BMI View: The Argentine courts have thrown the country into the middle of a bitter dispute between Chevron and the government of Ecuador. Not only does this further complicate an already difficult situation for Chevron, but also may have negative implications for Argentina itself, as it puts at risk a recent agreement between Chevron and YPF to jointly develop the country ' s shale resources.
An Argentine judge has ordered that US$19bn of Chevron ' s assets in Argentina be frozen on behalf of Ecuadorean courts pursuing damages relating to environmental contamination committed by Texaco (acquired by Chevron in 2001) in the Ecuadorean Amazon from 1964-1990 . Using the Inter-American Convention on the Execution of Preventive Measures, an international treaty signed in the 1970s, Argentina is able to freeze the assets of a defendant which has failed to pay a foreign judgement in another signatory state. The plaintiffs have also sought to enforce the Ecuadorean court's ruling in Brazil and Canada, in addition to the recent court order to seize approximately US$200mn of Chevron ' s assets in Ecuador itself.
At risk are : all of Chevron Argentina ' s stock, valued at approximately US$2bn ; all of its dividends ; the 14% stake that it holds in oil pipeline company Oleoductos del Valle ; 40% of oil sales revenue ; and 40% of its bank accounts in Argentina . Also at risk are any future investments made into Argentina, as well as the other three countries in which court action has been initiated.
For its part, Chevron has both denounced the Ecuadorean court's charges as fraudulent, and the freezing of its assets by Argentina as without legal merit. In Ecuador, Chevron has argued that the charges - Texaco ' s systematic contamination of watersheds for nearly three decades, result ing in over 300 cases of cancer among indigenous tribespeople and farmers - are ' a product of bribery, fraud and [are] illegitimate. ' Chevron has officially accused the plaintiffs of fraud in a US court, and a trial for that case is scheduled for October 15 2013.
Similarly , Chevron arguing that the Argentine court's most recent action is also unlawful. This argument is made on the basis that Chevron Corporation has no assets in Argentina, but that all of its operations are conducted by subsidiaries.
The fate of Chevron's assets in Argentina is therefore in jeopardy. What is likely, irrespective of the outcome, is a long arbitration process, further complicating Chevron's legal troubles in Latin America as a result of its assumption of Texaco's liabilities. The timing of these developments is also complicating, as it comes only months after Chevron made a big bet on Argentina, despite its degrading business environment.
Argentina's Risk Premium Rising
In September, Chevron became the first company to commit to working with the newly nationalised YPF to jointly develop Argentina 's vast Vaca Muerta shale reserves, which are estimated to be the world's third largest, after those in China and the United States. We had written at the time of the deal that i n the calculation of Chevron and other firms considering entrance , gaining access to the country's reserves was worth the risks; however, firms could easily pull back should the Argentine government retreat to a more combative approach to foreign particip ation in the oil and gas sector ( see our online service, September 18 2012, 'Chevron Eyes Shale Rewards But Risks Remain ' ).
We have long been highlighting the political risks to the energy sector in Argentina, irrespective of its significant below-ground potential. Not least of these concerns is the expropriation of YPF and its aftermath, which saw Repsol 's assets seized and operations in the country ceased. Additional challenges for foreign companies include artificial oil and gas prices, currency controls and import restrictions. These restrictions are hugely prohibitive, as they prevent exploration and production (E&P) companies from accessing the high-end technology and foreign capital necessary to stimulate successful production. These constraints are particularly acute for unconventional oil and gas production, including shale , on which Chevron was to focus in its deal with YPF .
That Chevron ' s assets are now at risk in Argentina due to this court ruling puts its agreement with YPF at risk. Indeed, the plaintiff in the case stated plainly : ' The freeze order applies to the entire US$19bn amount of the Ecuadoran judgement, meaning that Chevron will effectively be barred from investing in Argentina unless it wants to risk seizure of those assets as well. '
Foreign Participation Necessary For Shale Production
The news is potentially more harmful to YPF, which is unable to exploit its own shale resources alone. Indeed, the company 's current US$37.2bn investment plan is dependent upon US$4.5bn of funding from international oil companies (IOCs), and the remaining US$6.7bn from the issuing of bonds. Any delays in Chevron ' s agreement with YPF as a result of this asset freeze will only further hinder the company ' s ability to meet its goals, which include boost ing oil production by a third, as well as the drilling of 50 wells a year through 2016 (compared to an annual average of 19 wells per year between 2007 and 2011). In conjunction with this rise in output, the recently nationalised company is also seeking to resume the export of oil from Argentina, which was halted in 2006. The development of the country ' s shale resources will be critical in these regards, and is seen as a n essential component to reducing the recent decline in it s energy sector.
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