Over the past month, a giant flap in Argentina has emerged over alleged secret clauses in the YPF-Chevron agreement to develop the Vaca Muerta tight oil fields. The trigger was a New York Times article titled “An Odd Alliance in Patagonia.” The key paragraph:
Argentine oil officials said that the Chevron-YPF deal will shield the American company from financial loss connected to a change in the political winds. After the company invests $1.2 billion, 18 months later it can withdraw from operations without penalty and continue to receive net profits of 50 percent of the production from the initial wells in perpetuity.
After the Times story, other stories came out about “secret clauses” in the Chevron-YPF deal. They included:
- Jurisdiction under foreign law;
- Access to arbitration at the International Chamber of Commerce (ICC) in Paris;
- A security deposit of $100 million for Chevron.
Investment Project Agreement
On July 16, 2013, the Company and subsidiaries of Chevron Corporation have signed an Agreement for the joint exploitation of unconventional hydrocarbons in the province of Neuquén. The Agreement contemplates, subject to certain conditions, an expenditure of up to 1,240 million dollars by Chevron for a first phase of work to develop 20 km2 (4,942 acres) of the 395 km2 (97,607 acres) corresponding to the area dedicated to the project, located in the aforementioned province and which includes the Loma La Lata Norte and Loma Campana areas. This initial pilot project contemplates the drilling of more than 100 wells.
Together with what has already been invested by YPF in the aforementioned area, this new input will result in a total investment of 1,500 million dollars in the pilot project, where 15 drilling rigs are already currently operating and more than 10 thousand barrels of oil equivalent per day are being extracted.
After the signing of the Agreement and once certain conditions precedent are satisfied, Chevron will make the initial expenditure of 300 million dollars (which will have the benefit of a guarantee by YPF for the following ninety days until the implementation of all associated documentation for the rest of the Chevron financing, including the contribution of 50% of the project rights by YPF).
In a second stage, after the finalization of the pilot project, both companies expect to continue with the development of the entire area, sharing the investments 50% each.
Likewise, the Agreement contemplates, in a non-binding manner, the subsequent definition of the terms and conditions for the joint exploration of unconventional hydrocarbons in the provinces of Neuquén and Mendoza.
Not too informative. The opposition has sued to make the Chevron agreement public. (In fact, the Argentine politician behind the suit, Senator-elect Pino Solanas, plans to take the issue to a higher authority.)
OK, so is this a bad deal for YPF?
Probably not. First, there is nothing weird about a clause allowing Chevron to give up its role as an operator while retaining an ownership interest. Imagine that you are the manager of company in which you own stock. You can quit your management job while continuing to hold the stock. It would, in fact, be odd if you couldn’t. The problem here is that the Times made it seem as though this clause somehow protects Chevron from political risk.
Second, the fact that the agreements are made under New York law with recourse to ICC arbitration does protect Chevron from political risk (at least as long as Argentina either exports the hydrocarbons or needs American-controlled credit) ... but the clause is also utterly standard in these sorts of things.
Third, YPF denied (as part of its SEC filing!) that any cash security deposits will be made. (More SEC info can be found here.) I tend to believe YPF. After all, $100 million is really not a whole lot of security to offer against a $1.24 billion investment.
I would believe that YPF may have included clauses to protect Chevron against legal action by Repsol in America or Spain, should such actions succeed. But even if true, that would be less-than-shocking.
In short, there is not a lot to see here. Nicaragua this is not.