Respected: Miguel Galuccio, YPF chief executive, is seeking foreign investors to finance the Vaca Muerta shale project

Miguel Galuccio is showing the strain. He took over as chief executive of YPF a year ago, just after the Argentine government had nationalised the 51 per cent stake in the Argentine national oil company owned by Repsol of Spain. It was an unenviable task, even for such a respected engineer.

Argentina is, in many ways, a hostile environment for business, given its exchange controls, high inflation and cumbersome bureaucracy.

Yet since Mr Galuccio took over at YPF 18 months ago, the company’s share price has doubled, investment has risen from $2bn in 2012 to $5bn this year and exploration activity has increased threefold.

Mr Galuccio has also managed to turn round falling production in both oil and gas – YPF has suffered a drop in hydrocarbon output of 7 per cent on average over the past decade.

In addition, he led a $150m bond issue in New York in September, despite Argentina’s ongoing battle with creditors, who have often sought to impound sovereign Argentine assets abroad.

No wonder, then, that the 45-year-old is looking wan – it probably does not help that he is just off an overnight flight from Europe, where he was courting investors to develop Argentina’s vast shale reserves.

“I’m very pleased with YPF’s results,” he says, adding – about the company, although he could just as well be talking about himself – “we have to be careful not to overdo it.

“The key is to grow profitably without destroying value,” he says, playing the role of shareholder value-conscious chief executive rather than government placeman.

Central to Mr Galuccio’s strategy is the plan to tap the immense Vaca Muerta shale reserves, much of which lie in Mendoza, alongside the state’s sizeable conventional oil resources.

Mendoza’s conventional reserves account for about a fifth of YPF’s oil production, and it is home to one of the country’s most important refineries. “It is the only province in Argentina that is completely [energy] integrated,” says Mr Galuccio.

Although he concedes that it could take several years before development starts in Mendoza’s portion of Vaca Muerta, as opposed to the share in the neighbouring state of Neuquén, the province remains a vital cog in the workings of YPF.

One of the biggest challenges, however, is securing funding. Hence the importance of September’s bond issue. “It was something small to test the waters,” says Mr Galuccio of the $150m sum.

YPF was able to raise the money at less than 8 per cent, compared with double-digit rates on the country’s sovereign debt.

YPF has also been raising debt locally at even lower interest rates. About half of YPF’s debt is in local currency, compared with as much as 90 per cent in foreign currency before the nationalisation.

However, perhaps Mr Galuccio’s most significant achievement has been to secure a $1.2bn deal with Chevron to explore and develop a concession in Vaca Muerta.

It was trumpeted as proof that a large international company with shale gas experience trusts Argentina. YPF hopes the deal will encourage other companies to follow suit. Dow, the US chemicals company, has since signed a smaller deal.

“Things are working out,” says Mr Galuccio. “Everything we said would happen is happening.”

Nevertheless, YPF faces big challenges, most obviously in the form of the government’s continuing dispute with Repsol, which is demanding $10.5bn in compensation for its expropriated assets.

Antonio Brufau, the Spanish company’s executive chairman, rejected Argentina’s proposal this year that, as compensation, Repsol would be granted a 47 per cent stake – estimated to be worth $3.5bn – in a joint venture to develop Vaca Muerta. The Argentine government would also provide Repsol with a bond worth $1.5bn, but this would have to be reinvested in Argentina, along with a commitment to invest more to develop the asset.

Mr Galuccio has found himself caught in the crossfire. “Not everyone understands that this is a conflict between two shareholders – the state of Argentina and Repsol. I am the chief executive,” he says, underlining that his duty is to defend the value of the company for its shareholders.

“It cannot be that one shareholder, Repsol, should try to take YPF hostage,” he adds.

There seem to be two options: a negotiated solution, or a court settlement. “It would be better to reach an agreement,” says Mr Galuccio, who goes on to discuss a possible role for Pemex, Mexico’s state oil company, in negotiating a concord.

“We have very close relations with Pemex,” he says.

Mr Galuccio knows Emilio Lozoya, Pemex chief executive, from his time in Mexico with Schlumberger, the oil services company. Analysts have also pointed out that Repsol needs the support of Pemex if it is to expand its business in Mexico.

Pemex, which owns 9.37 per cent of Repsol’s shares, has already tried to broker the deal that Repsol refused. However, Mr Galuccio holds out hope that it could yet play a role in resolving the conflict.

In addition to the difficulties caused by the Repsol saga, problems in the broader economy, from basic macro­economic imbalances to government strictures on repatriating profits, will also make it hard for YPF to continue to attract the investment it needs to develop the shale reserves.

That may go some way to explaining why a much-touted deal with Bridas, the Sino-Argentine energy company, has so far failed to materialise. It is hoped that a potential deal with Bridas could be of the same magnitude as the Chevron agreement.

Says Mr Galuccio: “The Chinese could be very important for us. I think it can happen”.


Exploration begins at ‘Dead Cow’ formation

The arid semi-desert scrub that covers most of Mendoza conceals one of the great unexploited riches not just in the province, or even the country – but in the world.

The gigantic shale formation at Vaca Muerta, which in Spanish means Dead Cow, is one of the most talked-about prospects of the global oil and gas industry, with the potential to attract investors to the region for years to come.

According to the US Energy Information Administration, Vaca Muerta is home to the fourth-largest shale oil reserves and second-largest shale gas reserves in the world.

While preliminary wells are being drilled in the neighbouring province of Neuquén, after Chevron, the US oil and gas group, signed a deal to invest an initial $1.2bn, Mendoza’s portion of the formation – which accounts for as much as a third of the total – has hardly been touched.

This is expected to change over the coming decade if a range of geological, technical and financial challenges can be overcome – principally the need to secure the billions of dollars that are needed.

But with Argentina shut out from capital markets since its 2001 default, YPF, the state energy company, has to rely on attracting foreign investors into joint ventures.

Aside from the Chevron deal, and smaller investments from Dow of the US and Germany’s Wintershall – interest has been limited. Hopes of a sizeable investment from Bridas, the Sino-Argentine company half-owned by China National Offshore Oil Corporation, has yet to materialise.

Other commonly raised issues include high inflation, export tax, limitations on importing goods and services, restrictions on the right to remit profits abroad in dollars, high labour costs and insufficient skilled labour, according to Jose Valera, co-head of oil and gas at Mayer Brown, a Houston law firm.

Alejandro Bulgheroni, the investor whose family owns the other half of Bridas, says cutting operational costs is central to allowing Vaca Muerta to compete with similar projects around the world. For example, the cost of a shale well in the US is about $3m, compared with $7m-$8m in Argentina.

“Large investments and several years of work are needed for the current good expectations to become reality,” Mr Bulgheroni recently told an energy conference in Buenos Aires.

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