Less than a year after Argentina seized control of YPF, could the state-controlled oil company be close to a deal with its former parent, Repsol of Spain, to develop rich shale resources in Argentina?
Such is the spin, it’s hard to know how to take this. No one has actually seen a copy of the deal which one source close to the negotiations claims has been sitting ready to be signed for more than a week.
But there were excited headlines in Buenos Aires anticipating the domestically appealing prospect of a deal in which Argentina behaves badly but still gets its opponent to buckle to its will (rather like the country hopes to do in its bond holdouts row).
Under the proposal described by the source close to the negotiations, the two companies would set up a new joint venture to develop Vaca Muerta, in which Repsol would have a minority stake. Argentina would also pay compensation to Repsol on condition that it be reinvested in the shale development. One report said compensation could be $6bn.
It sounds unthinkable that Repsol and YPF could again become partners and that the erstwhile master could agree to such a drastic role reversal: Repsol, remember, is suing Argentina for $10.5bn for seizing a 51 per cent stake in YPF without compensation last April. Argentina, meanwhile, has spent more than a year accusing the Spanish company of having mismanaged YPF – hardly an ideal prelude to working harmoniously together again.
Repsol, which is naturally keen to paint YPF as performing worse solo than under Spanish stewardship, rubbished talk of any deal. “Neither Repsol nor its board is considering a deal with YPF,” a spokesman said. YPF had no comment.
But is the deal as “mission impossible” as it sounds? Argentina, which spends nearly as much as its trade deficit on energy imports, is keen to bring in partners to develop Vaca Muerta to overcome its dependence on costly imported fuels.
YPF has so far inked only two preliminary deals, with Chevron and Bridas, and knows it must resolve the Repsol dispute to unlock more investment. And Argentina, with its rampant inflation, currency controls and government strictures – including on reinvesting profits rather than repatriating them – gives many investors pause for thought.
What would be in it for Repsol? Well, a deal would save it from having to abandon one of the most promising shale plays on the planet. As the FT wrote last month:
The prize is undeniably enticing. Argentina is believed to hold the world’s second-largest shale gas resources; at 774tn cubic feet they are larger than those of the US and second only to China’s, according to the US Energy Information Administration. Formations such as YPF’s Vaca Muerta field are also thought to hold large volumes of shale oil
YPF’s chief, Miguel Galuccio, has for months been seeking to negoatiate a deal to halt Repsol’s flurry of lawsuits, and some Repsol shareholders are also considered to be keen to bury the hatchet.
But Argentina makes no secret of its terms: the exit of Antonio Brufau, Repsol’s chief. Even before the YPF nationalisation, the FT’s Lex column was suggesting “an alternative career may beckon” for him and Repsol was rocked in 2011 by shareholder hostilities.
La Caixa, Repsol’s biggest shareholder with 12.5 per cent, had no comment, but its chief Isidro Fainé was reported to have met Cristina Fernández, Argentina’s president, in Buenos Aires last week to mull over the fine print of a deal with YPF.
How is YPF doing without Repsol? Depends who you talk to. The company has a smart boss and a slick plan, but is struggling to turn around production as this report from the Instituto General Mosconi energy think tank spells out.
Repsol, meanwhile, accuses YPF of being a poor imitator, claiming in an internal newsletter that:
The Vaca Muerta find by YPF, when it was still part of the Repsol Group, whetted the interest of the entire international oil community in the company and, by extension, in Argentina. At least 15 memorandums of understanding were signed with potential strategic investors for the development of this massive formation. Talks were very advanced with some of these regarding the execution of specific investment and development agreements.
Galuccio, who is calm and quietly spoken, is nicknamed “The Magician” in Argentina. A deal with Repsol would be quite something to pull out of the hat.
Additional reporting by Miles Johnson in Madrid and Adam Thomson in Mexico