manzano-controlled company a stake in the lease in 2006 for no upfront money, after former President Nestor Kirchner’s administration licensed it for oil exploration.
In 2013, the Mata Mora field produced no oil or gas, while YPF’s nearby Loma Campana field, where Chevron is drilling, produced 272,000 barrels of crude, energy secretary records show.
Manzano, 58, leads one of seven groups of former government officials and members of Argentina’s ruling Peronist movement who’ve won a piece of the nation’s energy riches in auctions by provincial governments, according to a 2012 Argentine Senate investigation.
None of the winners had the oil industry experience required to own a lease, lawmakers who led the probe say. The Senate report says Manzano controls five companies that won leases. Those companies were awarded a total of 33 leases -- more than twice as many as any other winning bidder, according to provincial auction records.
Other beneficiaries include former central bank director Daniel Peralta and Daniel Lalin, a former treasurer of the city of Buenos Aires.
In November 2012, Peralta and his wife, Laura Peralta, were found lying dead in pools of blood in their home in Scottsdale, Arizona. Scottsdale police say Peralta killed his wife and then took his own life.
Lalin says he used contacts from years in the Peronist movement to win oil leases.
“Contacts are everything in Peronism,” Lalin says. “Oil experience helps, but the contacts are what matters.”
The oil leases are an underpublicized and little understood force behind the economic chaos now gripping Argentina.
After 11 years of rule by Nestor Kirchner -- who served from 2003 to 2007 and died in 2010 -- and his widow and successor, Fernandez, oil has become one more underdeveloped resource in a country blessed with fertile soil, abundant minerals and the world’s fourth-biggest cattle herd.
Four years ago, Argentina was a net exporter of oil and gas. Today, it imports a fifth of its energy.
“Importing 20 percent of our energy is destroying the economy, and a 180-degree change is needed,” says Juan Jose Aranguren, chief executive officer of Royal Dutch Shell’s Argentine unit.
At Mata Mora, which spreads across 22,800 hectares (56,340 acres) of the Vaca Muerta reserve, a Manzano-controlled company in Argentina was part of a group that won oil exploration rights in a 2006 Neuquen auction. The winning bidders pledged to spend $3 million within three years to search for oil, says Nigel Duxbury, a director of Andes Energia.
They didn’t keep that promise, says Guillermo Coco, Neuquen’s energy secretary, whose office polices whether leaseholders make required investments in exploration. Andes Energia now owns the lease.
Work in Mata Mora didn’t begin until September 2011, after Andes Energia struck a deal with YPF, which was then owned by Repsol. YPF had been Argentina’s national oil company from 1922 to 1999, when the government sold a controlling stake to Repsol.
Andes Energia is partnering with YPF to explore for more oil, says German Ranftl, the company’s chief financial officer. Andes Energia will pay back YPF 30 percent of its investment with money it gets from oil production, Ranftl says. With that arrangement, Andes will get about 30 percent of future revenue from drilling.
The Andes/YPF venture financed one 3,185-meter-deep (10,450-foot-deep) well into the oil-rich shale at a cost of about $11 million, Duxbury says. The project was intended as a test well and not a major oil producer. The effort produced about 64 barrels of oil a day until Feb. 16, 2012, Andes says.
Since then, the field has been idle, with not a drop of oil produced in 2013, according to Argentina’s energy department. YPF, now back under state ownership, plans to explore for more oil and produce as much as possible in Mata Mora, Ranftl says.
YPF Chairman Miguel Galuccio declined to comment for this story.
Andes Energia is the only company that is getting production work primarily funded by YPF, according to people familiar with the oil leases and YPF.
Andes and other companies controlled by Manzano stand to reap huge profits on their leases because a government-owned company is financing the production, says former Argentine Senator Maria Eugenia Estenssoro, who co-led the 2012 Senate probe of provincial oil leases.
Federal and provincial government officials have created a system that serves their friends, says Estenssoro, who’s now a legislator in Buenos Aires province.
“Once more, government officials are using YPF to make a few people rich,” she says. A member of the UNEN party, which opposes the president, Estenssoro is a daughter of Jose Estenssoro, who was YPF’s chairman from 1990 to 1995.
Manzano, who lives in Buenos Aires, declined repeated requests for interviews. Dominic Crossley, his lawyer, says Manzano never sought or received help from any politician or government official. Manzano has done nothing wrong, says Crossley, a partner at Collyer Bristow LLP in London.
Companies controlled by people with little or no experience in the energy industry have amassed almost half of the oil leases auctioned off by provincial governments since 2006, according to Gualter Chebli, the Buenos Aires–based consultant who investigated the auctions for the Senate.
The Argentine oil-lease-auction law doesn’t require bidders to pay any upfront money for their tracts. The law requires bidders to invest in oil exploration and production and then share oil revenue with provincial governments.
To bid for a lease, a firm has to pay administrative fees usually ranging from $4,000 to $20,000, depending on the size of the field in the contract. The owner of a lease also has to pay the province annual rental fees of a few thousand dollars for the land.
Companies controlled by Manzano and his partner, Daniel Vila, have won 33 leases in six provinces since 2006, according to records collected for the 2012 Senate investigation. The partners promised to spend a total of $393 million searching for oil within three years of getting the lease, the records show.
Andes Energia, which bought most of those leases in 2013, has invested $18 million in oil exploration, says Andes director Duxbury. He declined to say whether the funds were from YPF.
President Fernandez has tried to address her country’s energy inefficiency by government fiat. In May 2012, her government took back control of YPF from Repsol; on Feb. 25, Repsol agreed to accept the government’s offer of at least $5 billion in bonds for a 51 percent stake.
Fernandez had complained for years that Repsol was causing an energy crisis in Argentina by sending profits from existing oil wells home to Spain instead of drilling new wells -- an allegation Repsol said was false.
In December and January, Buenos Aires was wracked by power failures; utilities say frozen rates have prevented them from investing in new equipment. During the same period, police in Buenos Aires, Cordoba and Salta struck for higher pay, letting mobs of looters roam free on the streets.
Fernandez -- who had taken five weeks off in October and November for surgery to remove a blood clot near her brain -- spent most of December and January out of public sight as well. For five weeks of that time, she stayed in her 520-square-meter (5,600-square-foot) brick villa in Patagonia.
When she returned in late January, her government scrapped limits on buying dollars, and the central bank devalued the peso by 17 percent, to 8.01 pesos to the U.S. dollar, the lowest rate in 12 years. Inflation, which has been above 22 percent since May 2011, stood at 28 percent as of Feb. 10, according to estimates by economists.
The oil-lease program, launched in 2006, has held back Argentina’s ability to exploit areas like Vaca Muerta, says Daniel Montamat, a former energy secretary who was YPF’s chairman from 1987 to 1989 and now runs consulting firm Montamat & Asociados in Buenos Aires.
Leaseholders with political connections and no experience in the oil industry have most often sat on their holdings until they either sell some of the rights or, as in Andes Energia’s case, get funding from YPF, Montamat says.
Argentina’s annual oil production was down 24 percent in 2013 from 2003, costing the economy at least $60 billion, he says.
“Part of the problem is these oil lease deals,” Montamat says.
The potential value of these leases soared in 2010, after Repsol introduced advanced fracking technology to Argentina, making previously hard-to-recover oil easier to get out of the ground.
Andes Energia CFO Ranftl says the company has signed 15 oil production agreements with YPF since 2010. Andes won’t have to invest any of its own money for the work, Ranftl says.
Andes, which trades publicly on London’s AIM Exchange, has rights to drill on 86,000 hectares of Vaca Muerta worth as much $2.5 billion in a one-year pilot progam, based on YPF’s value of lease hectarage in its Vaca Muerta agreement with Chevron.
Andes shares have almost tripled since November, when the company announced oil discoveries in ventures with YPF; they traded at 62.00 pence on March 5.
Manzano’s companies won the leases in regulated, transparent auctions that were fully disclosed and haven’t been challenged by any administrative claims, Andes director Duxbury says.
“The building of Andes’s portfolio in Argentina has had nothing to do with politics,” he says.
A century ago, Argentina’s economy was bigger than France’s, according to Groningen, Netherlands–based Maddison Project, a research group that studies current and historical economic performance around the world.
For decades, wheat barons had plowed their wealth into Buenos Aires, creating a city with boulevards, monuments and decorous apartment buildings that mimic Paris’s. They brought Europe’s top opera singers to Teatro Colon, which is similar to Milan’s La Scala and twice as large. By 1914, a wave of Spanish, German and Japanese immigrants had landed in Argentina.
The country created YPF in 1922, 15 years after a drilling crew discovered oil accidentally in southern Argentina while searching for water.
In the past eight decades, Argentina has experienced a cycle of boom and bust. In January 2002, President Eduardo Duhalde defaulted on $95 billion in debt and devalued the peso, causing the economy to contract by 15 percent in the next year. Duhalde resigned after just 14 months in office.
His successor, Nestor Kirchner, who said he would enact a law to restructure the nation’s debt to resolve the crisis, was elected in a landslide.
Argentina has a history of cronyism that dates back to 1930, when the nation was taken over in a military coup.
In 1946, Juan Domingo Peron, an army colonel, was elected president. Peron, alongside his charismatic wife, Eva, cemented political support using patronage, awarding contracts to friends and printing money to fund social programs, says Ricardo Monner Sans, president of the Buenos Aires–based Civil Anticorruption Association.
The ascent of Argentina’s new oil barons began in 2004, when Kirchner enacted a law allowing the provinces, instead of the federal government, to auction oil leases. Kirchner had been lobbying for that kind of devolution since 1994, when he was governor of Santa Cruz, a big oil-producing province in Argentina’s extreme south.
He said that provinces, not the federal government, should control their natural resources to assure they got a bigger share of the wealth. By law, bidders must have the financial and technical capabilities to search for and produce oil.
Even though the provinces run the auctions, the president’s administration decides which bidders are qualified and has final say on who gets awarded the leases.
Manzano, who got a medical degree before entering politics, won a seat in Congress representing Mendoza province in 1983, when he was 27. He rose to majority leader in the lower house of congress in his second term, and President Menem appointed him interior minister in 1991.
During the same period, Kirchner and Fernandez were rising through the Peronist ranks: Kirchner was governor of Santa Cruz province, and Fernandez held a seat in the provincial legislature.
In December 1992, Manzano resigned during a flurry of corruption allegations against the Menem administration. Manzano was never charged with any wrongdoing.
Manzano quit because of political differences, not corruption, Crossley, Manzano’s lawyer, says.
“He denies ever having been involved in corrupt activity and has never has been prosecuted for any such offense,” he says.
Manzano moved to La Jolla, California, with his girlfriend, Argentine model Alejandra Massilo, where he was a visiting scholar at the University of California at San Diego. He later went to Washington to study international business and finance. In February 1993, the couple was featured on the cover of Argentine magazine Gente.
In 1996, Manzano, then 40, moved back to Argentina and became a partner in Grupo Uno SA, a cable-television company owned by the family of his future partner, Vila. Grupo Uno and its Supercanal Holding SA unit acquired television, radio and cable franchises -- many from the government -- creating what is now Argentina’s second-biggest media company.
Vila didn’t respond to calls seeking comment.
Vila comes from a wealthy Mendoza family that has long owned radio stations and other media companies. His girlfriend is Pamela David, who anchors the morning news program on America TV, which is now owned by Vila and Manzano’s cable company.
Manzano has a 10 percent to 30 percent stake in several of Vila’s companies, Crossley says.
After Kirchner took office in 2003, the administration invited Manzano to the Casa Rosada, which means Pink House, the rose-colored, colonial seat of the presidency in downtown Buenos Aires.
Manzano was in a position to help the president because of his role with TV and radio networks across Argentina, says Alberto Fernandez, who served as the chief of Kirchner’s cabinet.
Fernandez, who isn’t related to Cristina Fernandez, now advises companies on political risk in Argentina.
“He had his television channels, and that was important,” he says.
Manzano has visited every president for the past 30 years, Crossley says. He didn’t discuss oil with Kirchner or his wife, Crossley says. Manzano has visited YPF’s offices and met with Galuccio, YPF’s chairman, Crossley says.
“He has neither sought nor received improper help from any politician or administration,” he says.
In 2007, companies controlled by Manzano and Vila used a so-called reverse merger in which London-based Ragusa Capital Plc, then a publicly traded company, bought some of the two men’s companies’ oil leases and their control of the city of Mendoza’s electricity distributor, according to a regulatory filing.
That made Manzano Ragusa’s biggest individual shareholder, and the company was renamed Andes Energia.
“The mastermind behind Andes Energia and getting our oil leases is Manzano,” says Andes CFO Ranftl, who has worked for Manzano for 15 years. Manzano was the key person who negotiated for all of the oil leases, Ranftl says.
Manzano isn’t a board member, Andes Energia director Duxbury says.
“The experienced management team of Andes are the brains behind the successful growth of the company,” he says. “The company was quick to realize the existence and opportunity of underexplored resources in Argentina.”
“He is not in management but is very active in our strategic planning,” Ranftl says. “It was his idea to go public.”
Manzano-controlled companies haven’t met their commitments to search for oil in Chubut, Neuquen and Salta provinces, according to the energy secretaries in the three provinces. They say they looked into taking away his companies’ fields.
Salta province Energy Secretary Flavio Aguilera says he didn’t see any investment in two leases won by a Manzano-controlled company and little investment in others.
Andes Energia has searched extensively for oil through leases in the three provinces, including two fracking wells in Vaca Muerta, in Neuquen, Duxbury says.
“Andes Energia has fulfilled its commitments,” he says. “Andes has an experienced management team with significant expertise in the oil and gas industry as well as the world of finance, the combination of which is required to successfully build and grow an oil exploration and production company.”
In Chubut, the southern province where hundreds of whales gather to mate off the coast en route to Antarctica, the government canceled a 2006 public auction and instead awarded a Manzano-controlled company a stake in six oil leases in a no-bid process, provincial records show.
He didn’t have to pay administrative fees; all firms that won these leases had their fees waived.
In 2009, Luis Eduardo Tarrio, Chubut’s oil and mining secretary, who was a member of the administration of Peronist Governor Mario Das Neves, signed two resolutions exempting the companies from paying oilfield-rental fees to the government through 2010, saving the companies about 7 million pesos ($1.8 million at the time).
After investigating, the province’s legal department recommended nullifying the rental-fee exemption because of irregularities in the original resolutions, according to an Oct. 2, 2013, memo from Chubut’s energy secretary.
Duxbury says its companies with Chubut leases legally renegotiated the fee exemption with provincial officials during difficult economic times, as did other oil companies at the time in Argentina. Andes Energia isn’t aware of any case against the company for the rental-fee exemption, Duxbury says.
The province has approved an Andes Energia agreement with YPF to extend its leases in Salta, Duxbury says. Andes Energia is searching extensively for oil in the three provinces, he says.
Other former government officials and Kirchner friends won oil leases. One of those winners was Daniel Peralta, who had been appointed as central bank director during Menem’s presidency.
After gaining the leases, Peralta and his wife, Laura, bought control of Scottsdale, Arizona–based Delta Mutual Inc. in 2008, according to a company regulatory filing. During the next five years, the Peraltas used Delta to buy and sell oil leases in Salta province.
In August 2007, Delta’s South American Hedge Fund LLC had paid $1.7 million for stakes in oil fields owned by a company run by Daniel Lalin, the former Buenos Aires treasurer. In the late 1990s, Lalin, a Peronist, ran Kirchner’s favorite soccer team, Racing. When Lalin announced Racing was bankrupt, in 1999, one enraged fan smashed him in the head with a drum.
A decade later, Lalin profited from his company’s oil lease. Lalin’s company, Oxipetrol Petroleros de Occidente SA, valued its fields at $2.7 million in 2007. In 2009, Hong Kong–based oil company New Times Group Holdings Ltd. bought 60 percent of two of the oil fields for $270 million, according to filings by Delta Mutual.
Delta’s stake in the fields, which it bought from Lalin for $480,000, could be worth $135 million, Delta says.
During all of that time, Delta failed to make good on its promise to explore for oil, Salta province Energy Secretary Aguilera says.
“There’s nothing there from what anyone can tell,” he says, sitting in his small government office in the city of Salta, the capital of the province. The paint on the bare walls is smudged and peeling, and the only desktop computer isn’t connected to the Internet.
On Nov. 2, 2012, Peralta visited the office, saying Delta was on the verge of signing major investors to bankroll production on its leases, Aguilera says.
“He was very charming and dropped a lot of names,” he says.
Five days later, Peralta’s 22-year-old son found Peralta and his wife shot to death in their Scottsdale home, a few miles from Delta’s headquarters. After more than a year of investigating, Scottsdale police detective Hugh Lockerby says he believes Peralta shot his wife in a jealous rage and then killed himself.
Delta Mutual made Executive Vice President Malcolm Sherman the new CEO and put Peralta’s oldest son, Santiago, on its board.
Delta is negotiating with province officials to comply with its leases, Sherman says.
“We as a company made competitive bids and lost more than we won,” he says.
Back in the sweltering desert oil fields of SOIL 28 in Vaca Muerta, workers move tanker trucks and heavy equipment slowly across dusty gravel roads toward clearings where oil lies trapped 3,000 meters below.
In the near future, Andes Energia CFO Ranftl says, there will be similar activity on the company’s leases, where Andes and its largest individual shareholder, Jose Luis Manzano, stand to profit because state-owned YPF will fund exploration and drilling.
In less than a decade, people with close political ties have won energy empires for just a few thousand dollars in fees in a country sitting on a potential oil revolution.
Lalin says getting into the oil industry was as easy as calling on contacts he had made in a career working for the Peronist movement.
“I didn’t have any oil experience at all,” he says. “Those oil auctions are won with political contacts.”
The government system of granting oil leases is a monumental mistake that has set the nation back in both energy production and economic growth, says Estenssoro, the former senator who co-led the 2012 Senate investigation.
“The winners are the government’s friends,” she says. “The losers are the people of Argentina.”
To contact the editor responsible for this story: Jonathan Neumann at firstname.lastname@example.org.