ARGENTINA'S CHANGES

For an Argentine, Miguel Galuccio, the youthful chief executive of YPF, the country's biggest oil and gas company, is remarkably upbeat.

Although the economy is sinking deeper into recession following a sovereign debt default in July, with falling oil prices further exacerbating the country's troubles, Mr Galuccio is confident YPF will benefit from sweeping changes to Argentina's energy sector.

He is trying to persuade foreign energy companies to collaborate with YPF to tap Argentina's shale reserves, which rank as some of the largest in the world and are only just starting to come online.

Argentina is one of the first countries to commercially develop shale after the US, but it is struggling to secure foreign investment.

"Why do people go to Argentina? Because it's cheap," Mr Galuccio said in an interview with the Financial Times. "If you really think there is going to be a change in Argentina's energy sector, it's the right time to enter . . . And there is going to be change."

Since the petroleum engineer took the helm at the company in May 2012 – soon after the Argentine government shocked investors by seizing a majority stake in YPF from Spain's Repsol – he has overseen a dramatic turnround in its fortunes.

Mr Galuccio, who was a manager at oilfield services company Schlumberger, reversed a declining trend in oil and gas production at YPF last year, leading to a jump in profits.

This new and contentious incarnation of YPF has even earned rare praise from a foreign oil major. This year Chevron, the US energy group, became the first foreign company to commit to a significant investment to develop part of the vast Vaca Muerta shale formation in partnership with YPF.

Ali Moshiri, who runs Chevron's upstream operations in Latin America and Africa, described YPF as "one of the best companies" that the US group has ever worked with. He highlighted how unusual it was for a group of Chevron's size to allow a private company to have operational control over projects, as is the case at Vaca Muerta.

Debt markets have observed the changes at YPF with enthusiasm. While Argentine government borrowing costs have increased significantly since the July debt default, YPF's bond yields have barely changed, underlining how investors regard the company as a safer prospect.

Meanwhile, YPF's shares have tripled in value under Mr Galuccio's watch, and although they have been more volatile this year because of Argentina's economic problems, the stock could rise further if the government reaches a deal with its "holdout" creditors and puts an end to the debt default.

YPF has attracted major investors such as George Soros, whose Soros Fund Management doubled its stake in the Argentine company this year to become the fourth biggest holder of its American depositary receipts.

In spite of the steep fall in oil prices in recent months, Mr Galuccio hopes that reforms to a hydrocarbons law – which he played a key role in designing and promoting, and was approved by Argentina's congress last week – will boost investment in Vaca Muerta.

"There are many things that affect investment, but this law is fundamental," Mr Galuccio said of the hydrocarbons bill, which will extend drilling concessions and cut the minimum investment needed for companies to be exempt from certain import and capital controls.

The greatest beneficiary of the new law will be YPF. Crucially, groups already holding oil and gas concessions – of which about three-quarters are held by YPF – will be able to renew them automatically.

"What YPF wants – and what most politicians want – is to create the conditions for it to own most of the resources, and to use this to open up the sector in ways that benefit YPF, mostly by signing bilateral deals with other companies," said Daniel Kerner, an analyst at Eurasia Group.

Although Argentina sits on top of the second-largest reserves of shale gas in the world after China, and the fourth-largest reserves of shale oil, so far they have attracted investments from a limited clutch of companies.

Some analysts doubt whether many companies will follow in the footsteps of the likes of Chevron until Argentina's erratic president, Cristina Fernández, leaves power in December 2015.

"The law doesn't resolve the underlying problem in Argentina's energy sector," said Daniel Montamat, a former president of YPF, who argued that before anything else Argentina's dismal business climate must improve, with "the rules of the game" respected and an end to discretionary policy making. "A single law isn't going to change that."

ft.com