Oil deal set to open up Argentina’s shale riches

ARGENTINA has been excluded from international financial markets since defaulting on bonds in 2001. But change is on the way, writes Dr Joseph S. Tulchin. A recent energy deal will allow exploitation of the vast shale oil reserves in the Vaca Muerta basin. And a potential settlement with ‘holdout’ bondholders would allow the current government to borrow whatever it needs to maintain its social programmes and control inflation. After months of lobbying, Miguel Galuccio, CEO of YPF, the Argentine national petroleum company, has convinced the government to strike a deal with energy giant, Repsol. The Argentines expropriated the Spanish company’s stake in YPF in April 2012. Recently Repsol announced that an agreement had been reached under which it would receive new Argentine bonds with an underlying guarantee of US$5 billion. The guarantee is the key to the deal and links it to the wider geopolitical issue of the nation’s access to international markets. Repsol demanded US$10 billion for its stake in the nationalised company. Argentina argued that the expropriation was precipitated by Repsol’s failure to fulfill its contract. The dispute actually began years earlier when President Cristina Kirchner’s government froze the price of petroleum on the domestic market and added subsidies to local consumers to keep the price of fuel below market prices. Repsol and other international producers stopped investing. Production stagnated. Within five years, from 2008 to 2013, Argentina went from a surplus of energy exports of US$12 billion to an import bill of US$13 billion. The swing was enough to throw the national budget out of balance and led the government, which refused to stop its generous programmes of social benefits and subsidies to consumers, to print more and more money, driving up the rate of inflation to around 40 per cent by January 2014. But while energy production has been stagnant, exploration has continued and in the past two years enormous reserves have been discovered which promise to make Argentina the largest producer of shale oil in the hemisphere after the United States. The most significant of these discoveries is the Vaca Muerta field in the western Neuquen Province. In anticipation of bringing these riches to market, Mr Galuccio has signed agreements with multinationals, including Chevron, and with the Chinese and Malaysian national petroleum companies, all of which were on hold pending settlement of the Repsol claim. This was the most likely scenario for Argentina to escape the trap it had set for itself by refusing to negotiate with the ‘holdouts’ - those holders of its sovereign debt who have been seeking better bond settlements. It now appears that Mr Galuccio has convinced the government that Vaca Muerta cannot wait. At the same time, Argentina continues its efforts to discredit the holdouts by asking the US Supreme Court to declare vacant the recent decisions by the Federal Court in which the Argentines were ordered to pay the holdouts at the same time they paid the holders of the new bonds negotiated in 2005 and 2010. No matter what the court decides, Buenos Aires has decided to allow US courts to determine its path back into the international capital markets. In negotiations with the holders of its debt between 2005 and 2010, the Argentines persuaded more than 90 per cent of the bondholders to accept between 25 and 29 cents on the dollar for new bonds, an extraordinary ‘haircut’. The remainder, held by the group known collectively as the holdouts, own approximately US$13 billion face-value worth of bonds, including accrued interest. The hedge funds which hold the majority of the old bonds have expressed a willingness to negotiate a settlement. And that brings us back to the Repsol settlement. The company accepted about 50 per cent of its claim in order to move on. Putting US$5 billion in the corporate coffers now allows it to make significant investments which could easily be worth US$10 billion or more in a decade. It is believed that the holdouts would accept 45 cents or 50 cents, which would still be a great deal for them. The most likely scenario is that the Repsol settlement will be closed quickly and that investments in Vaca Muerta will move forward. In the next few months, it is likely that the US Supreme Court will rule against the Argentines who, however reluctantly, will enter negotiations with the holdouts. This would open the way for the government for access to the international capital markets, where it could borrow whatever it needs to maintain its social programmes and bring inflation under control.

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