International Business Insight In China, dragons are a symbol of power and strength, and Argentina’s Pan American Energy can testify to that.
When the company was formed in 1997 by an alliance between Amoco of the US and Bridas, a private Argentine company, its flagship Dragon Hill (Cerro Dragón) oil field, the biggest in Argentina, was a lethargic old beast with sinking production.
Transformed into a modern operation after a technological overhaul designed to unlock untapped hydrocarbons, production and reserves at Dragon Hill have doubled in the past decade and Pan American is now Argentina’s second-biggest oil producer, accounting for roughly 18 per cent of the country’s output.
As it pumps out oil, it has taken care also to pump billions of dollars back into its business in a strategy that has flown in the face of that applied by most of its peers, who have neglected reserves and stalled investment because of heavy government regulation and political uncertainty.
Pan American has investment of $1.05bn earmarked for its Argentine operations this year, after $874m in 2009, and the company says it has poured in $6.7bn in total since 2001.
As a result, production has soared by 90 per cent to an average 241,000 barrels of oil equivalent per day (150,000 of those at Dragon Hill) compared with 121,000bpd a decade ago. That and new proven reserves give a reserve replacement rate of 194 per cent in the past 10 years, the highest in the industry in Argentina. It now has 1.42bn barrels of oil equivalent in reserves, up from 858m in 2000. In that time, oil output has soared by 48 per cent, while gas production has nearly doubled.
It is no surprise that Dragon Hill’s future looks “unstoppable”, according to BP, which owns a 60 per cent stake in Pan American. However, the British company is currently negotiating its exit – due to be completed within weeks, according to sources close to the deal.
That opens the door for China’s Offshore National Oil Corporation to consolidate its position. The Chinese group’s purchase of 50 per cent of Bridas this year in a $3.1bn swoop gave it an indirect stake in Pan American.
The Argentine company says it had assets in 2009 of $7.2bn, but the market is already pencilling in valuations of as much as $20bn, largely because of the value of the reserve portfolio it has steadily built up.
In its core business, Pan American has spotted opportunities and grasped them, such as renegotiating the operating concession for Dragon Hill early, enabling a contract extension until 2027, with an option to push that forward again until 2047.
For a company so committed to boosting reserves – it drills an average of 200 new wells a year and invests heavily in technology and infrastructure – government programmes offering a higher-than-prevailing-market price for new production are a boon. It is also involved in higher-risk offshore exploration, where it has earmarked $80m in investment to 2012.
Pan American generates solid foreign currency earnings that mitigate its exposure to currency mismatches, and has manageable debt – about $1.5bn at a consolidated level.
It earned roughly $1.9bn from exports last year and had total sales of $2.78bn on production of 90.6m barrels of oil equivalent. The company has also successfully issued paper, including $500m this year, and tapped multilateral loans.
BP said this year that Pan American “thrived in the face of adversity”. But then in China, dragons are revered for bringing good fortune.
