By Jude Webber, The Financial Times
13 February 2013
Buenos Aires, Argentina – Late to the North American shale party, Chevron of the US is understandably eager to be the first international company to develop the vast unconventional oil and gas resources of Argentina if it can.
But Chevron's investment in Argentina has become bogged down in a morass of legal challenges. Many of its assets in Argentina have been frozen as a result of an action by Amazonian villagers pursuing $19bn in damages for pollution in Ecuador more than two decades ago.
Lawsuits are also flying over last year's contentious nationalisation of YPF, Argentina's largest oil group and Chevron's would-be partner. Chevron's ambitions, and indeed its entire presence in Argentina, are at risk. Saving them could be an expensive business.
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, capable of being extracted using the same techniques of horizontal drilling and hydraulic fracturing that have set off the US oil boom.
However, the development of Argentina's reserves has been bedevilled by political interference, including last year's expropriation of a 51 per cent stake in YPF from Repsol, the Spanish oil and gas group.
Argentina knows that it needs foreign investment if it is to realise its resource potential. Miguel Galuccio, YPF's chief executive, has been racking up air miles sounding out international oil companies, most recently in the Middle East. He has met with little success; Argentina's politics are toxic to most foreign investors.
Chevron, the second-largest US oil group by market capitalisation, is so far the only large western company to have agreed a deal with YPF: a $1bn investment to develop the Vaca Muerta prospect, which the two companies aim to finalise over the next couple of months.
However, while that deal was being discussed last year, Chevron was hit by the freeze of its Argentine assets. Villagers from Ecuador, who won an unprecedented $19bn judgment for environmental damage in a ruling in that country's courts two years ago today, are seeking to collect anywhere Chevron has anything they can grab, and their legal action in Argentina is the most advanced.
Chevron failed in an appeal against the ruling, and although its business in Argentina can keep operating, its stock, dividends and 40 per cent of its oil revenues and Argentine bank deposits are frozen.
In spite of evidence presented by Chevron arguing that the $19bn judgment against it was "fraudulent and farcical", independent legal experts say there may be no way to halt asset seizures in Argentina unless the ruling is overturned in Ecuador.
Chevron already has a significant presence in Argentina: it is the country's fourth-largest oil producer, extracting an average of 35,000 barrels a day in 2011, and it runs a shared services centre there providing IT and accounting support for its operations in the US, the UK and Latin America. The future of those operations is now in doubt.
Chevron's best hope probably lies in exerting some political leverage from the threat that it could be driven away by the legal action, leaving Argentina in the lurch without a deep-pocketed partner to help develop its shale reserves.
Eduardo Fernández, an energy consultant, says: "The Argentine branch [of Chevron] could be exerting pressure to force the Argentine government to lend a hand to resolve the problem."
Argentina has spent more than $9bn a year on energy imports in each of the past two years, and is pinning its hopes on Vaca Muerta to reduce that.
Chevron Argentina said in a paid newspaper advert late last year that the asset freeze would "affect economic progress in Argentina".
Last year Ricardo Aguirre, commercial and planning director of Chevron Argentina, was quoted in La Nación newspaper as saying that the asset freeze would mean "not only that we cannot go forward with the investment with YPF but . . . There [would be] no future for the company in the country." The company declined to elaborate on his remarks.
Chevron is optimistic that its appeal to Ecuador's National Court of Justice, the country's supreme court, will end the dispute in its favour. However, Francisco Rosales, a prominent Quito lawyer and former trade minister, says Ecuador's top court has such a backlog of cases it could take more than a year to rule.
Pablo Fajardo, also a lawyer for the plaintiffs in Quito, says Chevron "behaves like a fugitive from justice, it does not want to be judged."
Meanwhile, Chevron is facing legal attacks on another front: Spain. Repsol owned 57 per cent of YPF until last year when 51 per cent was nationalised without compensation by the Argentine government, in breach of guarantees made when YPF was privatised in 1993. The Spanish group has brought cases against Chevron in Madrid and New York, arguing that the US company should not be allowed to do deals with YPF's present management, and that they do not have legitimate control over the company's assets.
If Chevron is ultimately forced to drop out, will that spell disaster for YPF? Maybe not. But Mr Galuccio's $37.2bn five-year development plan is likely to take longer than he intended.
Eduardo Barreiro, an Argentine energy analyst, says: "The [YPF-Chevron] Vaca Muerta deal is not dead, by a long way, but Galuccio has a Plan B. It is perfectly possible, with an adequate price regime, to recover self-sufficiency without gigantic foreign investment. But it will take longer, perhaps until 2023-25."
Chevron, meanwhile, still does not want to miss out on the potential of Argentina. Ultimately it may be forced to seek peace in the Lago Agrio battle. The New York state retirement fund and other investors have urged it to do just that. Chevron has so far vehemently refused to do so, but the court decision in Argentina could change that.
"The Argentine asset freeze is probably the most likely thing to lead to a settlement," says Theodore Folkman, a lawyer at Murphy & King in Boston.
"If Chevron's activities in Latin America are curtailed because of the situation, you can imagine they might pay money to make this thing go away. This seems to me to be a real pressure point."