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Chevron May Be Playing With Fire

David Lee Smith
September 21, 2012

Could Chevron (NYSE: CVX  ) be the proverbial moth circling a flame? You know how it is with those critters: They fly ever closer to the fire until they recklessly singe their wings, and then its over for them.

The incessant South American meandering of the second-largest of the U.S.-based oil companies -- behind only ExxonMobil (NYSE: XOM  ) -- has me shaking my head to the extent that my better half is convinced I've developed a permanent tic. That's not the case, but it's tough to understand a giant oil company figuratively flirting with a flame.

An Argentinean flame
You see, earlier this week it was announced that Chevron has signed a memorandum of understanding with YPF SA, an Argentine energy firm that is controlled by its country's government. Under the terms of the agreement, Chevron and YPF will evaluate and explore conventional and unconventional resources in the province of Neuquen. The financial particulars of the pact remain undisclosed.

The specific acreage involved spans Vaca Muerta basin, which is thought to contain about 23 billion barrels of oil. Indeed, there are those who believe that Argentina ranks third only to China and the U.S. in the magnitude of its shale reserves. So, you're thinking that this is a terrific deal for Chevron, right?

Maybe, but maybe not. For starters, the state-controlled status of YPF stems from the expropriation last spring of 51% of the company from Spain's Repsol (NASDAQOTH: REPYY.PK) by Argentina's government. Before that move, the Spanish company had held a 57% stake in YPF. That stake has subsequently been forcefully whittled to 12%. Add to that Chevron's own dicey track record in South America -- Venezuela, Ecuador, and Brazil -- and you're apt to conjure up images of moths on suicide flights.

Not a terrific history
I hasten to note that none of Chevron's difficulties in those three countries appears to have resulted from its own ineptitude. As you likely recall, just over five years ago Venezuela's less-than-collegial Hugo Chavez expropriated operations that were being conducted in the Orinoco River basin by a half-dozen major national companies. Included among the big operators were ExxonMobil, Chevron, and France's Total (NYSE: TOT  ) . While Exxon dug its heels in and contested Chavez's buyout dictates, most of the other companies, including Chevron, accepted Hugo's terms.

In Ecuador, while it has nothing to do with its own operations, Chevron continues to be involved in litigation that seems to have become slightly older than dirt. Unless you've been held incommunicado for a couple of decades, you know that the company is defending itself against allegations that Texaco, which it bought in 2001, was responsible for severe environmental