Experts: Argentina’s a bad bet for U.S. oil companies

Argentina’s renationalized oil company YPF has been courting foreign investors to tap shale gas and crude reserves that could rank as the world’s third largest, but U.S. companies would be wise to shy away from the offers, energy experts advised today.

There are just too many risks to investing in Argentina, said Bud Weinstein, associate director of Southern Methodist University’s Maguire Energy Institute and University of Houston petroleum engineering professor Michael Economides.

Energy companies looking to make deals with YPF “need to make sure before going in that they have some very ironclad contracts that guarantee them payments or at least a rate of return,” Weinstein said. “In recent years, Argentina has abrogated contracts, refused to abide by (WTO judgments) and also failed to honor more than 100 court judgments in the United States demanding payment.”

Weinstein and Economides make the case that Argentina is a risky bet in two new studies. (Check out Weinstein’s report here and Economides’ study here).

“The Argentine government continues to signal that it is not a reliable partner for existing or potential international energy investors who require a partnership that affords a transparent and stable market-based regulatory framework,” Economides writes.

After roughly two decades as a private company, YPF was partially renationalized early this year — a move that effectively pushed out Spain’s Repsol as its majority shareholder. In response, Repsol launched legal action against Argentina and vowed to do the same against any companies that sign deals with YPF.

But that hasn’t scared off some U.S. oil firms looking to do business in Argentina.

Chevron last month signed a memorandum of understanding with YPF to jointly explore the vast Vaca Muerta basin, which is so promising it has been likened to the Marcellus shale stretching across Pennsylvania, Ohio and New York. Media reports suggest Exxon Mobil and Apache Corp. also have been in talks with YPF.

Argentine officials are expected to visit the United States later this month in another bid to secure capital.

Economides argued that Argentina is underestimating the amount of money it will need to produce its unconventional oil and gas reserves.

“YPF’s estimate of the amount of investment needed to develop its unconventional resources is unrealistically low and overly optimistic,” Economides said. “Just to develop gas wells alone, YPF would require an investment upwards of $250 billion, a gigantic amount considering Argentina’s current GDP is roughly $450 billion.”

Weinstein said Argentina could boost its prospects with foreign investors by buffing up its image and enacting stringent laws that block nationalization of any outside party.

“It’s absolutely critical that Argentina somehow change… its bad boy reputation,” Weinstein said. “If that doesn’t happen — if the Argentine government cannot ensure that the rule of law and the sanctity of contracts will prevail — there will be little or no investment.”

Argentina’s energy environment has changed dramatically, with the country recently losing its status as an exporter and becoming a net importer, despite sitting on major reserves.

The recently discovered Vaca Muerta shale formation in the west-central part of the country ranks as one of the world’s largest unconventional fields; the U.S. Energy Information Administration estimates it contains as much as 741 million barrels of recoverable shale oil.