INSIGHT: Argentina's YPF takeover sinks shale gas, petchems outlook

17 April 2012 17:16  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--The Argentine government's proposed takeover of energy producer YPF could scare away the outside investors needed to develop the country's vast shale-gas reserves – leaving its petrochemical industry short of feedstock.

Shortages of natural gas in Argentina have already led one company, Methanex, to make plans to move a methanol plant from the southern tip of Chile to Geismar, Louisiana. Methanex shut down the plant because it could not get natural gas from Argentina.

Petrochemical plants in Argentina now plan their turnarounds in the winter, to coincide with what has become annual industrial cutbacks in natural gas.

Meanwhile, Argentina’s liquefied natural gas (LNG) import needs continue to grow, reaching 80 cargoes this year. But the country has still not secured enough import cargoes to cover its needs for the upcoming South American winter.

The proposed takeover of YPF is the culmination of these energy shortages and of growing tensions between the Argentine government and YPF's owner, Spain-based energy producer Repsol.

The administration of President Cristina Kirchner has sent a bill to Congress to take control of 51% of YPF. Argentina has since taken over the management of YPF, replacing chief executive Sebastian Eskenazi with planning minister Julio De Vido.

The bill is likely to pass the vote in Congress, since Kirchner's party holds a majority, said Jorge Buhler-Vidal, director of US-based Polyolefins Consulting.

However, government control of YPF is unlikely to do anything to address falling energy production or bring its shale-gas reserves into play, Buhler-Vidal said.

Argentina as a whole has an estimated 774,000bn cubic feet (bcf) of technically recoverable reserves of shale gas, the third-largest behind China and the US, according to the US Energy Information Administration (EIA).

Argentina has third largest shale gas reserves in the world, 12% of the technically recoverable total according to the US Energy Information Administration (EIA)

Earlier this year, the head of YPF's upstream activities said the company will need a substantial amount of foreign capital to develop those shale gas reserves.

Nationalising YPF, though, would make foreign investors only more sceptical about Argentina, said Raul Arias, senior consultant and manager for Latin America at Nexant. Nationalising companies sends a bad signal to investors, he said.

The nationalisation of YPF would be the latest in a string of policies that have made investors skittish about Argentina.

Already, government restrictions on imports are hitting growth in Argentina's industrial sector, and the restrictions have delayed entry of vinyl and polypropylene (PP) imports.

With foreign investors out of the picture, the Argentine government would be left trying to raise funds to increase energy production.

However, it remains to be seen how easily the government could raise money, given the consequences of the Argentine default in 2002, Buhler-Vidal said.

Shale gas is much more expensive to recover than conventional gas, he said. "Right now, the country really doesn't have the funds to do that."

With that, the takeover will do little to change Argentina's outlook for energy production and, consequently, feedstock for petrochemicals.

Tight feedstocks are preventing petrochemical producers from expanding capacity, Buhler-Vidal said.

The YPF takeover still has to go through, and Repsol has threatened legal action to protect its interests.

The government of Spain is likely to jump in, and the EU could also become involved, Buhler-Vidal said.

Plus, the YPF takeover still has no price tag, and it is unclear who will fund it, Buhler-Vidal said.

YPF was actually established as a state-oil company, back in 1922. Repsol acquired control of YPF in 1999.

The company's output accounted for about 34% of the nation’s production in 2011, according to Argentina energy secretariat data. It is the country’s largest fuel retailer and refiner, with 52% of refining capacity, and one of Argentina's largest petrochemical producers.

YPF owns several industrial sites, including La Plata in Buenos Aires, Lujan de Cuyo in the state of Mendoza and Plaza Huincul in the state of Neuquen. YPF also owns half of the Refinor plant in the northern state of Salta.

La Plata refinery accounts for 30% of Argentina’s refining capacity and has a capacity of about 251,600 bbl/day. The plant also produces base oils, lubricants and asphalt.

Lujan de Cuyo represents 17% of national refining capacity and has a processing capacity of about 141,000 bbl/day. The Plaza Huincul plant has a capacity of 33,500 bbl/day.

YPF also operates both the country’s LNG terminals at Bahia Blanca and Escobar. A major offtaker of the regasified LNG at Bahia Blanca is the petrochemical plant Mega, which is a consortium of Dow Chemical, YPF and Brazil’s Petrobras.

Additional reporting by Leela Landress and Ryan Hickman

By: Al Greenwood
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