Wednesday, October 01, 2008
Oil Boom in Argentina
An oil boom is just getting underway in Argentina. Even though a recession is probably around the corner, the oil business should be good in Argentina, no matter what happens. Some of the reasons are:
- Declining local production. Crude production is down more than 200,000 barrels per day since its peak in the 1990's. One aspect of the “economic model” of the Kirchner government is to minimize imports and maintain self-sufficiency in important resources wherever possible. This is especially important to them when the Argentine benchmark crude price is $42.00 and the world price is around $100.00. When the government is forced to import oil to supply the local refineries, the current trade surplus will turn into a deficit.
- The Kirchners are in the oil business and stand to make money on more oil production. Several of the newer oil companies formed in Argentina are controlled by long-time Kirchner allies, and they have been winning a lot of exploration blocks, especially the Kirchner home ground of Santa Cruz province. Also, Enrique Ezkenazi, head of the Peterson group, is buying up as many shares of Repsol YPF as he can get his hands on. He bought 14.9% of the company earlier this year, and is advertising publicly for more shares. He is a VP of the company now, and a board member. As owner of the Banco Santa Cruz, where Kirchner was governor, he has been in business with the Kirchners a long time. YPF, the largest producer by far, needs to make money for Kirchner and his buddies to make money. When Repsol sold the 14.9% to Ezkenazi, it reflected their appreciation that it is much better to have Kirchner on the inside as a partner, than to have him picketing your gas stations and arresting your president, as he had done with Shell when they refused to sell out to Hugo Chavez. If an old buddy of Kirchner owns an oil company, you know the Nestor has a cut.
- Companies are increasing their exploration budgets onshore in the near certainty of a price increase in the near future. The price is set by the government, and there is a very strong rumor that it will be increased from $42.00 to $62.00, for “new production.” The natural gas price will be increased next year, probably after the midterm elections if the government can hold off that long. They are currently subsidizing gas imports from Bolivia in order to try to keep a lid on inflation, but the kitty is shrinking.
- Economic conditions will be favorable no matter what. If there is a recession in Argentina, as everyone believes, oil producers will be able to export more, both crude and refined products, at world prices, as local demand drops. In addition production costs will drop in dollars, as both labor and equipment and materials get cheaper, as the dollar rises against the peso; it is already rising, 3% over the past month. If the current high growth rate continues, not a likely scenario, local demand will continue to increase, and companies will be selling all the $62.00 oil they can produce. In Argentina you can count on the definition of “new production” being very flexible. At some point the world price may be close to that $62.00 again.
- Oil will be a source of export cash. With the prices of commodities like wheat, soy and corn dropping in world markets, and with a 100-year drought in large parts of Argentina, the government's income may soon be shrinking, if it is not already doing so. (There is no good way to know, since the Kirchners rigged the official statistics.) Taxes on oil exports would help to replace the lost income.
- For the first time in 30 years, there is new exploration offshore Argentina. A jackup rig arrived off Caleta Paula a couple of weeks ago and is now setting up to begin an initial 4-well exploration program. I have it from the someone who was instrumental in determining the program that it is a very good play. Currently an auction is in process for 11 additional offshore blocks, and the government plans to have the entire offshore area under license by 2010 (that remains to be seen, but that is the theory.)
- Planned seismic acquisition programs as of August 2008 total more than 30,000 square kilometers of high density 3D imaging, and 50,000 of 2D. In addition there aerial surveys planned for very large areas.
- Local companies are forming partnerships for ambitious exploration programs with foreign companies. Money and expertise are coming in from the US, Kuwait, Russia, China, and other places, some deals announced publicly and others still under wraps. For example, there was a report earlier this year the Moammar Khadaffi's son had flown into Mendoza to meet with a local media magnate who had recently set up an oil company. A US company, supposedly with Kuwaiti backing, has signed a deal with the province of Tierra del Fuego to build and operate a half-billion dollar gas to liquid plant in the province.
- With the provinces now running their own exploration auctions, there is much more latitude to make favorable deals than there was when the federal government ran everything. This has generated more interest in marginal areas than previously existed. Royalties and investment commitments vary widely.
- Last but not least, some of the new companies in the industry, such as Petro Andina, Geo Park and Gran Tierra are making new discoveries in non-traditional areas. There is nothing like an oil well to put dollar signs in your eyes.
