For any investors in the energy sector who have not paid attention for the past few years, Hurricane Isaac should have taught them a lesson...the economics of the U.S. energy industry has changed drastically thanks to the shale revolution brought about by hydraulic fracturing (fracking).
Hurricanes in the Gulf of Mexico used to send natural gas prices soaring due to the supply disruptions from the region. But no longer. Now the Gulf of Mexico produces only 7 percent of total U.S. natural gas as opposed to the 20 percent it produced as recently as 2005. Fracking has led to such a boom in gas production in the continental United States that there is now a huge glut of gas on the market. This glut has pushed down the market price of natural gas so low that it is leading to problems for the gas production companies.
This gas glut will lead to, when full-year results are revealed in 2013, a great number of natural gas firms taking large writedowns in their reported reserves. In other words, these companies will be revising downward (some more than others) the commercial prospects for their natural gas assets. This is important in many cases because many oil and gas agreements with banks link borrowings to reserves. The hit may be exceptionally hard, and catch investors off guard, at gas companies which were too aggressive in booking reserves.
The weakness in natural gas prices has even affected the big energy companies like ExxonMobil (NYSE: XOM), which after its purchase of XTO Energy is the biggest U.S. producer of natural gas. Poor results from its gas division led Exxon CEO Rex Tillerson in June to say that energy companies were “all losing our shirts” thanks to the very low gas prices.
But the poster child for these upcoming writedowns has to be the most aggressive of the natural gas companies, Chesapeake Energy (NYSE: CHK). In its second quarter results, the company already wrote off 4.6 trillion cubic feet of natural gas reserves. That was 24 percent of its reserves and equivalent to more than two months of U.S. consumption of gas! However, that was offset somewhat by reserve additions to make the net decline only 7 percent. Its full-year 2012 results, which should have some massive writedowns, will certainly have its suffering shareholders on edge.
Chesapeake has hardly alone in announcing reserve writedowns in its latest earnings reports. One of Canada's major natural gas producers, Encana (NYSE: ECA), took a second quarter loss of $1.48 billion after it took a $1.7 billion charge on some of its gas assets thanks to the low prices. And it warned that further writedowns were to come in the months ahead.
Natural resources giant BHP Billiton ADR (NYSE: BHP) also announced a major writedown. In August, it took an impairment charge of $2.84 billion against its Fayetteville gas assets that it acquired from Chesapeake Energy in February 2011 for $4.75 billion. The company ended up entering the U.S. gas market in a big way just before the major downturn in gas prices. BHP also wrote down the assets thanks to lower than expected production from the gas fields.
Smaller gas producers have also been hit, such as Ultra Petroleum (NYSE: UPL) which announced a $1.1 billion writedown on its natural gas assets, resulting in a $1.2 billion loss in the second quarter. Its average selling price for gas fell plunged 22 percent from $5.17 a year earlier to $4.04 in the second quarter of 2012. The company owns gas fields in Pennsylvania and Wyoming.
The only way for this situation to turn around in the long term for the natural gas producers is to see a substantial cutback in drilling activity. Some cutbacks have already occurred...the number of working gas rigs in the U.S. has fallen by almost half in the past year. However, figures from energy consultancy Bentek Energy show that gas production still rose by about 5 percent in the first half of 2012 due to increased rig efficiency.
Translation? A lot more drilling activity has to be cut back before natural gas prices can enjoy a sustainable rise, ending the writedowns and the troubles for gas companies' shareholders.
This article originally appeared on the Motley Fool Blog Network. make sure to read all my articles for the Motley Fool at http://blogs.fool.com/tdalmoe/,
Showing posts with label shale gas. Show all posts
Showing posts with label shale gas. Show all posts
Monday, September 17, 2012
Tuesday, May 29, 2012
Asset Sales Galore Coming for Chesapeake
Despite having some of the best assets in the natural gas business, Chesapeake Energy (NYSE: CHK) has become the poster child for the type of company that investors should give a wide berth. Among the problems which ail Chesapeake are very questionable corporate governance, large amounts of debt both on and off the balance sheet, strained liquidity and murky accounting. No surprise then that the company's stock has fallen roughly 45 percent in the past six months.
Chesapeake Energy, the second-biggest natural gas producer in the United States, now has one choice to survive...it will have to liquidate some of the juiciest energy assets in the country. That is where this story gets interesting for investors in the sector as its rivals look to scoop up some of Chesapeake's prime assets at a good price. In fact, industry analysts believe there are at least $25 billion in valuable acreage that Chesapeake owns which should find eager buyers.
The company's principal assets are oil and gas leases covering roughly 15 million acres in key areas all across the country including Texas, Louisiana, Oklahoma and Pennsylvania. Chesapeake is the largest or second-largest leaseholder in many of the most promising in the US for producing shale gas and oil that have been opened by advances in drilling technology.
Even before the recent problems came to a head, the company had planned to make some assets sales as it has done the past several years. The biggest planned deal is the sale of 1.5 million acres of leases in the Permain Basin oil fields of west Texas and eastern New Mexico. It is believed this sale should fetch the company at least $6 billion since these fields hold much more oil than they do gas.
The most obvious possible buyer for these assets is Anadarko Petroleum (NYSE: APC) which is Chesapeake's partner in many wells in the Permian Basin. Its CEO Al Walker has publicly stated Anadarko plans to “take a look” at those assets. Another possible buyer for these assets is Occidental Petroleum (NYSE: OXY). This company is the biggest oil producer in the Permian Basin. In the past, it showed interest in these assets, offering Chesapeake about $3.5 billion for it (the offer was rejected).
The second planned disposal is a joint venture for its 2 million acres in the Mississippi Line region of Oklahoma and Kansas. This acreage, like many of Chesapeake' other assets, requires significant capital spending to bring it into full fruition. The company's capital spending has exceeded cash flow each quarter since October 2003, according to Bloomberg. This is the one of the main reasons behind the company's high debt burden and why ratings agency Fitch recently said Chesapeake's cash flow shortfall this year may reach $10 billion.
With much capital required, buyers of Chesapeake's assets are going to have to be some deep-pocketed companies. One such company which comes to mind immediately is Chevron (NYSE: CHV). Unlike some of its peers in the industry like ExxonMobil, it has been very slow in acquiring US shale reserves and has to date nearly missed the shale revolution occurring in the United States. Chevron's pockets are even deep enough for it to catch up quick and acquire the whole of Chesapeake Energy if it so desires.
Another possibility is an overseas natural resources company with a strong interest in US energy assets. That company is BHP Billiton ADR (NYSE: BHP). Its management has been trying to shift the company away from a reliance on metals mining and more towards a focus on energy assets around the globe. BHP recently announced a reduction in its capital spending on mining projects. Investors will recall that BHP, which had already bought some US energy assets, spent $12.1 billion to acquire Petrohawk Energy in July 2011. The acquisition of Petrohawk's shale assets in Texas and Louisiana moved BHP into the top 10 of oil and gas companies and it is looking to expand even more in the US.
What will happen to Chesapeake? It could try a piecemeal approach – both selling and buying assets. But this strategy will do the company little good...it will be just running in place with a heavy debt load tied around its neck. Despite its reluctance, management will likely have to put the whole company up for sale sooner or later.
This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Chesapeake Energy, the second-biggest natural gas producer in the United States, now has one choice to survive...it will have to liquidate some of the juiciest energy assets in the country. That is where this story gets interesting for investors in the sector as its rivals look to scoop up some of Chesapeake's prime assets at a good price. In fact, industry analysts believe there are at least $25 billion in valuable acreage that Chesapeake owns which should find eager buyers.
The company's principal assets are oil and gas leases covering roughly 15 million acres in key areas all across the country including Texas, Louisiana, Oklahoma and Pennsylvania. Chesapeake is the largest or second-largest leaseholder in many of the most promising in the US for producing shale gas and oil that have been opened by advances in drilling technology.
Even before the recent problems came to a head, the company had planned to make some assets sales as it has done the past several years. The biggest planned deal is the sale of 1.5 million acres of leases in the Permain Basin oil fields of west Texas and eastern New Mexico. It is believed this sale should fetch the company at least $6 billion since these fields hold much more oil than they do gas.
The most obvious possible buyer for these assets is Anadarko Petroleum (NYSE: APC) which is Chesapeake's partner in many wells in the Permian Basin. Its CEO Al Walker has publicly stated Anadarko plans to “take a look” at those assets. Another possible buyer for these assets is Occidental Petroleum (NYSE: OXY). This company is the biggest oil producer in the Permian Basin. In the past, it showed interest in these assets, offering Chesapeake about $3.5 billion for it (the offer was rejected).
The second planned disposal is a joint venture for its 2 million acres in the Mississippi Line region of Oklahoma and Kansas. This acreage, like many of Chesapeake' other assets, requires significant capital spending to bring it into full fruition. The company's capital spending has exceeded cash flow each quarter since October 2003, according to Bloomberg. This is the one of the main reasons behind the company's high debt burden and why ratings agency Fitch recently said Chesapeake's cash flow shortfall this year may reach $10 billion.
With much capital required, buyers of Chesapeake's assets are going to have to be some deep-pocketed companies. One such company which comes to mind immediately is Chevron (NYSE: CHV). Unlike some of its peers in the industry like ExxonMobil, it has been very slow in acquiring US shale reserves and has to date nearly missed the shale revolution occurring in the United States. Chevron's pockets are even deep enough for it to catch up quick and acquire the whole of Chesapeake Energy if it so desires.
Another possibility is an overseas natural resources company with a strong interest in US energy assets. That company is BHP Billiton ADR (NYSE: BHP). Its management has been trying to shift the company away from a reliance on metals mining and more towards a focus on energy assets around the globe. BHP recently announced a reduction in its capital spending on mining projects. Investors will recall that BHP, which had already bought some US energy assets, spent $12.1 billion to acquire Petrohawk Energy in July 2011. The acquisition of Petrohawk's shale assets in Texas and Louisiana moved BHP into the top 10 of oil and gas companies and it is looking to expand even more in the US.
What will happen to Chesapeake? It could try a piecemeal approach – both selling and buying assets. But this strategy will do the company little good...it will be just running in place with a heavy debt load tied around its neck. Despite its reluctance, management will likely have to put the whole company up for sale sooner or later.
This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Wednesday, April 4, 2012
US Shale Gas Boom Depresses Coal Companies
The shale gas boom in the United States has been good news for companies involved in shale extraction and other including industrial companies and consumers who have benefited from lower prices for natural gas. But there is one industry in particular that has been impacted negatively in a big way by cheap and plentiful shale gas...the U.S. coal industry.
Both coal and natural gas are used to fire power plants across the country. And in fact, coal remains the largest source of electricity production in the United States. But the share of electricity in the U.S. generated by burning coal has been losing market share, as utilities switch to cheaper natural gas, falling to near a 35-year low.
In December, coal's share of the market fell below the 40% level for the first time since March 1978, according to the U.S. Department of Energy. Coal use for the generation of electricity peaked in 1985 at almost 60%. The drop below the 40% mark is a highly significant development since the United States is the world's largest electricity market.
Its significance has not gone unnoticed by the coal market. U.S. benchmark central Appalachian thermal coal prices recently dropped to $58 a ton, the lowest level in nearly two years. The price drop did not escape the notice of the stock market either. The stocks of leading U.S. thermal coal miners including Consol Energy (NYSE: CNX), Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) have dropped sharply and are near 52-week lows.
The drop in coal prices is forcing many domestic coal miners to cut back production and also attempt to export their excess supplies overseas into the $100 billion thermal coal seaborne coal market. This, however, is having a knock-on effect in that market. U.S. exports are creating a glut in that market too, sending global thermal coal prices to a 15-month low and hurting the leaders in that sector like Rio Tinto ADR (NYSE: RIO). Other large global producers of thermal coal include Anglo American and Xstrata.
Annual contracts last year for thermal coal with large Asian consumers like Japanese utilities were settled at $130 a ton, a rise of 32.6% from the $98 a ton the previous year. It is expected that this year's contracts will be settled roughly 10%-11% lower at between $115 and $120 a ton. This is not a disaster yet for the likes of Xstrata and Rio Tinto with demand still rather robust in the Asia-Pacific region. After all, last year's price was an all-time record high and $115 a ton would be the third highest price ever for an annual contract.
The $115 a ton price probably looks tremendous to U.S. producers of thermal coal who are only receiving $58 a ton domestically. Expect more and more U.S. thermal coal to enter to the global seaborne market, thanks to cheap freight costs and the higher thermal coal prices overseas. As this occurs, the share prices of coal companies like Arch, Alpha Natural and Consol should stabilize and retrace some of their recent losses.
This article was originally written for the Motley Fool Blog Network. Please check out all my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/ or subscribe to them there.
Both coal and natural gas are used to fire power plants across the country. And in fact, coal remains the largest source of electricity production in the United States. But the share of electricity in the U.S. generated by burning coal has been losing market share, as utilities switch to cheaper natural gas, falling to near a 35-year low.
In December, coal's share of the market fell below the 40% level for the first time since March 1978, according to the U.S. Department of Energy. Coal use for the generation of electricity peaked in 1985 at almost 60%. The drop below the 40% mark is a highly significant development since the United States is the world's largest electricity market.
Its significance has not gone unnoticed by the coal market. U.S. benchmark central Appalachian thermal coal prices recently dropped to $58 a ton, the lowest level in nearly two years. The price drop did not escape the notice of the stock market either. The stocks of leading U.S. thermal coal miners including Consol Energy (NYSE: CNX), Arch Coal (NYSE: ACI) and Alpha Natural Resources (NYSE: ANR) have dropped sharply and are near 52-week lows.
The drop in coal prices is forcing many domestic coal miners to cut back production and also attempt to export their excess supplies overseas into the $100 billion thermal coal seaborne coal market. This, however, is having a knock-on effect in that market. U.S. exports are creating a glut in that market too, sending global thermal coal prices to a 15-month low and hurting the leaders in that sector like Rio Tinto ADR (NYSE: RIO). Other large global producers of thermal coal include Anglo American and Xstrata.
Annual contracts last year for thermal coal with large Asian consumers like Japanese utilities were settled at $130 a ton, a rise of 32.6% from the $98 a ton the previous year. It is expected that this year's contracts will be settled roughly 10%-11% lower at between $115 and $120 a ton. This is not a disaster yet for the likes of Xstrata and Rio Tinto with demand still rather robust in the Asia-Pacific region. After all, last year's price was an all-time record high and $115 a ton would be the third highest price ever for an annual contract.
The $115 a ton price probably looks tremendous to U.S. producers of thermal coal who are only receiving $58 a ton domestically. Expect more and more U.S. thermal coal to enter to the global seaborne market, thanks to cheap freight costs and the higher thermal coal prices overseas. As this occurs, the share prices of coal companies like Arch, Alpha Natural and Consol should stabilize and retrace some of their recent losses.
This article was originally written for the Motley Fool Blog Network. Please check out all my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/ or subscribe to them there.
Monday, March 5, 2012
Chesapeake, Debt and Natural Gas
Perhaps no company prospered more during the early stages of the U.S. shale gas boom than Chesapeake Energy (NYSE: CHK). Its strategy was to aggressively buy drilling rights in relatively unexplored shale fields. This gave Chesapeake a very strong position in dry natural gas shale plays such as the Barnett in Texas and the Haynesville in Louisiana.
This strategy of buying acreage, however, in combination with a decline in natural gas prices from $6 per million BTU in 2010 to less than $2.50 per million BTU today, has left the company with a much heavier debt burden than most of its peers. The debt has been a drag on the stock's performance with it dropping by 25% in the second half of 2011.
The company pledged to reduce its debt by the end of 2012 by $800 million, to $9.5 billion. This is still a very high two-thirds of its market capitalization. More ominously, Chesapeake does not expect to generate enough cash from its operations to fund planned drilling and completion capital expenditures until 2014.
So the company has adopted a two-pronged approach to the problem. It is cutting back on some dry gas drilling activity and it is also disposing of some of its hydrocarbon assets.
Chesapeake recently reported it may sell up to $12 billion in assets as it seeks to plug its funding gap. It said earlier this week it was close to a deal to sell future output from the liquid-rich Granite Wash in the Texas panhandle. The company is also contemplating disposing its entire interest in the Permian Basin region of Texas, an area the company has yet to explore heavily, but thought to be rich in oil and 'wet' gas. Chesapeake would rather be selling some of its dry gas assets, but the price of natural gas is so low right now, there are few if any buyers for such assets.
The company last month also announced a planned 8% cut in gas production and a 67% cut in the number of rigs drilling gas wells. This number will drop from an average of 75 rigs in use in 2011 to only 24 by the second quarter of this year. This is a significant move since Chesapeake is the second largest natural gas producer in the United States. It accounts for 9% of the country's production and contributed a high proportion of the growth in gas production in the last decade.
The good news for Chesapeake is that other companies have joined them in cutting back on gas drilling activities. According to Baker Hughes (NYSE: BHI), the number of rigs drilling for gas in the United States fell for the fifth week in a row to 720 last week. This is the lowest level since October 2009 and down more than 23% from its October 2011 peak of 936. But more cutbacks need to happen for the industry to enjoy a rebound in prices.
The COO of Baker Hughes, Martin Craighead, said he expects the gas rig count to keep falling “until there is a meaningful increase in gas prices”. Most in the natural gas industry believe the 700 level in rigs will be crucial. The belief is that once the rig count is below 700, gas production will begin to fall and prices will stabilize then within a 5-6 month period.
The price of gas is now below the cost of production in some parts of the United States, so it logical to conclude that other large producers such as EOG Resources will follow Chesapeake's lead. Other companies like Canada's Talisman Energy have already sharply cut rig drilling in Pennsylvania's Marcellus Shale region.
Chesapeake and its shareholders must hope that others in the industry will follow them in slashing gas production. Such actions should raise gas prices and lend a little stability to its financial situation. After all, it can't simply keep selling all of its assets until its well of assets runs dry.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
This strategy of buying acreage, however, in combination with a decline in natural gas prices from $6 per million BTU in 2010 to less than $2.50 per million BTU today, has left the company with a much heavier debt burden than most of its peers. The debt has been a drag on the stock's performance with it dropping by 25% in the second half of 2011.
The company pledged to reduce its debt by the end of 2012 by $800 million, to $9.5 billion. This is still a very high two-thirds of its market capitalization. More ominously, Chesapeake does not expect to generate enough cash from its operations to fund planned drilling and completion capital expenditures until 2014.
So the company has adopted a two-pronged approach to the problem. It is cutting back on some dry gas drilling activity and it is also disposing of some of its hydrocarbon assets.
Chesapeake recently reported it may sell up to $12 billion in assets as it seeks to plug its funding gap. It said earlier this week it was close to a deal to sell future output from the liquid-rich Granite Wash in the Texas panhandle. The company is also contemplating disposing its entire interest in the Permian Basin region of Texas, an area the company has yet to explore heavily, but thought to be rich in oil and 'wet' gas. Chesapeake would rather be selling some of its dry gas assets, but the price of natural gas is so low right now, there are few if any buyers for such assets.
The company last month also announced a planned 8% cut in gas production and a 67% cut in the number of rigs drilling gas wells. This number will drop from an average of 75 rigs in use in 2011 to only 24 by the second quarter of this year. This is a significant move since Chesapeake is the second largest natural gas producer in the United States. It accounts for 9% of the country's production and contributed a high proportion of the growth in gas production in the last decade.
The good news for Chesapeake is that other companies have joined them in cutting back on gas drilling activities. According to Baker Hughes (NYSE: BHI), the number of rigs drilling for gas in the United States fell for the fifth week in a row to 720 last week. This is the lowest level since October 2009 and down more than 23% from its October 2011 peak of 936. But more cutbacks need to happen for the industry to enjoy a rebound in prices.
The COO of Baker Hughes, Martin Craighead, said he expects the gas rig count to keep falling “until there is a meaningful increase in gas prices”. Most in the natural gas industry believe the 700 level in rigs will be crucial. The belief is that once the rig count is below 700, gas production will begin to fall and prices will stabilize then within a 5-6 month period.
The price of gas is now below the cost of production in some parts of the United States, so it logical to conclude that other large producers such as EOG Resources will follow Chesapeake's lead. Other companies like Canada's Talisman Energy have already sharply cut rig drilling in Pennsylvania's Marcellus Shale region.
Chesapeake and its shareholders must hope that others in the industry will follow them in slashing gas production. Such actions should raise gas prices and lend a little stability to its financial situation. After all, it can't simply keep selling all of its assets until its well of assets runs dry.
This article was originally written for the Motley Fool Blog Network. Be sure to check out my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/
Wednesday, January 4, 2012
Shale Boom in Argentina
Many investors are aware of the current shale oil and gas boom in the United States brought about by the use of fracking technology.
What investors may not be aware of though is that this technology is now beginning to used all around the world. One example which was in the headlines recently is Argentina.
That country has some of the largest and highest quality reserves of shale oil and gas. This year, the U.S. Energy Information Agency ranked Argentina third globally in terms of technically recoverable shale gas reserves with 7.74 trillion cubic feet of gas. This total is behind only China and the U.S.
The company at the forefront of shale discoveries in Argentina is the former state-owned oil company YPF SA ADR (NYSE: YPF), which is 57.43% owned by Spain's Repsol YPF SA.
YPF is eying another 1 billion barrel discovery which is adjacent to a field in the Vaca Muerta formation, located in Patagonia, which was found to have reserves six times bigger than original estimates at 927 million barrels. Vaca Muerta compares very favorably to U.S. shale formations. It is three times as deep as Eagle Ford in Texas and its yields may be double.
The company said the hydrocarbons found there were about three-quarters oil and one-quarter gas. The 927 million barrel estimate from YPF is a very conservative one which says only 4 percent of all the hydrocarbons will be extracted.
On top of that, there may be a lot more shale oil and gas to be discovered since YPF has explored only a 502 square kilometer area out of the total 12,000 square kilometer area so far. In 2012, the company plans to spend at least $87 million drilling in the area.
A flood of companies have launched exploration programs in Argentina over the past six months. These companies include many large global firms with experience in shale hydrocarbons such as ExxonMobil (NYSE: XOM), Total SA ADR (NYSE: TOT), Apache (NYSE: APA) and EOG Resources (NYSE: EOG).
Energy industry leaders in Argentina believe the country can follow in the footsteps of the United States and turn the energy industry from a state of decline into a boom.
The energy industry in Argentina has definitely been on a downward slope. For example, the country expects to import a record 80 cargoes of LNG (liquified natural gas) in 2012, a 20% increase from this year.
But for a shale boom to proceed Argentina must overcome some obstacles.
First, oil and gas prices are regulated in Argentina. The government has kept prices so artificially low that investment is discouraged.
Royalties are also low in comparison to other energy-rich countries. The good news here is that the government is offering higher prices for shale oil and gas under the Gas Plus and Oil program which offers better conditions for the industry.
Finally, labor relations stink. There have been a number of strikes by oil workers. This needs to improve before Argentina can enjoy a shale boom.
However, as evidenced by the Gas Plus and Oil program, Argentina finally seems to be moving in the right direction. If it continues along this path, YPF is sure to be the prime beneficiary.
Article originally written for Motley Fool - http://blogs.fool.com/tdalmoe/
What investors may not be aware of though is that this technology is now beginning to used all around the world. One example which was in the headlines recently is Argentina.
That country has some of the largest and highest quality reserves of shale oil and gas. This year, the U.S. Energy Information Agency ranked Argentina third globally in terms of technically recoverable shale gas reserves with 7.74 trillion cubic feet of gas. This total is behind only China and the U.S.
The company at the forefront of shale discoveries in Argentina is the former state-owned oil company YPF SA ADR (NYSE: YPF), which is 57.43% owned by Spain's Repsol YPF SA.
YPF is eying another 1 billion barrel discovery which is adjacent to a field in the Vaca Muerta formation, located in Patagonia, which was found to have reserves six times bigger than original estimates at 927 million barrels. Vaca Muerta compares very favorably to U.S. shale formations. It is three times as deep as Eagle Ford in Texas and its yields may be double.
The company said the hydrocarbons found there were about three-quarters oil and one-quarter gas. The 927 million barrel estimate from YPF is a very conservative one which says only 4 percent of all the hydrocarbons will be extracted.
On top of that, there may be a lot more shale oil and gas to be discovered since YPF has explored only a 502 square kilometer area out of the total 12,000 square kilometer area so far. In 2012, the company plans to spend at least $87 million drilling in the area.
A flood of companies have launched exploration programs in Argentina over the past six months. These companies include many large global firms with experience in shale hydrocarbons such as ExxonMobil (NYSE: XOM), Total SA ADR (NYSE: TOT), Apache (NYSE: APA) and EOG Resources (NYSE: EOG).
Energy industry leaders in Argentina believe the country can follow in the footsteps of the United States and turn the energy industry from a state of decline into a boom.
The energy industry in Argentina has definitely been on a downward slope. For example, the country expects to import a record 80 cargoes of LNG (liquified natural gas) in 2012, a 20% increase from this year.
But for a shale boom to proceed Argentina must overcome some obstacles.
First, oil and gas prices are regulated in Argentina. The government has kept prices so artificially low that investment is discouraged.
Royalties are also low in comparison to other energy-rich countries. The good news here is that the government is offering higher prices for shale oil and gas under the Gas Plus and Oil program which offers better conditions for the industry.
Finally, labor relations stink. There have been a number of strikes by oil workers. This needs to improve before Argentina can enjoy a shale boom.
However, as evidenced by the Gas Plus and Oil program, Argentina finally seems to be moving in the right direction. If it continues along this path, YPF is sure to be the prime beneficiary.
Article originally written for Motley Fool - http://blogs.fool.com/tdalmoe/
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