Apache Argentine Push Bucks Tide of Resource Nationalism

HOUSTON Oct 3, 2006 (Dow Jones Newswires)

A surge in resource nationalism has thwarted most new foreign energy investment in Latin America. But Apache Corp. (APA) is bucking the tide with a major new push in Argentina.

The Houston-based producer, one of the largest U.S. independents, has been ramping up operations since it acquired Pioneer Natural Resources Co.'s (PXD) natural gas assets there for $675 million in April. The company is drilling dozens of wells in Argentina, which company officials have called Apache's "latest core area."

Apache's Argentina campaign comes amid several high-profile setbacks by other foreign companies in neighboring Latin American countries. Since oil prices began surging a few years ago, international oil companies have clashed with Bolivia, Ecuador and Venezuela over contract terms and the threat of possible nationalization.

Like its South American neighbors, Argentina is known for its legal instability, which last surfaced in the 2002 economic collapse. Then, the government triggered dozens of claims from foreign investors when it froze bank accounts and changed energy laws, among other emergency measures.

But oil industry experts don't consider expropriation a serious threat in Argentina. Unlike some Latin neighbors that primarily export their fuel, Argentina needs private investment to to quench growing domestic energy demand, analysts said.

Rather, the main risk in Argentina is over-regulation: natural gas prices are heavily controlled, and oil export taxes are high. Yet Apache is hopeful that Argentina may liberalize as it seeks to increase domestic energy production.

"Argentina is a little bit like the U.S. was before natural gas prices were decontrolled" in the 1980s, said Apache's Chief Financial Officer Roger Plank. "There's bottled-up opportunity."

Apache is not the only U.S. independent taking the Southern Cone plunge.

Los Angeles-based Occidental Petroleum Corp., which saw its large Ecuador operation expropriated in May, hopes to double its production there to 75,000 barrels a day over five years. Occidental spokesman Lawrence Meriage cited Argentine President Nestor Kirchner's recent visit to Wall Street as a positive sign.

"Clearly it's a country that's seeking additional investment," Meriage said.

Atypical resource holder

Apache, which entered Argentina with a minor investment in 2001, produces 103 million cubic feet of gas a day and 6,581 barrels of oil a day, or about 6% of its total production, according to the company's second quarter earnings report. The Argentina investment is part of a two decades-long effort to diversify the company's reserve base beyond its traditional North American core.

Apache, which defines itself as "contrarian," sees Argentina as place many other investors shun but where it can achieve major growth, much like its venture in Egypt, where the company is now the largest U.S. investor.

Holding Latin America's third-largest gas reserves, Argentina is indeed atypical among energy-rich developing nations. Since the 1990s, when the government sold off national oil and gas operator Yacimientos Petroliferos Fiscales, most of its energy sector is in private hands, rather than under the purview of state energy companies.

While companies seeking offshore energy exploration must establish joint ventures with a newly-created state oil firm, independents like Apache can develop mature onshore areas unhindered, putting exploration skills honed in North America to use.

Argentina likes this framework because it still gives country officials authority over offshore developments, which are thought to offer the potential for the biggest energy prizes.

The onshore fields operated by Apache "are not areas where you're going to find huge reserves," said Tom Covington, a Denver-based analyst with A.G. Edwards. But reserves there are also relatively cheap by North American standards, he added.

The main challenge for operators is the stern control on natural gas prices the government instituted in the aftermath of the 2002 economic collapse. Currently Apache sells two thirds of its production at regulated prices well under international levels.

But cheap energy has pushed up demand, and the impending supply crisis may open the door to further deregulation, Apache executives believe.

"There is risk, but there's recognition that the economics need to change," said Plank, who said Apache's venture is profitable even at current prices. "If they don't fuel economic growth they won't be able to get out of their crisis."

But Argentine officials say they have no plans to liberalize, and analysts consider a full-scale liberalization unlikely.

"It's going to be something more selective, as long as it does not affect consumers," said Daniel Kerner, a New York-based analyst with the Eurasia Group, a political risk consultancy. "If there's an energy crisis, the government will probably increase subsidies or its participation in the sector."

Assuming a certain level of risk

Most analysts agree that Argentina, once one of the world's wealthiest countries, offers fewer risks of expropriation than other Latin American countries. Its government does not depend on oil and gas revenue for most of its resources, and foreign companies will fare happily as long as they don't cross the government, said Eurasia's Kerner.

"There's not an ideological imperative in this government to expropriate, but the state must call the shots," Kerner said. "It's not a country that is against foreign entrepreneurs, but there's the idea that the state must be the one setting the rules of the game."

Apache's and other U.S. investments are protected by a long-standing bilateral investment agreement with the U.S., which provides recourse to international arbitration. The treaty, however, did not keep the government from establishing price controls during the 2002 crisis, triggering dozens of claims by foreign companies. In the past, Argentine officials have threatened not to abide by international court rulings on the matter.

The Argentine government has "a tendency to change the rules from time to time," Plank acknowledged.

But Apache believes that a strong relationship with a government bent on averting an energy crisis will ward off trouble. Such attitude helped the company become a major player in Egypt, Plank said.

Though in itself substantial, Apache's $675 million investment could be a prelude to a larger campaign. But not yet.

"We want to make sure we have the basis for that kind of relationship," said Plank.

Copyright (c) 2006 Dow Jones & Company, Inc.


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