ARGENTINA'S YPF HOMES IN ON PRIVATIZATION

Sept. 30, 1991
Argentina's push to privatize and attract more foreign investment to its petroleum sector continues to gather momentum. The Argentine government plans by yearend 1992 to sell unprofitable assets of Yacimientos Petroliferos Fiscales, then sell as much as 50% of the state oil company through an international stock offering. If privatization proceeds as expected, YPF Pres. Jose Estenssoro said, the company's stock will be offered to private investors early in 1993. The company was founded

Argentina's push to privatize and attract more foreign investment to its petroleum sector continues to gather momentum.

The Argentine government plans by yearend 1992 to sell unprofitable assets of Yacimientos Petroliferos Fiscales, then sell as much as 50% of the state oil company through an international stock offering.

If privatization proceeds as expected, YPF Pres. Jose Estenssoro said, the company's stock will be offered to private investors early in 1993. The company was founded in 1922.

By March 1992, Argentina also will begin selling all assets of state owned Gas del Estado (GDE) through an international bidding process expected to take about 18 months.

MORE E&D ACTION

Meantime, the Argentine government has accepted bids to acquire interests in two more concessions in two of the country's four key hydrocarbon basins.

YPF will be a partner with Total Austral in the Vizcachieras basin of Mendoza province and with a combine of Capsa and Repsol Argentina in the Huemul-Koluel Kayke (El Huemel) basin in Santa Cruz province.

Separately, Argentina began offering exploration and production joint ventures under association contracts with YPF on three blocks in the Austral basin, the first time private companies have been offered anything but service contracts in a highly prospective area or the more recent outright purchase of interests. Those blocks were incorrectly reported earlier as being targeted for privatization (OGJ, Sept. 9, Newsletter).

YPF will retain less than 50% interest in the Austral associations, covering a total of 57,000 acres on Tierra del Fuego and in southern Santa Cruz province. Since last January, under a new petroleum law YPF has offered private companies 50-50 joint venture, exploration/development association contracts in marginal areas.

At the same time, YPF is stepping up its exploration and development activity with 1991 plans to boost Argentine reserves at a rate three times that of last year.

PRIVATIZATION STATUS

A bill laying out the final stage of Argentina's oil and gas industry privatization program was introduced last month in the Argentine Congress.

Passage is expected before adjournment in December 1991, Estenssoro said.

Selling noncore YPF assets will streamline its oil and gas operations. And selling GDE will end the Argentine government's participation in gas transmission and distribution.

YPF expects to raise about $4.4 billion through stock offerings during 1993-96. Estenssoro expects U.S. investors to account for about 75% of that amount, European investors 15%, and Argentine investors 10%.

"A smaller YPF will result in a larger Argentine oil and gas industry," Estenssoro said. "In every action we take, we'll reduce our share of participation. If Argentina's oil industry is to grow, it's going to grow because of participation by the private sector."

YPF DOWNSIZING

Estenssoro said reorganizing YPF will allow it to function more like a private company. A smaller, leaner YPF will try to maximize value and minimize risk to private investors.

Among the assets YPF plans to sell are producing properties, refineries, pipelines, oil tankers, and commercial distribution facilities. YPF will trim its staff to 12,000 employees from 52,000, a process already in progress. It will return less prospective exploratory acreage to the Ministry of Economy undersecretary of fuels, who will offer it for lease to private companies.

YPF estimates the company's net present value at about $4 billion. When the downsizing is complete in 1992, Estenssoro said, YPF's net present value will be about $7.88 billion.

YPF's estimate of the company's net present value as presently structured breaks out as $6 billion for production, $120 million for refining, and $400 million for pipeline facilities and operations less $670 million for the cost of operating its shipping fleet, $600 million for operating commercial outlets, and $1.25 billion in administrative expenses.

YPF estimates the book value of its assets at $8.17 billion: $7 billion for reserves and upstream facilities, $600 million for refineries, $400 million for pipeline infrastructure, and $17 million for its tanker fleet and related assets.

PRIVATIZATION OF GDE

Estenssoro, a GDE trustee, expects the government to complete the legal framework, technical studies, and bidding documents needed to begin privatizing GDE by March 1992,

If that schedule is kept, bids will be received through July or August 1992 for GDE's major business units. Contract negotiations and transfer of business units could be complete by December 1992.

As conceived, winning bidders for GDE assets will receive 35 year concessions, with optional 10 year renewals. Transportation and distribution tariffs will be set for 5 year periods through a price cap formula based on efficiency of service.

Transportation systems will be open access, one company will not be allowed to own all GDE systems, and transporters will not be allowed to buy or sell gas, only provide transportation.

Distribution zones will be based on economic and technical studies, and distributors will earn profits exclusively by providing gas service.

Producers and distributors or large customers will be free to negotiate prices. Gas brokering will be allowed.

Vertical integration of production, transportation, or distribution will not be permitted.

YPF PRODUCTION VALUE

YPF plans to sell unprofitable or marginal properties in all major producing basins to focus operations on profitable fields.

When downsizing is complete in 1992, YPF reserves will fall to 1.236 billion bbl of oil and 13.87 tcf of gas from 1.472 billion bbl and 17.1 tcf in 1990, Estenssoro said.

Meanwhile, YPF estimates the net present value of its production will increase to $7.3-8.3 billion. The estimate includes $6 billion net present value of 1990 production, income from association and leasing bonuses, decreases in operating costs, workover costs, and development investments, and increased productivity of properties retained.

YPF expects net values to increase $800 million in San Jorge basin, $800 million in Neuquina basin, $300 million in Cuyana basin, and $300 million in Northwest basin.

For net present value after privatization, YPF assigned zero value to reserves in the Austral basin.

CONGRESSIONAL APPROVAL

With approval of the Argentine Congress, YPF believes it can increase the present net value of its refining sector in 1992 to $661 million.

YPF expects to:

  • Raise $95 million from the sale of refineries at San Lorenzo, Campo Duran, and Dock Sud.

  • Increase income $152 million by enhancing the product mix at the La Plata and Lujan de Cuyo refineries.

  • Save $134 million in energy, maintenance, and personnel costs.

  • Add $190 million value by improving conversion capacity to 90% in retained refineries.

Estenssoro said YPF shipping assets will be offered in two stages: first river vessels, then 15 oceangoing tankers. In all, 26 large vessels will be sold.

YPF also will sell ship maintenance yards, ports, and buoys.

Shipping sales will raise $300 million, and YPF will save $50 million by eliminating operating costs. That will reduce to $300-350 million/year the cost of shipping products to foreign markets, Estenssoro said.

YPF will sell nine of 22 distribution plants from its commercial operations, including six jet fuel facilities.

All 50 YPF drilling rigs will be sold.

Only YPF's pipeline sector will not be touched by the privatization campaign.

GDE PIPELINE SYSTEM

GDE's pipeline system consists of 7,900 miles of main line, 6,100 miles of distribution lines, and 900 miles of gathering lines.

GDE delivers 2.3 bcfd of gas to 4.24 million customers. The gathering, transmission, and distribution system includes seven processing plants.

Major gathering and distribution pipelines include:

  • North trunk line, a 24 in., 1,764 mile, 494.4 MMcfd line from Duran field.

  • Center West trunk line, a 30 in., 935 mile, 388.5 MMcfd line from Loma de La Lata to the central provinces.

  • West (Neuba 1) pipeline, a 24 in., 745 mile, 406.1 MMcfd line from Loma de La Lata and Plaza Huincul to Bahia Blanca.

  • Neuba 11 pipeline, a 30 in., 1,633 mile, 459.1 MMcfd line from Loma de la Lata to Buenos Aires.

  • Southern (San Martin) trunk line, a 30 in., 2,292 mile, 529.7 MMcfd line extending along the southern coast to Tierra del Fuego.

CONCESSION INTERESTS

Government sources estimate value of the two new association contracts to Argentina at a combined $231.9 million.

Current production is 16,350 b/d in the Huemel-Koluel Kayke basin and 14,440 in the Vizcachieras basin.

One of the requirements for the partnership was verification that the private companies have the technical ability to increase production in the areas.

The government hopes production will increase by at least 30%.

Argentine President Carlos Saul Menem said more such interests will be sold to boost production volumes in other oil regions (OGJ, Jan. 14, p. 51).

The government earlier sold interests in the El Tordillo and Puerto Hernandez basins in the provinces of Chubut and Neuquen.

The El Tordillo concession will be operated by a combine of Tecpetrol-Santa Fe Energy Resources Inc. and Puerto Hernandez by a combine of Perez Compac SA and Occidental Petroleum Corp.

PROGRESS REPORT

In exchange for giving up title to half the production in the four basins, which together account for 13-15% of Argentina's total crude production, the federal government has received $556 million.

Last year, when the government decided to sell oil and gas interests under local and international private tenders, it expected that as much as $1 billion would be offered.

Companies justified low bids by noting the need for heavy spending to revive the areas' production.

At the same time, however, the big infusion of cash has buoyed the federal treasury's efforts to maintain an operational surplus to meet obligations with the International Monetary Fund.

More sales of producing interests and/or association contracts with the private sector are expected by yearend when areas in southern and northeastern Argentina, with less reserves, will be put on the block.

In the concession areas targeted for sale, private companies will be responsible for operatorship and supply of technology. They will receive 50% of the crude oil produced and have the option to sell it to domestic refineries or for export.

YPF UPSTREAM PLANS

YPF is targeting oil reserves addition of 146 million bbl this year.

It has earmarked exploration outlays of $178 million for 7,285 line km of seismic surveys and 60 exploratory wells.

That compares with reserves additions of about 50 million bbl in 1990, 35 million bbl in 1989, 21 million bbl in 1988, 25 million bbl in 1987, and 31 million bbl in 1986.

YPF officials note that from now on the state company's oil finding costs must adjust to the new situation of a deregulated market to remain competitive.

YPF administrators estimate that each new barrel of oil discovered will cost about one-third less than in previous years.

DOWNSTREAM PRIVATIZATION

The government also has taken steps to decontrol the downstream side of the oil sector.

YPF, which commands 64% of the Argentine gasoline market, no longer sets prices. Previously, its three major competitors--Argentina's Isaura and units of Exxon Corp. and Royal Dutch/Shell--had to adhere to YPF's prices. Now marketers are free to set their own prices.

At the same time, decontrolling that side of the industry is accompanied by some economic pain.

By the end of the second quarter, inflation in Argentina had reached 12.2%, Instituto de Politica Economica y Social (IPES) reported. The IPES index jump represented the largest monthly increase in inflation in Menem's first 25 months as president.

Many economists believe rising inflation threatens the goals of economic stabilization policies announced last April, notably the effort to peg the local currency to the U.S. dollar by Economy Minister Domingo Cavallo.

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