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Eurnekian Says Gas Price Rise Would Bolster Argentine Output
by Daniel Cancel
12:00 AM ART April 8, 2015
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Billionaire Eduardo Eurnekian, owner of Corporacion America, left, and his nephew Hugo Eurnekian, president of Cia General de Combustibles, stand for a photograph in Buenos Aires, Argentina, on Nov. 27, 2013. Photographer: Diego Levy/Bloomberg
Hugo Eurnekian, who heads the energy unit of Argentina’s Corporacion America, says an increase in domestic natural gas prices would boost investment and output.
“Prices are far from being in line with what it costs to import natural gas,” Eurnekian, whose billionaire uncle runs the Corporacion America holding company, said in an interview at his office in Buenos Aires. “With a higher price you’d have more people investing and at a faster rate.”
While President Cristina Fernandez de Kirchner’s government has nearly tripledthe price paid to natural gas producers since nationalizing YPF SA in 2012 and increased the price paid for crude oil domestically to be above international levels during the collapse in global energy prices, there’s still room to provide incentives for natural gas, he said. Argentina pays gas producers who increase production a maximum of $7.5 per million British thermal unit, trailing import costs of as much as $18 per million BTU in the past year to ship the fuel from as far away as Qatar to cover a shortfall.
Argentina posted an energy trade deficit of about $6 billion in 2014 after running surpluses for at least 20 years until 2011. In contrast to gas, which is more widely used in Argentina, crude oil producers are receiving about $65 to $80 a barrel domestically, while U.S. benchmark prices hover around $50 a barrel.
After nationalizing the country’s largest company YPF, the government implemented the so-called Gas Plus plan as an incentive to increase production. Whoever wins the October presidential election to replace Fernandez will continue to give priority to the energy industry to try and reduce the deficit, Eurnekian said.
Austral Basin
Cia. General de Combustibles, the energy producer run by Corporacion America, plans to more than double gas and oil production in the Austral basin in the Patagonian province of Santa Cruz after paying $101 million to buy 26 fields and infrastructure from Petroleo Brasileiro SA last month, Eurnekian said.
While many companies are investing in Argentina’s shale deposit, known as Vaca Muerta, CGC is fully focused on conventional output.
“This is the only oil and gas basin in Argentina that is underdeveloped,” said Eurnekian. “We’re concentrating on conventional production in the short term because there’s still so much to be done.”
To reach the target of 60,000 barrels of oil equivalent in the next few years, CGC will invest more than $100 million this year and look to double annual capex in the short term. To do that, the company willtap local debt markets for the first time and may try to sell foreign currency bonds abroad or hold an initial public offering, according to Eurnekian.
CGC Purchase
CGC, which is 70 percent owned by Corporacion America and 30 percent owned by Sociedad Comercial del Plata, is valued at about $700 million currently, the 32-year-old executive said.
Eduardo Eurnekian, the 82-year-old founder and chairman of Corporacion America paid $190 million for an 81 percent stake in CGC and later sold an 11 percent stake to SCP. Now is a good time to buy assets in the country since they’re “attractive,” he said.
YPF paid $800 million in cash to buyApache Corp.’s energy assets last year while Apco Oil & Gas International sold its Argentine assets to Pluspetrol for $427 million.
Beyond the fields in Santa Cruz, CGC has production in other provinces including Chubut, Neuquen and Rio Negro while also owning stakes in the main pipelines in the country, including Transportadora Gas del Norte.
“We’ve managed to triple the size of the company with the purchase of the Petrobras assets and break into the top 10 biggest producers in the country,” Eurnekian said. “With the 30,000 square kilometers we now have in the south it’s like having a whole basin to ourselves to explore.”
Energy Natural Gas Oil ArgentinaCrude Oil Investing Gas PricesBuenos Aires Qatar Energy Industry
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The Oil Industry's $26 Billion Life Raft
by Asjylyn LoderDakin Campbell
8:00 PM ART April 8, 2015
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U.S. shale oil operations.
Photographer: Eddie Seal/Bloomberg
For U.S. shale drillers, the crash in oil prices came with a $26 billion safety net. That’s how much they stand to get paid on insurance they bought to protect themselves against a bear market -- as long as prices stay low.
The flipside is that those who sold the price hedges now have to make good. At the top of the list are the same Wall Street banks that financed the biggest energy boom in U.S. history, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
While it’s standard practice for them to sell some of that risk to third parties, it’s nearly impossible to identify who exactly is on the hook because there are no rules requiring disclosure of all transactions. The buyers come from groups like hedge funds, airlines, refiners and utilities.
“The folks who were willing to sell it were left holding the bag when prices moved,” said John Kilduff, partner at Again Capital LLC, an energy hedge fund in New York.
The swift decline in U.S. oil prices -- $107.26 on June 20, $46.39 seven months later -- caught market participants by surprise. Harold Hamm, the billionaire founder of Continental Resources Inc., cashed out his company’s protection in October, betting on a rebound. Instead, crude kept falling.
West Texas Intermediate oil futures rose $1.12 to $51.54 a barrel in New York at 9:41 a.m. London time. Prices are down 3.3 percent this year after plunging almost 50 percent in 2014.
Counterparty Names
Other companies purchased insurance. The fair value of hedges held by 57 U.S. companies in the Bloomberg Intelligence North America Independent Explorers and Producers index rose to $26 billion as of Dec. 31, a fivefold increase from the end of September, according to data compiled by Bloomberg.
Though it’s difficult to determine who will ultimately lose money on the trades and how much, a handful of drillers do reveal the names of their counterparties, offering a glimpse of how the risk of falling oil prices moved through the financial system. More than a dozen energy companies say they buy hedges from their lenders, including JPMorgan, Wells Fargo, Citigroup and Bank of America.
Danielle Romero-Apsilos, a Citigroup spokeswoman, said the bank actively hedges and manages its risk. Representatives of JPMorgan, Wells Fargo and Bank of America declined to comment.
At the end of 2014, JPMorgan had about $671.5 million worth of derivatives exposure to five energy companies, including Pioneer Natural Resources Co., Concho Resources Inc., PDC Energy Inc. and Antero Resources Corp., according to company records. That’s the amount JPMorgan would have owed if the contracts were settled Dec. 31, not including any offsetting trades the bank made.
It’s a similar story for Wells Fargo, which was on the hook for $460.9 million worth of oil and natural gas derivatives for companies including Carrizo Oil & Gas Inc., Pioneer, Antero, Concho and PDC, according to regulatory filings.
Energy Trading
These aren’t, of course, the kind of figures that would trigger any sort of systemic-risk concerns. Commodities are generally smaller parts of banks’ businesses compared with lending and underwriting, and banks hedge their oil-price risk.
New York-based JPMorgan had $2.57 trillion in assets at the end of last year compared with net liabilities for commodity derivatives of $2.3 billion, not including cash from settled trades and physical commodity assets, according to regulatory filings. San Francisco-based Wells Fargo had $1.69 trillion in total assets compared with net commodity liabilities of $241 million.
Still, $26 billion is $26 billion.
U.S. oil companies already netted at least $2.4 billion in the fourth quarter of 2014 on their hedges, according to data compiled on 57 U.S. companies in the Bloomberg Intelligence index.
Oil companies would rather be losing money on the trades and making money selling crude at higher prices, Kilduff said.
“It’s like homeowners’ insurance,” he said. “You don’t buy it hoping the house burns down.”
Offset Risk
The $26 billion of protection won’t last forever. Most hedging contracts expire this year, according to company reports. Buying new insurance today means locking in prices below $60 a barrel. The alternative is following Hamm’s example and having no cushion if crude keeps falling.
Financial institutions act as a go-between, selling oil derivatives to one company and buying from another while pocketing fees and profiting on the spread, said Charles Peabody, an analyst at Portales Partners LLC in New York. The question is whether the banks were able to adequately offset their risk when the market took a nosedive, he said.
“The banks always tell us that they try to lay off the risk,” Peabody said. “I know from history and practice that it’s great in concept, but it’s hard to do in reality.”