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Argentina's Oil Rich Neuquen Province Mulls Sovereign Wealth Fund

Date : 12/05/2012 @ 3:05AM
Source : Dow Jones News
Stock : Apache Corp. (APA)
Quote : 101.83  0.46 (0.45%) @ 5:30AM
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Argentina's Oil Rich Neuquen Province Mulls Sovereign Wealth Fund

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--Neuquen to create sovereign wealth fund based on oil revenue

--Neuquen oil production expected to double in four years

--Neuquen holds some of the world's most abundant unconventional energy resources

By Taos Turner

BUENOS AIRES--Argentina's Neuquen Province plans to set up a sovereign wealth fund to save some of the royalties it expects to reap from the development of its vast unconventional oil and gas resources.

Neuquen Governor Jorge Sapag compared the plan to Norway's decision to sock away the windfall revenues from oil and gas production in the North Sea.

"Forty years ago Norway was a very poor country," Mr. Sapag said in an interview. "Like Norway, I think we can have a fund to offer ... pensions. I'm not saying we'll be as lucky as Norway, but we are putting together a similar model."

Oil producing countries and even states like Alaska have channelled oil and gas revenues to state-owned investment funds for decades. But a provincial oil savings fund like the one proposed by Mr. Sapag would be novel in Argentina.

"This would be the first fund of its kind in Argentine history," said Veronica Sosa, an economist at Economia y Regiones, who specializes in provincial economies.

Mr. Sapag said his government also plans to take its oil and gas company, Gas y Petroleo del Neuquen, public as Norway did with its state-run energy giant Statoil ASA (STL.OS).

Mr. Sapag hopes to list 30% of the company's shares on stock exchanges in Buenos Aires, New York and Toronto as early as next March, with the province retaining a 70% stake.

Neuquen accounts for 22% of Argentina's total oil output, though its share will rise sharply if big investments in unconventional oil and gas production materialize.

Argentina ranks third in the world, behind China and the U.S., in potentially recoverable shale-gas reserves, with 774 trillion cubic feet, according to the U.S. Energy Information Administration. Argentina is also thought to have lots of shale oil.

With much of that underneath its soil, Neuquen is the lynchpin of the Argentine government's ambitious plan to end the country's dependence on imported energy by reversing over a decade of declining oil and gas output.

Neuquen's unconventional energy riches are located in an area known as Vaca Muerta, or "dead cow" in Spanish, which is about the size of the state of New Jersey.

"I'm very, very optimistic," Mr. Sapag said. "We know not only that the quantity of our unconventional oil and gas reserves is good, but we know the quality of them is very good."

Neuquen hopes to replicate the unconventional energy boom in the U.S., where a technique called hydraulic fracturing, or fracking, is used to extract oil and gas from shale rock and so-called tight sands formations.

Fracking has allowed the U.S. oil and gas industry to tap reserves that were previously thought to be impossible or too expensive to extract. The technology has been so successful that the U.S. is expected to surpass Saudi Arabia as the world's top oil producer by 2020, according to the International Energy Agency.

Industry executives and analysts say Argentina possesses all the geological characteristics necessary to become a global energy powerhouse. The challenge will be to make the country more investment friendly, analysts say. Constantly shifting policies, heavy government intervention, price and export caps, as well as a ban on sending dividend abroad have discouraged investment despite the appeal of the resources.

Argentina's government will have to provide assurances that contracts will be honored and it will need to allow investors to turn a profit for the money to flow.

President Cristina Kirchner's decision to expropriate YPF SA (YPF, YPFD.BA) from Spain's Repsol SA (REP.MC) hasn't helped attract the billions of dollars Argentina needs to put its unconventional energy into production.

So far, Argentina has not publicly offered to pay Repsol a dime for the takeover and Repsol is seeking around $10.5 billion in compensation.

Mr. Sapag says Neuquen will double oil production over the next five years thanks to shale oil discoveries and he expects the economy to grow 70% over that period.

YPF will play a big role boosting Neuquen's production oil and gas output, he said.

After the expropriation, YPF said it would invest $37 billion between 2013 and 2017.

That plan got a big boost last week after Mrs. Kirchner said the government would allow YPF to charge $7.5 per million British thermal units for new natural gas production.

That's over three times what YPF charged for gas last year and it's well above the benchmark natural gas price of $3.65 in the U.S.

YPF Chief Executive Miguel Galuccio said the higher price will make investing in Argentina, and in YPF, more appealing to foreign investors.

Companies already working in Neuquen include Apache Corporation (APA), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM), Total SA (TOT, FP.FR), Petroleo Brasileiro SA (PBR), Royal Dutch Shell PLC (RDSA, RDSA.LN) and Wintershall AG.

"If any of those companies finds the vocation to invest billions of dollars then the process will move much faster," said Mr. Sapag in reference to the oil and gas production boom he expects to see in coming years.

Neuquen has already stopped the decline in production that last year helped turn Argentina into a net energy importer for the first time in almost two decades.

Over last five years, gas production fell 25% in Neuquen and oil output dropped almost 30%, Mr. Sapag said. This year, production of both has stabilized.

Unconventional gas now accounts for 10% of all gas produced in Neuquen and unconventional oil makes up 5% of total output.

"We're at an inflection point," Mr. Sapag said.

Write to Taos Turner at taos.turner@dowjones.com



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