Analysis - Regional risks fail to deter Chevron
London, 21 September (Argus) — Chevron is showing a growing appetite for legal and political risk in South America, becoming the first major to plan an upstream joint venture with Argentina's recently nationalised YPF.
An agreement announced this month with the state-controlled firm, in which the government of Argentinian president Cristina Fernandez de Kirchner expropriated a 51pc stake from Spain's Repsol earlier this year, has prompted Repsol to threaten a legal fight to block the new venture. “We do not plan to let third parties benefit from illegally confiscated assets,” Repsol says.
YPF chief executive Miguel Galuccio and Chevron's president for Latin America and Africa, Ali Moshiri, signed the agreement in Buenos Aires. The partnership is to explore areas of the Vaca Muerta formation in Argentina's Neuquen basin, which holds estimated shale resources of almost 23bn bl of oil equivalent (boe). Chevron and YPF will study a joint development of a shale cluster in the formation. Argentina ranks third behind China and the US with shale gas resources of 774 trillion ft³ (22 trillion m³), according to the US EIA.
Chevron was one of the industry's more vocal critics when Kirchner's administration sent a bill to congress seeking the expropriation in April. “When you see that happen in a location, it does give you pause,” Chevron chief financial officer Patricia Yarrington said at the time. “It makes you sit up and take notice.”
Five months later, Chevron plans to jointly explore Vaca Muerta with YPF and work with it on the development of enhanced oil recovery techniques. Production in Argentina's mature oil and gas sector is in steady decline.
Chevron's move has surprised some observers. The company has four concessions in the Neuquen basin and produced 27,000 boe/d in Argentina last year. But the firm declines to comment on its reasons for its new plans, except to say: “Chevron has had an ongoing collaborative relationship with YPF since the early 1990s.”
Repsol controlled YPF during these past dealings. The companies have worked together previously on joint ventures, including contracts signed in 2010 to develop crude reserves in Venezuela's Orinoco belt at a cost of $30bn.
Chevron was the only US major to endure President Hugo Chavez's 2007 takeover of Venezuela's last remaining privately-run oil fields, electing to continue operating in the country rather than follow ExxonMobil and ConocoPhillips in seeking compensation in international arbitration for their seized assets.
ExxonMobil and ConocoPhillips are still fighting for payment five years later, but Chevron is signing new contracts even with a ban on international arbitration in case of conflict. The payoff is access to one of the world's richest oil regions. Chevron produced 65,000 boe/d in Venezuela last year.
But Chevron's exposure to political and legal risk in South America has grown over the past year. The company faces civil and criminal cases in Brazil over an oil spill at the offshore Frade field last year in addition to fighting an inherited and decades-old legal battle against Texaco, which Chevron acquired in 2001, for polluting Ecuador's rainforest.
The company was producing a gross 60,000 b/d at Frade before the spill. Production remains suspended, and a court injunction calls for the company to shut down all oil-related activities in the country at the end of this month. A Brazilian prosecutor is seeking $20bn in damages for the spill, which totalled about 3,000 bl of oil, and only this month a court agreed to lift a ban on the departure of Chevron's top executive in the country.
In the Ecuador case, a court in Lago Agrio last year ordered Chevron to pay $8.6bn in damages and an equal amount in punitive damages for alleged contamination of the rainforest by Texaco over 1964-92. The judgment is the product of fraud and not enforceable “in any court that observes rule of law”, Chevron says.
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