Keeping Putin’s Hands Off Argentina’s Oil
The White House shouldn't allow Argentina's debt problems to impede U.S. energy security.
Just prior to the downing of Malaysia Airlines Flight 17, Russian President Vladimir Putin was wrapping up a six-day tour of Latin America, including a bilateral meeting with Argentine President Cristina Fernández de Kirchner on July 12.
Kirchner’s meeting with Putin, in conjunction with a July 18 meeting between Kirchner and Chinese President Xi Jinping, could have significant strategic repercussions for the United States if Argentina follows through on its threats to default on its sovereign debt on July 30.
An Argentine default would be the nadir of a rancorous 12-year-long dispute between Argentina and some of its creditors, who refused to take losses of over 70 percent following the country’s historic default on over $80 billion in 2001.
After years of legal battles, the U.S. Supreme Court issued the definitive ruling against Argentina on June 16 of this year. The Supreme Court declined to hear Argentina’s appeal of a lower-court ruling ordering it to pay creditors who did not participate in the restructuring at the same time it pays those who agreed to losses.
The lower-court judge has now ordered Argentina to negotiate with its holdout creditors, but it has so far refused. If Argentina does not find a way to settle with its holdout creditors by July 30, the country will default for the second time in 13 years. But according to news reports, Argentine leaders have still not met with creditors to negotiate a resolution, even though it has been over a month since the Supreme Court’s ruling.
This is where Putin’s recent visit becomes important: A focus of discussion between Kirchner and Putin was reported to be Russia’s role in helping develop Argentina’s vast unconventional oil reserves, the Vaca Muerta. Kirchner announced that members of the Russian delegation would visit the field in Patagonia.
According to the International Energy Agency, the 20,000-square-mile, 3,000-foot-deep Vaca Muerta shale field — estimated to be the largest oil field in the Western Hemisphere and one of the top two or three in the world — likely contains more than 20 billion barrels of oil equivalent.
The U.S. Energy Information Administration ranks Argentina second and fourth worldwide in deposits of recoverable shale gas and oil, respectively. If exploited, these reserves could make Argentina a net energy exporter, a capacity it lost in 2012 as a result of mismanagement, ideologically driven economic policies, and a failure to abide by international law. Argentina is currently importing energy at a cost of nearly $10 billion annually, something Kirchner would be happy to reverse. And to make this happen, the Argentines are looking for partners.
According to Argentine estimates, the full development of the Vaca Muerta unconventional reserves will cost upwards of $250 billion and, just as essential, will require foreign engineering expertise. Since re-nationalizing its national oil company, YPF, from Spain’s Repsol in May 2012, Argentina has aggressively sought global investors and partnerships, among them Russian state oil company Gazprom (whose financing arm was hit by the latest round of U.S. sanctions) and Chinese state oil company Sinopec.
Several U.S. companies, including Exxon Mobil, have been active in the Vaca Muerta, and others are looking to get involved. This year, Chevron signed an investment agreement with YPF under which it will invest $1.6 billion in 170 wells with future investments of up to $15 billion. But this agreement was brokered prior to the current crisis. If Argentina’s leadership takes the country into default, the deal with Chevron could be a casualty. Furthermore, opportunities for other U.S. companies would likely diminish or evaporate, as none would be able to afford the heightened country risk that another default would create.
Argentina can ill afford a second default in 13 years. Its economy is in recession, inflation is at double-digit levels, and its trade deficit is widening. Furthermore, a second default would close the door to international capital markets, which the country desperately needs and has had only limited access to since 2001.
But another Argentine default wouldn’t only be a problem for Argentina. It would also be a strategic loss for the United States. A default would almost certainly forestall U.S. energy companies’ investment in Argentina’s energy industry — the sector that offers the most promising growth potential. Lead investor Chevron is likely to have second thoughts about its commitment to Argentina if the country appears, once again, to be an untrustworthy business partner. Others are likely to pull back or demand more favorable terms to offset risk.
If Argentina’s government does choose to default, and if it remains locked out of U.S. and European capital markets, then partnership with Russia’s Gazprom and China’s Sinopec will likely provide a much-needed alternative to U.S. investment, putting U.S. energy companies at a significant disadvantage.
Kirchner’s courtship of Russia has intensified visibly in recent months, most notably in her defense of Russia’s seizure of Crimea, which she compared to Argentina’s fight with Britain over the Falkland Islands. Similarly, in its rapprochement with China, Argentina has brokered new agreements with Sinopec to partner on energy development. Significantly, Argentina announced new investment pacts with China totaling $7.5 billion immediately following Xi’s meeting with Kirchner on July 18.
Argentina can take another path — one in which it respects the rule of international law, settles its debts, regains full access to the global financial markets, and consequently continues to attract energy investment from U.S.-based global companies that have the engineering experience and know-how to develop an unconventional oil field.
Energy security in the Western Hemisphere is of vital strategic importance to the United States. And thus helping to avert Argentina’s self-destructive path to default must be a top priority for Barack Obama’s administration as it signals to Argentina in the critical days ahead.
Administration officials can help by engaging with their counterparts in the Argentine government and explaining that a settlement with Argentina’s private creditors would finally clear the way for Argentina to regain access to numerous sources of external capital after more than a decade of relative economic isolation.
For one thing, a full economic normalization would open the way to a resumption of World Bank lending to Argentina, which the U.S. government has opposed since 2011 due to Argentina’s failure to pay its debts. But more importantly, the administration can and should make the case that U.S. energy companies are uniquely capable of helping Argentina fully develop and benefit from one of its most promising natural resources.
Above all, the administration needs to make sure that it does not through inattention allow Argentina to slip away. As we have seen in recent weeks, the United States’ geopolitical rivals stand ready to take advantage of such a strategic mistake.