Chevron $1.24 Billion Deal Leads YPF Post-Repsol Shale Hunt

Chevron Corp., the world’s second-biggest oil company, signed the first agreement with Argentina’s government since it nationalized YPF SA in 2012 to help develop shale oil and natural gas in Vaca Muerta.

YPF’s American depositary receipts rose 5.7 percent today in New York after John Watson, Chevron’s chairman and chief executive officer, and YPF CEO Miguel Galuccio signed the accord late yesterday at YPF headquarters in Buenos Aires. The contract to develop the world’s second-largest shale gas deposit and fourth-largest shale oil reservoir finalizes terms for Chevron’s initial $1.24 billion investment, which may reach as much as $15 billion. The partnership was first formed in December.

“Vaca Muerta is a world-class asset and fits perfectly in our strong portfolio of unconventional resources,” Watson said in a statement e-mailed by YPF. “It is consistent with our strategic objective to enter attractive new areas early in the process.”

Argentine President Cristina Fernandez de Kirchner’s government seized a 51 percent stake in YPF from Spain’s Repsol SA in April 2012 to stem fuel imports that doubled to $9.4 billion in 2011 and are expected to rise to as much as $15 billion this year. Argentina said July 15 it will offer energy companies incentives if they invest $1 billion or more over a five-year period.

Price Target

YPF’s price target was raised to $17 from $13 by Deutsche Bank AG, the Frankfurt-based company said today in an e-mailed statement. YPF rose to $17.19 at the close, the highest since Jan. 30, and traded at 456 times its three-month daily average volume. Chevron gained 0.2 percent to $124.35.

The first phase of the venture between Chevron and YPF calls for drilling 100 wells in a 5,000-acre tract. Daily production is forecast to be 50,000 barrels of oil and 3 million cubic meters of gas by 2017, they said in an Argentine regulatory filing. The companies will be 50-50 partners in the second stage, which requires drilling 1,500 wells, YPF said.

“This partnership is strategic for the company and for Argentina,” Galuccio said in the statement. “We are putting into production a resource that can change the energy future of our country.”

Chevron’s investment will help make Argentina energy independent, Ali Moshiri, Chevron’s head of Latin America, Middle East and Africa, said May 16, after touring the shale formation in southwestern Argentina.

Production Opportunity

Vaca Muerta, Spanish for dead cow, may hold at least 23 billion barrels of oil equivalent, according to a report by independent auditor Ryder Scott released in February 2012 by YPF. Argentina holds the world’s second-largest shale gas reserves and the fourth-largest for shale oil, according to U.S. Energy Information Administration data.

Chevron Argentina is currently producing an average of 21,000 barrels of crude and 4 million cubic feet of gas in Neuquen Basin, the San Ramon, California-based company said yesterday in a separate statement.

The shale investment “provides Chevron with a new opportunity to profitably grow production beyond our 2017 production target of 3.3 million barrels per day,” George Kirkland, vice chairman of Chevron, said in the statement.

Argentina’s Supreme Court on June 4 revoked the seizure of Chevron’s assets in the country, lifting an embargo that had threatened to derail plans with YPF. The lawsuit originated from a $19 billion award for pollution in Ecuador.

Bargaining ‘Carrots’

YPF has also signed preliminary Vaca Muerta development accords with Dow Chemical Co., Corp. America run by Argentine billionaire Eduardo Eurnekian and Bridas Corp., a joint venture of the billionaire Bulgheroni brothers and China’s CNOOC Ltd.

Energy companies that meet Argentina’s $1 billion, 5-year investment requirements will be able to sell 20 percent of production in international markets without paying export taxes and keep export revenue from 20 percent of output outside of Argentina, according to a government decree on July 15.

Companies will also be able to sell oil and gas slated for export in the domestic market at international prices if the local supply is insufficient, Argentina’s government said. Those qualifying for the plan will also be granted foreign currency access, it said.

“This time around, the authorities appear to have brought ‘carrots’ (economics) to the bargaining table instead of sticks,” Barclays analysts Sebastian Vargas and Alejandro Grisanti said yesterday in a note to clients.

Repsol Negotiations

The analysts also said they think it “crucial” that the government follow through on negotiations with Repsol.

Repsol, based in Madrid, on June 25 rejected an offer by the Argentine government meant as compensation for YPF’s expropriation. Repsol was offered a 47 percent stake in a joint venture in Vaca Muerta valued by Argentina at $3.5 billion, as well as $1.5 billion for development, according to a regulatory filing in Spain.

Repsol has filed numerous lawsuits including ones in Madrid and New York seeking compensation of $10.5 billion for the seizure.

YPF, which has depended solely on the local debt market for financing in pesos, has been shut out of international capital markets because of double-digit borrowing costs for Argentine issuers.

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