You likely know about Venezuela's energy world, which combines Hugo Chavez's antics with a plethora of thick oil from the country's Orinoco Valley. And just as surely, you've been following the numerous discoveries during the past five years in Brazil's prolific deepwater Santos Basin.
A new South American game has emerged in Argentina, but it's one fraught with severe political and economic perils of the type that have long existed across the continent, including in Venezuela. While Argentina is already South America's largest natural gas producer, it's oil production registers something less than 750,000 barrels per day (or about a third of Venezuela's output), a figure that undoubtedly would be higher, but for periodic outbreaks of labor unrest.
A deceased bovine play
While the country's production has historically been conventional, of late the world's energy industry -- including the likes of ExxonMobil (NYSE:XOM) and China's CNOOC (NYSE:CEO) -- has excitedly pursued shale drilling opportunities in the Neuquen Basin. More specifically the basin's Vaca Muerta (dead cow) shale is fast gaining worldwide attention. According to Houston-based independent oil and gas auditor Ryder Scott, with Vaca Muerta's 23 billion barrels of oil equivalent, Argentina likely holds the world's third-largest deposits of shale gas, behind only the U.S. and China.
The original interest in the Neuquen, eponymously located in the Patagonian province of the same name, was to the east, where conventional exploration was the order of the day. Slightly more than two years ago, however, a group of companies -- including Apache (NASDAQ:APA) and EOG Resources (NYSE:EOG) -- discovered the potential for recovering both oil and gas in the Vaca Muerta shale.
Of all the companies involved in the South American country, it's clear that Apache's ties are the strongest and longest. The company began its Argentine operations in 2001 and expanded them materially with a pair of major acquisitions in 2006. Today, Apache's interests in Argentina run to about 3.7 million gross acres. It's especially active in the country's four primary producing basins: Neuquen, Austral, Cuyo, and Noroeste.
They continue to sign on
In addition, just last month, Chevron (NYSE:CVX) reached an agreement with Argentina's nationalized oil company YPF to form a $1 billion partnership to develop shale oil reserves in the Vaca Muerta. And YPF is also holding talks with Norway's Statoil (NYSE:EQNR) for the development of Argentinean properties.
While all this appears compelling, there is a pair of potential flies in the proverbial ointment for those signing on to participate in boosting Argentina's oil and gas output. First, the country's government demonstrated last spring that it possesses the same sort of sharp elbows in dealing with international companies that Venezuela's Chavez and Russia's Vladimir Putin have notoriously displayed. Second, the country's economy, and consequently its government, are hardly bastions of stability.
As to the government's inability to consistently play nice with foreign companies, last May legislation was passed confirming the expropriation of YPF, thereby doing Spain's Repsol out of most of its 51% ownership in the Argentine company. The move ostensibly resulted from Repsol's failure to pour sufficient investment into the country's hydrocarbons development efforts. But given that recent performance of overpowering resource nationalism, it's rather surprising that Chevron and Statoil -- or any other non-Argentine company, for that matter -- would commit its shekels to a nation where the government is apt to obliterate contractual or equity agreements on its own whim.
The YPF expropriation was obviously initiated Argentina's president, Christina Fernandez de Kirchner. Her motivation may have been more that inducing increased oil and gas development spending. Indeed, at the time the move was announced, The New York Times observed: "In seizing control of YPF, Mrs. Kirchner has adroitly shifted attention away from her country's soaring inflation, capital flight, and her own falling approval ratings..."
But despite thrusting YPF into government hands, Kirchner's difficulties continue to escalate. The country's growth rate will do well to top 2% this year, and private forecasters are surreptitiously looking for inflation to top 20%. (Researchers who predict higher rates than the official projection of 9.8% have been fined.) Capital is fleeing so rapidly from the country -- $22 billion in 2011 alone -- that dollar-sniffing dogs have been employed to thwart the process at airports, along with ferry and bus terminals in Buenos Aires.
Further, crime remains an even bigger worry for Argentinians than their wounded economy. However, just last month the two concerns merged when massive demonstrations and looting erupted across the country. The culprits were largely from Kirchner's Peronist Party, and their demands targeted an unlikely combination -- in a teetering economy -- of lower taxes and better salaries for workers.
Even more ignominious for the country's government is that, when Kirchner travels to Asia, the Middle East, and Cuba later this month, her Boeing 757 president's plane will remain parked in favor of a hired private jet. The reason: Unsatisfied international creditors are deemed likely to seize the government's plane to satisfy a portion of the country's sizable bad loans. Dating back to 2001, for instance, Argentina defaulted on nearly $100 billion in debt.
The Foolish takeaway
So today, Argentina doubles as a geologist's delight and a creditor's nightmare. My approach to playing the former involves doing so through either Apache or EOG Resources, two extremely solid independent producers with the ability to withstand a trip-up in the shaky South American country.