Argentina’s shale: More than gas (YPF Repsol more)

Every oil analyst is suddenly a bit more focused on Argentina than they were a week or two ago. I just want to correct a couple little mis-impressions about Argentina’s shales in these two generally quite good pieces.

One, expressed by the FT’s John Gapper, is that it’s all the Vaca Muerta shale. There are a bunch of shale areas. Indeed, below the Vaca Muerta you can find the Los Molles formation, which is much thicker. Argentina’s shales, combined, have the world’s third-biggest likely unproved reserves, according to US Geological Survey methodology, but Vaca Muerta alone is not even half of that.

Second, in Raul Gallegos’s piece on the same page says that the shale could offer “four centuries of the country’s consumption.” This reminds me that most people see the shales as primarily a source of natural gas. Yes, shales offer gas, but what’s exciting about Repsol’s discoveries in Argentina is that these rocks also yield oil. In the Argentine context, that makes these rocks more valuable, as gas prices are generally controlled at a low level, and exports are strictly controlled. I understand that pumping oil is more profitable, as the sales price is higher with respect to production costs.

Did Tea Partiers also profit from Chavez?

I didn’t realize until seeing this article today (via Eschaton) that the Koch family is the main source of financing for the U.S. right-wing populist movement that goes by the general rubric of Tea Party. The authors rightly point out that the Koch family was tight with Joe Stalin. They may not have realized that the bonds to ostensibly left-wing leaders continues today.

This page shows the shareholding in Fertilizantes Nitrogenados de Venezuela, Fertinitro CEC, a joint venture controlled by Venezuela’s state chemicals company and Koch Industries, each of which hold 34.99% of the shares.

Fertinitro makes more than 6 million tons a year of nitrogen-based chemicals out of natural gas. In the words of Fitch Ratings, “the plant was conceived and developed to convert associated natural gas of Petroleos de Venezuela S.A. into ammonia and urea, with export sales of these products generating dollar revenue for Pequiven.”

Natural gas in Venezuela is heavily subsidized. The government pays oil companies (such as Harvest Natural Resources’ joint venture, Petrodelta, $1.54 per thousand cubic feet while selling it to chemicals makers and power plants in Jose (where the plant is located) for Bs.F 0.03740 per cubic meter. By my math (0.0374 bsf/m3 =37.4 bsf/1000 m3 = 37.4 bsf/28,316.8 cubic feet = 1.321 bsf/thousand cubic feet) that works out to 1.321 bolivars (30.7 U.S. cents) per thousand cubic feet. So just on the natural gas, never mind the electricity or water subsidies, Koch profits from a direct Venezuelan government subsidy of $1.23 for every thousand cubic feet of gas consumed at Fertinitro.

Now, there’s nothing wrong with investing in Venezuela and taking part in the country’s development. Mitsui, Mitsubishi, and even the International Finance Corp., the investment arm of the World Bank, are partners in Venezuelan petchem plants. If the government wants to subsidize the profits of multinational corporations, go for it! Heck, I just ate a subsidized breakfast. The only problem is the hypocrisy. As Yasha Levine writes:

Apparently everyone’s a free-market enthusiast at Koch Industries, including its spokeswoman, who recently wrote a letter to the New York Times stating that “it’s a historical fact that economic freedom best fosters innovation, environmental protection and improved quality of life in a society.” It might be true somewhere for someone, but not for the Kochs—they owe it all to socialism and totalitarianism.

Sounds about right.

In theory, Chavez’s “revolution” should have nationalized the Koch factory a couple years ago. The government passed a clear law mandating state control of at least half the shares in primary petchem plants such as Fertinitro. However, both of the vice-ministers of petrochemicals who have served since the law was passed have told me they had no plans to seize plants and would instead exercise right of first refusal on ownership changes.

Despite that, the punchline is different than it was under Stalin. The Chavez government decreed in 2007 that a big chunk of Fertinitro production has to be sold domestically, at a price well below the cost of production. Low international prices and a currency devaluation have left the company’s cash reserve exhausted, Fitch said March 30. Fertinitro bonds are now rated CCC, three steps above default, and the plant needs $20 million in deferred repairs. The Man giveth, and the Man taketh away.