Life at Last for the "Vaca Muerta" Shale Area

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Argentina's YPF (NYSE: YPF) finally sealed a deal with Chevron (NYSE: CVX) regarding YPF's huge shale oil and gas reserves. It has not been easy to find a partner for the currently state-controlled Argentinean oil champion (the government controls 51% of YPF's shares), but the huge potential of the Vaca Muerta shale formation plus relevant concessions from the Argentinean government made the closing possible.

The deal

The final agreement, which the companies started on last December, will give Chevron 50% control of a joint company that will own 96,000 acres of the Vaca Muerta formation (3% of the total acreage) in exchange for a $1.24 billion investment. The US oil company would be the first international oil company to invest in the country since the government nationalized YPF in 2012, taking its current 51% from the hands of Spanish oil group Repsol (NASDAQOTH: REPYY.PK) and from the Eskenazi family (Repsol still controls 12% of YPF's shares.)

According to the deal, Chevron and YPF will share investments and proceeds equally after Chevron pays $740 million for the acreage, $240 million to compensate YPF for the works already completed on those acres and the rest on further investments. The initial plan is to drill 100 wells on 5,000 acres of the Vaca Muerta formation and then to expand that figure up to 1,500 wells in order to reach a production of 50,000 barrels of oil and 30,000 barrel equivalents of gas per day.

The deal also allows Chevron to export 20% of the produced oil and gas tax free and also lets the company send home the export's proceeds. This is a 180 degree change in Argentina's current energy policy. This very same deal shall be available for any company offering to invest more than $1 billion over a five-year period.

Not an easy sale

Making an international oil group invest in Argentina was not an easy task, even when the country owns the third biggest shale gas reserves in the world and the fourth largest shale oil reserves (according to the US Energy Information Administration.) There are two main reasons for these difficulties. Argentina's government expropriated 51% of YPF from Repsol and the Eskenazi family without compensation. As a result, the Spanish group is now demanding Argentina to pay $10.5 billion in cash or liquid assets through a court of international arbitration; Repsol has also threatened to sue anyone who would invest alongside YPF. Argentina also has strong currency restrictions and harsh government requirements to reinvest most profits into production.

The two aforementioned points have been making most major oil companies pause their investments in Argentina until the outlook ameliorates (as is happening right now.) I think that Repsol will finally be compensated through a mix of acreage in Vaca Muerta and cash. As a matter of fact, YPF recently offered Repsol a deal. Valued at $5 billion, it was considered too low by the Spanish oil company.

Foolish conclusion

John Watson, Chevron’s CEO, described Vaca Muerta as a “world class” asset while Miguel Galuccio, YPF's CEO, described the deal as “a demonstration of trust by a great international company.” Galuccio also said “We are putting in production a resource that may change the energy future of our country."

After a decade of stagnant investments due to the lack of sustainable  energy policies, Argentina lost its energy self-dependence and is importing over $12 billion of oil and derivatives per year. I think of this deal as a step forward. YPF has scattered an ambitious $37.2 billion investment plan, but the Argentinean company needs foreign partners to help finance the expensive shale drilling. My bet is that other companies such as the Sino-Argentine company Bridas or Brazil's Petrobras will follow Chevron soon.

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Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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