Argentina's oil production has steadily declined since peaking in 1998, and consumption surpassed production in 2011. Natural gas production remained strong until it too began to fall in 2006, with consumption overtaking production in 2007. The production declines and rapid increases in consumption are a result of Argentina's price controls on energy. Though the government has allowed energy rates to change with inflation, domestic market prices are not competitive with international rates. This has led to low investment in the sector over the past decade, despite Argentina's relatively robust infrastructure and promising geology — factors that would otherwise make Argentina an excellent investment for foreign energy companies.
Argentina's inability to meet its energy needs and the country's loss of exports have led to increased imports and subsidy bills for the government. These have damaged the government's finances and the country's overall balance of payments, and the increased possibility of a sharp economic downturn has threatened the administration of President Cristina Fernandez de Kirchner.
Indeed, this political concern drove the government's decision in 2012 to nationalize a controlling stake in YPF. Naturally, the move further spooked energy investors. Since then, the government has attempted to attract major foreign companies to partner with YPF by, among other moves, significantly raising the wellhead price of natural gas for any new production. But the country's unstable political environment has prevented any serious commitments since the nationalization.
The November court decision to freeze Chevron's assets should be viewed in this context. Buenos Aires used a 20-year-old dispute between Ecuador and Chevron to pressure the company to increase investments in Argentina, and Chevron and the government have been engaged in heated backroom negotiations since then. The issue seemed to be at least partially resolved in May, when Chevron agreed to a $1.5 billion partnership with YPF. The two companies are slated to drill around 100 unconventional exploratory wells in the Vaca Muerta shale deposit over the next year. Argentina's June 4 decision to unfreeze Chevron's assets will allow the partnership to move forward.
For Chevron, this is a mixed outcome. The company will get early access to some of the most promising shale deposits outside of the United States, but it will do so knowing that the government reserves the right to legally interfere with Chevron's operations if the relationship turns sour. For the Argentine government, oil and natural gas production is a matter of regime survival. To stabilize the country's gradually accelerating inflation and to boost consumer confidence, the government will need to bring the energy resources online.
Without rapid improvement in Argentina's trade balance, the combination of capital flight and restricted access to international financial markets will cause a major crisis within the next few years. The agreements with Chevron are a start, but YPF and the government will need to demonstrate that they can work productively with Chevron if Argentina hopes to attract more significant, long-term investment. In the meantime, YPF will remain the main player in Argentina's upstream oil and natural gas industry.
