YPF, a victim of political hounding

The pressure of the Argentinean authorities on the oil firm YPF, 57.4-percent owned by Spain's Repsol, has not slacked off. As in a chain reaction, the decision by the governors of the provinces of Chubut and Santa Cruz to withdraw YPF’s petroleum operation license in four areas has been imitated by the governors of Neuquén and Mendoza. And it seems that things will not end there. This process, accompanied by much media noise in Argentina, is viewed with concern by Repsol, basically because supposedly technical reasons are being invoked, but the real intention is political.

The provincial governors, in line with President Cristina Fernández de Kirchner, maintain that the Spanish-Argentinean company has not fulfilled its commitment to invest in production. This is roundly denied by YPF, adducing that, for example, in the case of the provinces of Chubut and Santa Cruz, its investments totaled $2.3 billion in the period 2007-2011, in line with the best practices in exploration and extraction.

No doubt, from a technical viewpoint, the conflict surrounding YPF must be viewed in the context of the energy revolution in Argentina in recent years. Between 2002 and 2010 the country has seen a GDP growth of eight percent annually, favored by the prices of energy products in general, and of hydrocarbons in particular, which are kept artificially low. In this time, the annual demand for energy products has risen sharply: five percent for electricity, four percent for diesel, seven percent for gasoline and four percent for natural gas. Argentina is now one the world’s most hydrocarbon-dependent countries (particularly on natural gas) so that in 2010 petroleum and gas accounted for 84 percent of primary energy supply. With this degree of dependence, the fact that in the last 10 years the country’s oil and gas production has fallen by 18 and 11 percent respectively has set off all alarms. Because, if we add this fact to the still-rising demand, it is no exaggeration to say that the Argentinean energy industry is headed for an unprecedented change, which may be visualized in these terms: in 2011 the trade balance between imports and exports of energy products was negative by some $3.438 billion, when only a few years earlier, in 2006, the balance was positive by $6.031 billion.

In the face of this reality, it appears that the rulers of Argentina, instead of admitting their share of responsibility in what looks like bad planning and management of their country’s energy sector, wish to attribute all the evils to the fall in oil and gas production, resulting from a supposed negligence on the part of the oil industry and, more concretely, of YPF. Yet they also ought to ask themselves whether the fall is not due to a more general and irreversible phenomenon: the ageing of the oil fields. Do they want to find a guilty party, or really understand the decline, the better to manage its consequences? Very probably, in short-term considerations, their priority has been to find someone to blame, in the understanding that to point to a supposed mismanagement of national resources by a foreign company is generally profitable in electoral terms. However, in technical terms, this verdict of guilt is unjustifiable. Let’s see why:

Do they want to find a guilty party, or really understand the decline, the better to manage its consequences?

The problem of declining production is not exclusive to Argentina. It is a global challenge. Indeed, in its annual World Energy Outlook reports, the International Energy Agency (IEA) has long been emphasizing the need for precise estimation of the rate of production decline in the world’s presently active oil and gas fields. Knowing this rate – which measures the annual loss of production in a field when it enters its phase of maturity – is critical for predicting the new production capacity, and the investments needed to satisfy global demand.

In the case of petroleum, after detailed analysis of the historical production trends of some 800 oil fields which in 2007 accounted for more than 60 percent of world production, the IEA calculates that the observed rate of decline for fields that have passed their productive zenith averages worldwide at 6.7 percent annually. Meanwhile, if we define the natural (or underlying) rate of decline as the annual drop in production that would have taken place had it not been corrected by a suitable program of investment in technology, it appears that worldwide this rate averages nine percent annually. In the case of gas, after a study of historic rates of extraction in about 600 fields that represent 55 percent of world production, the IEA estimates that the rate of decline in production averages 7.5 percent annually. Globally the importance of the decline phenomenon is so great that, if we add the predictable rise in demand, it turns out that in the next eight years the industry must set in motion a new productive capacity equivalent to four times that of Saudi Arabia.

The history of hydrocarbon production in Argentina began more than a century ago (the first discovery was in Comodoro Rivadavia in 1907), and in recent years the pattern of evolution through time of oil and gas production has been similar to that of other regions considered mature, such as the United States, Mexico and the North Sea. And contrary to what might be expected in the case of a lack of investment or poor technical management of the oilfields in Argentina, the historical data show trends of decline similar to those of the United States, with values that in 2011 stood at about 6.1 percent annually in the case of crude and 3.1 percent for gas. We are looking, then, at decline percentages which are below the world averages, and this in a year when production was especially affected by union conflicts in the south of the country. And if we refer to the historical development of production rates in relation to reserves, we also observe how the values in Argentina are comparable to those of Norway and the United States, with the particularity that in Argentina, YPF shows a higher production rate than other companies.

The general opinion within the international oil industry is that we are looking at a harassment for political reasons, whose ultimate intention, as the Argentinean press has noted, seems to be the search for a larger state shareholding in the control of YPF, or even its nationalization, for which, as a previous step, a campaign has been designed to lower the market quotation of YPF.

The Argentinean government must understand that the country’s energy future involves the development of its vast potential in non-conventional hydrocarbons, a task that will require close collaboration not only with YPF but with other international oil companies. And in this sense, the present “petro-nationalist” image that the country is projecting does nothing to favor its interests.

Mariano Marzo Carpio is a professor of Energy Resources in the Faculty of Geology at the University of Barcelona.