Oh to be a fly on the wall of the rounds of meetings between Miguel Galuccio (pictured), chief executive of nationalised Argentine energy group YPF with US and UK investors starting in Los Angeles on Friday.
There’s no doubt that Galuccio is an experienced oilman and knows his subject. But it’s safe to imagine that investors will subject him to a barrage of questions that probably boil down to this: how much leverage will he have with the government of Cristina Fernández to guarantee investors the incentives needed to bring foreign cash flowing into YPF?
Plenty has been said about why investors might be wary: YPF was expropriated from Spain’s Repsol without compensation; Argentina has a terrible reputation for being sued and for paying up; the government wants to see companies plough revenue back into investment rather than spirit it outside the country via dividends; the rules of the game can change rapidly; and so on.
It’s worth keeping an eye on the size of the prize here: Argentina has what are estimated to be the third biggest reserves of unconventional shale oil and gas on the planet – reserves which could turn it from a cash-strapped energy importer to an energy exporter. YPF has unveiled a $37.2bn plan to boost production and get the shale revolution rolling.
So what, in a nutshell, should Argenina do to get investors to open their wallets?
Bernard Weinstein, associate director of the Maguire Energy Institute at the Southern Methodist University’s Cox School of Business in Dallas, and Michael Economides, a professor at the University of Houston’s Cullen College of Engineering have some handy recommendations, paraphrased here:
1. Enact new legislation, like 50-year leases protected from seizure to attract and reassure investors.
2. Expressly forbid new nationalisations of foreign partners.
3. Reviving Argentina’s Oil and Refining Plus – incentives programmes scrapped because they cost $461m a year – would send the right signals and the cash could be more than recouped by shale development. There have been signs that this is a message that may be getting through.
4. Restructure taxes, including lowering the effective tax rate and reducing or removing export taxes. As Weinstein says: “Outside partners simply won’t drill in Argentina if they can do so elsewhere at a lower cost.”
5. Fix the fixed price for natural gas. Weinstein says: “Why would a company from the US drill for gas in Argentina when it can’t get market value and also pays high taxes? Argentina needs to return to an uncontrolled free market for natural gas.”
6. Learn from the US, where “real estate investment trusts (REITs) and master limited partnerships (MLPs) have created substantial cash inflows for real estate and energy ventures,” Weinstein says. He adds REITs now have more than $700bn in total market capitalisation and MLPs some $300bn. He notes:
Both vehicles are structured as tax-free, publicly-traded partnerships that require 90 percent of earnings to be distributed to the individual partners. In other words, the REIT or MLP itself does not pay taxes, but the income passed through to the partners is taxable. Argentina should consider allowing structures similar to REITs/MLPs as vehicles to attract foreign invest into their energy sector.
7. Negotiate a quick deal with YPF and bury the hatchet. As Economides says: “Venezuela’s Chávez knew his revolution depended on foreign capital and expertise. Chávez has honored most of his debts, although many still await international arbitration.”
8. Pay up other debts (arbitral awards by ICSID, the Paris Club and the like).
Economides reckons developing Argentina’s shale over the next 15-20 years will cost $250bn – “a figure impossible to envision” in today’s Argentina. He says:
Argentina is at a crossroads. While its fundamentals are adequate (for instance a favorable GDP/debt ratio and the existence of abundant unconventional natural resources) the nation is on an economic collision course. It will, no doubt, eventually develop its huge hydrocarbon potential. Whether President Fernández gets the credit is a different issue.
How much clout Galuccio has, and whether he will succeed in wooing investors given the constraints of doing business in Argentina, is the $37.2bn, if not the $250bn question.
Related reading:
YPF signs with Chevron for shale fields, FT
Argentina poised for shale oil and gas boom, FT
There’s no doubt that Galuccio is an experienced oilman and knows his subject. But it’s safe to imagine that investors will subject him to a barrage of questions that probably boil down to this: how much leverage will he have with the government of Cristina Fernández to guarantee investors the incentives needed to bring foreign cash flowing into YPF?
Plenty has been said about why investors might be wary: YPF was expropriated from Spain’s Repsol without compensation; Argentina has a terrible reputation for being sued and for paying up; the government wants to see companies plough revenue back into investment rather than spirit it outside the country via dividends; the rules of the game can change rapidly; and so on.
It’s worth keeping an eye on the size of the prize here: Argentina has what are estimated to be the third biggest reserves of unconventional shale oil and gas on the planet – reserves which could turn it from a cash-strapped energy importer to an energy exporter. YPF has unveiled a $37.2bn plan to boost production and get the shale revolution rolling.
So what, in a nutshell, should Argenina do to get investors to open their wallets?
Bernard Weinstein, associate director of the Maguire Energy Institute at the Southern Methodist University’s Cox School of Business in Dallas, and Michael Economides, a professor at the University of Houston’s Cullen College of Engineering have some handy recommendations, paraphrased here:
1. Enact new legislation, like 50-year leases protected from seizure to attract and reassure investors.
2. Expressly forbid new nationalisations of foreign partners.
3. Reviving Argentina’s Oil and Refining Plus – incentives programmes scrapped because they cost $461m a year – would send the right signals and the cash could be more than recouped by shale development. There have been signs that this is a message that may be getting through.
4. Restructure taxes, including lowering the effective tax rate and reducing or removing export taxes. As Weinstein says: “Outside partners simply won’t drill in Argentina if they can do so elsewhere at a lower cost.”
5. Fix the fixed price for natural gas. Weinstein says: “Why would a company from the US drill for gas in Argentina when it can’t get market value and also pays high taxes? Argentina needs to return to an uncontrolled free market for natural gas.”
6. Learn from the US, where “real estate investment trusts (REITs) and master limited partnerships (MLPs) have created substantial cash inflows for real estate and energy ventures,” Weinstein says. He adds REITs now have more than $700bn in total market capitalisation and MLPs some $300bn. He notes:
Both vehicles are structured as tax-free, publicly-traded partnerships that require 90 percent of earnings to be distributed to the individual partners. In other words, the REIT or MLP itself does not pay taxes, but the income passed through to the partners is taxable. Argentina should consider allowing structures similar to REITs/MLPs as vehicles to attract foreign invest into their energy sector.
7. Negotiate a quick deal with YPF and bury the hatchet. As Economides says: “Venezuela’s Chávez knew his revolution depended on foreign capital and expertise. Chávez has honored most of his debts, although many still await international arbitration.”
8. Pay up other debts (arbitral awards by ICSID, the Paris Club and the like).
Economides reckons developing Argentina’s shale over the next 15-20 years will cost $250bn – “a figure impossible to envision” in today’s Argentina. He says:
Argentina is at a crossroads. While its fundamentals are adequate (for instance a favorable GDP/debt ratio and the existence of abundant unconventional natural resources) the nation is on an economic collision course. It will, no doubt, eventually develop its huge hydrocarbon potential. Whether President Fernández gets the credit is a different issue.
How much clout Galuccio has, and whether he will succeed in wooing investors given the constraints of doing business in Argentina, is the $37.2bn, if not the $250bn question.
Related reading:
YPF signs with Chevron for shale fields, FT
Argentina poised for shale oil and gas boom, FT
