Argentina’s provincial powerhouse

Argentina

TOGY talks to Alberto Saggese, CEO of Gas y Petróleo del Neuquén (GyP) about the exploration and development of unconventional areas, pilot projects with some of the world’s largest companies and the advantages of contributing to the government. GyP is a provincial company with working interests in several exploratory blocks in Argentina’s Neuquén Province.

What initially led to the creation of GyP?
GyP was primarily created because oil prices were very low in 2008 and 2009. A process of restitution to the state had begun, and companies were not motivated to invest. They began relinquishing areas that were not geologically interesting in an effort to have fewer fiscal responsibilities.
In addition, certain areas were not under contract, or were under contract with a state company, Hidenesa [Hidrocarburos del Neuquén]. As Hidenesa was not fulfilling its intended purpose of locating investors and operators for the area, GyP was created in 2008.
Three bidding rounds were carried out, but there had been no great interest in these areas, and the committed investments were very low. However, toward the end of 2010, the US Energy Information Administration presented a report on worldwide shale resources. We became more aware of the international importance of Vaca Muerta, and Neuquén suddenly became very attractive. According to prior agreements, GyP had a 10-20% working interest in each block. Thus, areas that had not been of conventional geological interest became interesting as unconventional areas.
To explore and develop unconventional fields, there must be significant investment. At the time, GyP’s partners were not big enough. Today, approximately four years after the contracts were signed, we have four pilot projects with some of the world’s largest companies: ExxonMobil, Shell, Total and Wintershall. Policies implemented by the provincial government were fully successful in this sector because GyP was put in a privileged position.

Which other areas do you operate within?
GyP holds conventional areas yielded by YPF through an asset swap process at the end of 2014. GyP rescinded its 10% participation in two areas, La Amarga Chica and Bajada Añelo, so YPF could hold 100% of those areas. In exchange, GyP was granted access to very mature areas that provided important profitability and have become valuable resources.
GyP carries out direct operations in an area shared with Enarsa [Energía Argentina], the state energy company, located in Aguada del Chañar. We operate in a joint manner with Enarsa. This is the only operation that GyP directly performs, and it allows us to clearly understand what is going on in the sector, who the key players are regarding services and what problems may arise with labour unions. We are also able to assess operations on a day-to-day basis.
We hold some mature and marginal areas in which we use a hired operator, Oilstone. This allows us to closely observe small local operators that are making an effort to acquire technology and grow in the industry.
Meanwhile, our participation in a consortium with international companies that carry out pilot programmes is edifying, and indicates what should and should not be done in unconventional areas. GyP is a sort of a witness company for Neuquén [with a unique perspective, participating in all operations within the province], and serves to introduce the oil industry by speaking the same language. GyP strives to co-ordinate the interests of public tenders and private companies. This is the company’s objective, and has been reflected in its history.

Regarding the economic role of GyP, how much does it contribute to the government per year, and how have these contributions evolved?
GyP has always intended to have an insider’s perspective and generate resources for the government. Although there would be no inconvenience from the perspective of human resources, there is the risk that it may be inconvenient for a state-owned company to devote resources to a risky activity when a private company could do so. In 2015, the company paid dividends to the state of approximately USD 2 million.
Currently, GyP has an accounting problem, as it generates a negative balance, though it has more earnings than costs. Companies that generate a negative balance cannot pay dividends. So, we generate credits for the government as a royalties advance, in order to contribute to the state’s cashflow.
Honestly, we have an important debt in dollars with Enarsa, the company that financed the project in which we have operations. This means that on the 2015 balance sheet, the devaluation of the peso was catastrophic for GyP. The balance showed losses, though we generated considerable revenues. We foresee this situation continuing, and will use the generation of cashflow to provide loans to the government.

How much will you lend the state in 2016?
We have already lent ARS 60 million and will have lent another ARS 60 million by the end of 2016, the equivalent of around USD 10 million, which is our usual revenue. If all operations are underway over the next three years, GyP could generate a dividend of approximately USD 20 million per year for the state.
Toward the end of this year, or by mid-2017, our four pilot projects will be in the early stages of production, from which GyP will receive 10% in almost every case. This is a pure benefit. On the other hand, GyP also contributes tax payments to the state. GyP is not a company with fiscal structures that allow it to pay fewer taxes than necessary. It contributes the total amount, which also serves to support the state.

What are the advantages of this type of association, regarding the participation agreement?
In Neuquén, there is a constitutional clause establishing that concessions may only be granted to state companies. This clause creates a bit of gridlock for private companies and applies to all concessions, with the exception of those granted by the government prior to the “provincialisation” law.
On the other hand, the province has granted certain provincial concessions to YPF by implementing laws with exceptions. For example, YPF is characterised differently. The provincial government has commissioned GyP to promote exploration and development for the remaining concessions and mining property, the latter of which belongs to the province. There is a reserve of areas in favour of GyP, the result of the company having subscribed to agreements with operating companies under certain conditions to fulfil its social objective.
As the proprietor of mining rights, which were granted by the province, GyP reserves 10%. When this occurs, the company does not pay exploration and exploitation fees, but a repayment condition goes into effect at the start of the exploitation phase, signifying that while the company does not bear risk, it pays to participate. This was highly debated and poorly understood.
Beginning with the first gas injection, and following the first oil sale, companies making the exploratory investment are given a 50% deduction in their share to compensate for exploration and development investments. Our partners don’t consider this system to be inconvenient, as it constitutes a way to extensively finance our operations, and works proportionally with the quality of deposits, so companies can see that GyP’s debt quickly diminishes after exploitation begins. This type of financing does no harm and GyP runs no risks.
Upon production, GyP begins to incur operational costs in addition to costs of exploration and development. This is a financing method, and with no production, there would be no repayment. In this manner, the investing company will invest 100%. If the exploration is successful, GyP will return the investment. It’s not as though GyP’s involvement had spurred a larger investment.

How has GyP’s four pilot projects evolved over the past year, and what are the plans for 2016 and 2017?
Pilot plans were approved between November and December 2015. In 2015, the commercialisation of three fields was declared. A fourth that had already been declared was also included in the pilot programme. The execution of some plans has begun. ExxonMobil will begin drilling around July 2016, Shell is organising and building a treatment plant and many other facilities prior to drilling, and Total is in the initial process.

What are the challenges to the development of shale gas in Neuquén?
The first challenge is determining the precise technique to be used to carry out exploitation. Many attempts using transplant technologies have not been as successful as expected. Some companies that were largely successful in the USA have not succeeded in Argentina for this reason. YPF primarily carried out exploitation with vertical wells, before realising that horizontal wells would have been more effective, and the company is currently searching for horizontal well locations. ExxonMobil and its operating company XTO Energy have already begun pilots with horizontal wells to determine the technique necessary to explore Vaca Muerta, with great results.

Are any benefits being discussed that would improve entry conditions for small or medium-sized players?
From the provincial government’s point of view, I don’t think this would be possible, as it is limited by law. Neuquén gets the royalties, approximately 12% of all production. There are provincial taxes, but they have no significant impact on this area. The reality is that oil exploitation is essentially a table with four legs.
One is the national government, which lifts barriers and liberalises certain markets. However, there is still much to be done. It is still difficult to import certain products to Argentina. We still have the vestiges of blockades to private investment. The role of the provincial government is to support.
Owning the land or area in which the fields are located comes with many responsibilities, such as providing the appropriate conditions and infrastructure needed to obtain permission to operate. The oil industry may generate a huge expansion in a given area, but the area may be devastated a few years later when the exploitation ends, which is undesirable. The province is focusing on collaboration to ensure that roads, facilities, utility-related construction and other necessities are built. I believe this is going well.
Labour unions comprise the table’s third leg, and play a very important role in the potential exploitation of Vaca Muerta. In a way, they understand this role, though it is not easy, as the industry is constantly in flux. Regarding prices, the current cycle is not good, and it is understandable that labour unions defend the workers.
Change must be implemented through efficiency, which brings us to the fourth leg, services companies. Working methodologies of services companies must also be updated to assume a much more pro-industry role. These companies must accommodate all aspects of business. If national and provincial governments make an effort, as do the unions, the services companies must match it by renovating and introducing new technology, so that labour unions can adapt to modern methods. We cannot work with old equipment, which is inefficient and unsafe.

Regarding challenges to infrastructure, how have the province’s efforts evolved?
The province has embarked on a series of policies established by a government willing to collaborate with the industry. Collaboration of the industry is also ensured, regarding investment in infrastructure projects, with an escrow to which companies must contribute. We cannot ask the province to single-handedly build the entire infrastructure necessary for an industry that is very demanding, particularly in terms of roads and housing, which in turn creates the demand for healthcare, education and safety-related infrastructure.
While the province is doing its part, the industry is very demanding and requires immediate change. If there is an exploitable field, approximately 1,500 people will need housing, hospitals, schools and entertainment. This is not easy for the state to control or freely provide, so a compromise must be reached before companies can contribute. Fortunately, the province is doing quite well in terms of logistics. However, it is not yet ready for the massive development that the exploitation of Vaca Muerta will demand.

What is GyP’s development strategy?
In five years, GyP will have become a partner to four or five international companies operating in Vaca Muerta, and we hope that we can meet our objective to generate more exploration and exploitation in areas either yet to be explored or in production. Ideally, this will allow us to attract medium-sized international investors, as the large investors are already participating, with four or five exceptions. These are not really exceptions, as I believe they will soon join.
Considering that ExxonMobil/XTO, Wintershall, Total, Shell, BP through PAE and local companies are already engaged in the area, we are in a very good position. Now we need the medium-sized companies to help create a revolution among provincial operators at the level of Oilstone or Pecom Servicios Energía. These companies have the capacity to operate and need investors willing to compromise in these areas. This is a whole new business, and is very much needed in Argentina.
In a general overview, although gas is not a commodity that we export as petrol, Argentina’s market for the next 15 years has a very high benchmark, established by internal prices, so the conditions are in place for us to exploit this product.

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