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April 18, 2014

LATIN AMERICA

Thursday, January 2, 2014

Vaca Muerta changes landscape

An aerial view shows a shale oil drilling rig in Neuquén province in this July 11, 2013 photo.
By Pablo Gonzalez and Daniel Cancel
Bloomberg news

Neuquén province sees economic transformation with shale oil exploration

In the desert town of Añelo, Ale- jandra Díaz’s task at eight o’clock each morning is to make sure the oilmen have clean sheets.

As the manager of the 70-room Sol de Añelo, her staff has 40 minutes to clean the hotel’s designated “hot beds” before the next set of occupants arrive from their shifts in the shale oil fields of Neuquén province. Opened in 2005 as an eight-room roadside stop for tourists en route to the Andes mountains, Añelo’s largest hotel now offers 10 percent of its rooms for 12 hours at a time to accommodate the crush of oil-industry workers that have descended upon the town of just 1,700.

“We’re devoted to the oil industry now, no more tourists, just oil workers,” the 41-year-old Díaz said in an interview from Añelo, about 750 miles southwest of Buenos Aires.

The boom, which prompted Mayor Dario Díaz to proclaim that Añelo would become Latin America’s “shale capital,” is being supported by companies such as Chevron and YPF, which are investing billions of dollars to tap the world’s second-largest shale gas deposit, known locally as Vaca Muerta, or Dead Cow. Those ambitions have also drawn Royal Dutch Shell and Petroleo Brasileiro, causing Neuquén’s borrowing costs to plummet from distressed levels as oil royalties surge.

“The boom we’ve seen in Neuquen from Vaca Muerta will only accelerate in coming years,” Veronica Sosa, an economist who tracks provincial finances at Economia y Regiones in Buenos Aires, said in a telephone interview. “Investor demand for assets with exposure to shale will keep driving yields lower as the collateral these bonds have are appealing.”

Since rising to a record 12.1 percent 13 months ago, yields on Neuquén’s US$236 million of dollar-denominated secured bonds due 2021 have tumbled 4.46 percentage points to 7.74 percent, the lowest in 21 months. The notes have returned 27.73 percent this year alone. Emerging-market corporate and government debt have posted losses this year.

More than 50 percent of Neuquén’s oil royalties are pledged to debt payments, Sosa said. Its bonds are guaranteed by production from companies such as Total and Pan American Energy, while the dollar bonds due in 2014 are backed by concessions with Chevron, YPF and Petroleo Brasileiro.

Chevron plans to transfer almost US$1 billion by year-end to complete an initial pilot venture. State-run YPF raised US$500 million of five-year securities yesterday in its largest overseas bond sale on record to accelerate exploration of non- conventional energy resources.

While new shale investments haven’t yet offset the province’s declining energy output, Neuquén’s tax collection increased by 50 percent during the last year as oil services companies were incorporated. Provincial royalties from oil production jumped 16 percent in August from a year earlier while employment in the oil industry has risen 10 percent.

Argentina is offering energy companies the ability to export 20 percent of output and repatriate dividends if they invest more than US$1 billion over five years as the government struggles with what YPF Chief Executive Officer Miguel Galuccio called a “serious” energy deficit. Argentina’s energy imports surpassed exports by US$5.8 billion through October.

The continent’s second-largest economy after Brazil will need an estimated US$300 billion to develop its shale resources, Juan Jose Aranguren, the head of Shell Argentina, said in a December 9 interview. Shell plans to triple its investment in exploration to about US$500 million in 2014.

“Argentina needs a huge capex for YPF and to cover its US$13 billion annual deficit on the balance of payments,” Siobhan Morden, head of Latin American fixed-income strategy at Jefferies Group in New York, said in an email. “Especially if it’s only scraps of US$500 million here and there.”

If YPF’s initial US$1.2 billion pilot with Chevron is successful by March 2014, the joint venture will invest as much as US$16 billion to pump shale oil and gas from the area surrounding Añelo, bringing almost US$9 billion of royalties to Neuquén, said lawmaker Luis Sapag in a telephone interview.

“To have a complete idea of how big the rush can be, you just need to understand that the JV with Chevron is to develop 3 percent of the 37 percent acreage YPF owns in Vaca Muerta,” Sapag said. Vaca Muerta is about the size of Connecticut and holds an estimated 23 billion barrels of oil equivalent.

YPF has secured another joint venture deal with Dow Chemical and hopes to partner with Mexico’s state-run Petroleos Mexicanos to develop shale deposits in Vaca Muerta, Galuccio said in September. YPF’s US$500 million of five-year securities were issued to yield 9 percent yesterday.

“If you want to play the Argentina oil boom, YPF is on sale right now,” Russ Dallen, head trader at Caracas Capital Markets, said in an email.

In the arid fields of Vaca Muerta, reminiscent of the apocalyptic world in a Mad Max film, rigs are popping up and trucks carrying water to inject into wells crisscross the sand. At the SOIL28 well, field manager Hugo Guiñez oversees one of three daily fracking operations by blasting 1,100 cubic meters of water (290,000 US gallons) and 12,500 kilos of sand into a 3,100 metre-deep well.

When the job is finished for the day, Guiñez says “this deserves a toast later in Añelo.”

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