How Argentina's Menem Touched Off A Gusher

When it comes to exports, the land of the gauchos is known for beef and wheat. But those traditional products may soon be topped by a more lucrative product of Argentina's rich lands: oil.

With his free-market reforms, President Carlos S. Menem has triggered the hemisphere's biggest oil boom. Oil investments and the revenue from rising output should give a boost to Menem's efforts to revive Argentina's economy--and service its $65 billion foreign debt. Crude and refined oil exports climbed to $1 billion last year, up from $800 million in 1990, and they seem to be headed higher.

When Menem took office in 1989, only four foreign oil companies were active in Argentina: Amoco and Occidental Petroleum, which produced 14% of the country's oil, along with Exxon and Royal Dutch/Shell, which operated about a third of Argentina's refining capacity and filling stations. By law, the only customer for crude and the sole oil supplier to the refineries was Yacimientos Petroliferos Fiscales (YPF), the money-losing state oil monopoly.

`VERY BULLISH.' Since then, Menem's drive to privatize the oil industry has drawn more than 45 foreign companies and 25 local outfits to buy stakes in producing fields and exploration acreage. They plunked down $1.3 billion in cash and are expected to spend $3.8 billion to $4.1 billion more for drilling and other investments. A big player is Texaco Inc., which signed exploration concessions covering 19 million acres and plans to spend $20 million to $25 million on exploratory drilling. Other companies have been flocking to Argentina to supply equipment and oil-field services. "We're very bullish on the expectations for Argentina's future," says Floyd W. Boyd Jr., president of Amoco Corp.'s Argentine subsidiary.

With reserves estimated at 2.4 billion barrels, Argentina will never be a major player in the oil business compared with heavy hitters such as Venezuela and Mexico, which have reserves of 58 billion and 51 billion barrels, respectively.

What's attractive about Argentina, though, is the favorable terms it is offering, along with political stability and a business-friendly climate. Although YPF retains a share as a joint-venture partner in some fields, Argentina is selling other acreage as 25-year concessions with no restrictions on marketing the oil, in Argentina or abroad. And the effective tax rate on earnings repatriated by foreign oil companies is a moderate 36%.

Those terms compare favorably with the climate for oil companies in Venezuela, Mexico--or the U.S. Although Venezuela plans to open marginal fields to foreign companies, they will operate as contractors to the state oil monopoly, while Mexico still bars any private role in eil exploration and production. "It's a lot more encouraging for the oil and gas industry in Argentina than it is in the U.S. at the moment," says C. Ed Hall, a vice-president of Houston's Santa Fe Energy Resources Inc. "Our government, through its taxation, is causing problems for the oil-and-gas community." Santa Fe is a partner in a U.S.-Argentine consortium that paid $185 million for a 90% share in an existing Argentine field.

MORE TO COME. Menem's reforms have shattered the nationalist ban that for decades squeezed private and foreign companies out of much of Latin America's oil industry. And there's more privatization to come. Menem announced in October that most remaining areas of Argentina with oil-and-gas potential will be put up for bidding this year. Last year, the influx of new investors boosted oil output by 5%, to 500,000 barrels per day. And production "will increase dramatically over the next 5 to 10 years," predicts Luis A. Rey, chairman and CEO of Pluspetrol, a private Argentine oil company. "All this exploration is bound to produce results."

YPF President Jose "Pepe" Estenssoro is paring the company down in order to take it public--a move Argentina's Congress is expected to authorize soon. He's selling 26 tankers, a shipyard, part or all of three oil refineries and pipelines, and has already shrunk YPF's bloated payroll. Estenssoro, a Menem appointee, ran the South American operations of Hughes Tool Co., now part of Houston-based Baker Hughes Inc., for more than 20 years. His plan is to sell a 50% stake in YPF, valued at $4 billion, to investors in Argentina, the U.S., and Europe starting in 1993, and eventually to list it on the New York and London stock exchanges.

So far, state oil monopolies in other big Latin American countries--Mexico, Venezuela, and Brazil--have remained largely exempt from the region's free-market trends. But if the oil boom gives Argentina's economy a strong lift, the example of YPF's privatization seems sure to weaken the nationalist oil taboo in those countries, too.