8/3/2019 A Chinese Energy Purchase in Argentina - a policy memo for Fundamentals of Energy (Luciani)

http://slidepdf.com/reader/full/a-chinese-energy-purchase-in-argentina-a-policy-memo-for-fundamentals-of 1/2

Dear Senator Earl Grey:

Thank you very much for bringing this deal to my attention. I can understand how Oxy’s sale inArgentina might worry our constituents, but respectfully I must disagree with your view that the move isunpatriotic. From my understanding, the real issue is not that the U.S. is forgoing oil imports fromArgentina as a result of the deal (it isn’t). Instead, slowly but surely, U.S. (and European) companies are

offloading their Latin American assets to Chinese interests—something good for profits but notnecessarily positive for our influence in the region. I invite you to click on the links in the text below toread external support for my arguments from respected sources.

Although it may seem at first glance that Sinopec is taking U.S.-destined oil hostage with this purchase,much of Occidental’s production in Argentina is destined for domestic sale. According to the EnergyInformation Agency, Argentina has not even figured among the top 15 oil exporters to the United Statesin the past two years. Furthermore, Argentine export restrictions on oil production and exploration arereviled throughout the industry, and one such politically-motivated provision in 2007 aimed at Repsol-YPF mandated that internal oil demand must be satisfied by domestic production (at inflexible, anti-competitive prices no less) before oil can be exported. The only way for China to receive the actual outputfrom this investment is through a change in the law or  oil swaps with local refiners that have operations 

abroad.

When we were discussing Cristina Fernandez’s government early last year, you may remember the article from the New York Times I sent you about her country’s oil production situation.  One thing to be veryaware of with Argentina is the tendency the country has to politicize natural resources and threatenforeign firms when times are tight. Argentina’s record over the past several years is nothing short of  pathetic, given the nationalization of the country’s private pension system and flag carrier airline. Addthis to the constant threats of export taxes on the commodities that are driving growth in the first placeand it is no wonder that Western companies are fleeing the scene. I cannot imagine that things will getany better now that the president’s popular husband (and previously potential successor) Nestor Kirchner has died, compounded by the national budget being squeezed by a hostile Congress and payments coming due from the renegotiation of their 2001 debt default. 

Both the Wall Street Journal and Argentina’s leading daily Clarin, assert that, along with BP’s sale toCNOOC of its part of a joint venture in Pan American Energy, Western oil companies are looking tooffload mature oilfields and are hungry for the cash that can fund more profitable exploration elsewhere.Oxy’s sale, if anything, is recognition of this unstable environment and Argentina’s restrictions on newoffshore and onshore exploration by foreign companies. The Chinese analyst interviewed in the piece yousent is optimistic about the absence of major competition in markets like Argentina. But there is a reasonwhy this competition is lacking—volatile regulatory policies, falling production, and the real threat of further power grabs under the Fernandez government.

For strategic reasons, of course the U.S. needs to keep a close watch on China’s growing naturalresources acquisitions in Latin America. Nevertheless, Argentina has proven time and time again to be

hostile to foreign investment in the energy sector, and the Chinese may soon learn the harsh realities of doing business there. If Oxy can offload production capability that is not destined to the U.S. marketanyway and give good returns to shareholders, I think this can only be a good thing for our economy.

All the best,James Stranko

P.S. – Given the $2.5bn cash injection, might this not be a good time to give Spencer Abraham a call togauge his support in the run-up to 2012?

8/3/2019 A Chinese Energy Purchase in Argentina - a policy memo for Fundamentals of Energy (Luciani)

http://slidepdf.com/reader/full/a-chinese-energy-purchase-in-argentina-a-policy-memo-for-fundamentals-of 2/2

Sources:

Repsol

Investor Disclosure: Operational Risk Factors (Significant presence in Argentina)

http://www.repsol.com/es_en/corporacion/accionistas-e-inversores/inf_general_acerca_de_la_sociedad/factores_de_riesgo/factores-riesgo-relativo-operaciones.aspx 

Wall Street Journal:

Sinopec Buys Occidental Unit for $2.45 Billion, 12 Dec 2010http://online.wsj.com/article/SB10001424052748703766704576010280953337542.html

New York Times

Dispute Shows Argentina’s Lack of Oil Exploration, 25 Feb 2010http://www.nytimes.com/2010/02/26/world/americas/26argentina.html

Americas QuarterlyArgentina’s Proposal to Pay Off its Debt, 23 Nov 2010http://www.americasquarterly.org/node/2006 

Clarin (in Spanish)

Otro avance chino: compran la cuarta productora local de petróleo, 11 Dec 2010http://www.clarin.com/politica/avance-compran-cuarta-productora-petroleo_0_388161316.html