Chevron To Expand Argentina Operations After Signing Agreement with YPF

Chevron (NYSE:CVX) recently signed a working agreement with Argentina’s state-run oil company, YPF SA, to develop oil and natural gas wells in the Vaca Muerta shale formation in Western Argentina. YPF is the largest oil and gas producer in the country and accounts for over one-third of Argentina’s total oil output. ^[1]

According to last year’s estimates by the U.S. Energy Information Administration (EIA), Argentina has around 774 trillion cubic feet in potentially recoverable shale gas reserves, the world’s third largest after the U.S. and China. It also has vast reserves of shale oil. There is rapidly growing demand for natural gas in the country, but production has declined substantially in recent years, which has increased its dependence on energy imports. ^[2]

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YPF was until recently a subsidiary of Spanish company Repsol SA. It was expropriated by the Argentine Government in May this year, on the basis that Repsol did not invest sufficient amounts to support production growth, and has now been nationalized.

The company has ambitious plans to develop the country’s vast energy reserves and seeks to invest $37 billion over the next five years with the goal of expanding production by 32%. Chevron will provide financial backing as well as technical expertise, given its experience in shale gas production in the US. YPF has also signed strategic agreements with two smaller companies, and is currently in negotiations with Exxon Mobil and Apache.

Gaining access to the vast Vaca Muerta reserves will give Chevron an opportunity to considerably increase its shale oil and gas production. The company already has a presence in Argentina, and holds operating interests in four concessions in the Neuquen basin. In 2011, its operations in the country produced an average of 27,000 oil-equivalent barrels per day.

In 2011, Chevron produced an average of around 4.6 million cubic feet of natural gas per day. We project average daily production to increase to over 5.3 million cubic feet by the end of our forecast period.

One potential impediment to the deal is Repsol’s threat of taking legal action. It released a statement soon after the agreement was announced, in which it declared that it will attempt to prevent Chevron and YPF from working together. The company is seeking up to $10 billion in compensation for the expropriation of YPF.

We currently have a Trefis price estimate of $115 for Chevron, which is in line with the market price.

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1. Chevron Agrees with YPF to Develop Shale Wells in Argentina, Bloomberg, September 2012 [↩]
2. Argentina – Analysis, U.S. Energy Information Administration [↩]