December 22, 2014
Can oil and honey mix?
Thursday’s agreement with Malaysia’s Petronas confirms that there is life after default for the energy sector (even without YPF CEO Miguel Galuccio’s assurances that there is enough cash in reserve to finance investments for the next year) but this half-a-billion-dollar injection into the Vaca Muerta shale formation comes at the same time when the national government and the governors of the main oil-producing provinces seem to be moving towards a consensus over future oil legislation. Both of these developments sound positive but there was nothing capricious about the differences which had arisen over the government’s oil legislation reforms, strongly pushed by Galuccio — these were designed to make Argentina more investor-friendly by clipping provincial wings and reducing future surprises for foreign stakeholders while many governors resented some of their previous prerogatives being curtailed.
If this friction seems to be fading with the new consensus possibly being confirmed in this coming week, this could spell the return of the provincial potential to burden and block overseas investors over and above the agreements at national level. Thus the half-billion-dollar agreement with Petronas includes the 35-year concession of the La Amarga Chica zone within the Vaca Muerta formation, which would require the agreement of Neuquén Governor Jorge Sapag — something which Sapag had been showing scant inclination to grant in recent weeks. And nor is the governor the only local hurdle — the Chevron agreement last year provoked fierce resistance by environmental and other civil society groupings, including stormy scenes outside the provincial legislature. The agreement also comes at a time when the selective default has prompted the vulture funds to serve notice that they plan to swoop on the investments of Argentina’s energy partners (as they have already threatened with Chevron, the main multinational involved in Vaca Muerta until now, alongside the alleged Nevada interests of Lázaro Báez and the Chinese infrastructural investments agreed last month). Nor might the vulture funds be the only creditors to question the new investor’s ability to move dollars freely under the agreement, along with permission to repatriate dividends denied other foreign companies here as well as the exemption of 20 percent of their production from export duties.
The Vaca Muerta potential is so enormous for both this country and the world that ways to square these various circles will doubtless be found but it is going to be interesting to see how.