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Cablegate: Apache Energy Expands Argentine Hydrocarbon Exploration And

VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #1369/01 1991346
ZNR UUUUU ZZH
R 181346Z JUL 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 8662
RUCPDOC/USDOC WASHINGTON DC
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6368
RUEHCV/AMEMBASSY CARACAS 1360
RUEHMN/AMEMBASSY MONTEVIDEO 6587
RUEHSG/AMEMBASSY SANTIAGO 0594
RUEHBR/AMEMBASSY BRASILIA 6226
RUEHLP/AMEMBASSY LA PAZ JUL PARIS 1284
RUEHSO/AMCONSUL SAO PAULO 3422
RUEHRI/AMCONSUL RIO DE JANEIRO 2271

UNCLAS BUENOS AIRES 001369

SIPDIS

SIPDIS
SENSITIVE

ESC/IEC/EPC FOR MCMANUS,IZZO
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER
NSC FOR ROD HUNTER
TREASURY FOR TRAN

E.O. 12958: N/A
TAGS: EINV EPET ENRG ECON AR
SUBJECT: APACHE ENERGY EXPANDS ARGENTINE HYDROCARBON EXPLORATION AND
DEVELOPMENT

REF: '06 Buenos Aires 2598

Buenos Aires 85
Buenos Aires 414
Buenos Aires 1278

This cable contains business-sensitive information. Not for
internet distribution.

-------
Summary
-------

1. (SBU) Apache Energy is expanding exploration and development
activities in Argentina's southern most Tierra del Fuego province,
with $100 million invested in new production in 2006 and an
additional $150 million budgeted in 2007. This expansion comes
despite shrinking profit margins caused by substantial increases in
labor expenses driven by domestic inflation and aggressive unions;
GoA-mandated below-market price caps on domestic sales of oil and
natural gas; and high export tariffs on gas exports. In separate
meetings with Ambassador, President Kirchner and Tierra del Fuego
governor-elect Rios, Apache stressed the company's commitment to its
Argentine operations. End Summary

-------------------
Apache in Argentina
-------------------

2. (U) On July 10, Ambassador met with a delegation of Apache
Corporation senior management, including Raymond Plank, Founder and
Chairman; Steve Farris, President and CEO; Roger Plank, VP & CFO
(Raymond Plank's son); Floyd Price, VP for Eurasia and Latin
America; George Lawrence, Board Member; and Robert Johnston, VP &
Argentina Country Manager. Johnston had earlier hosted the
Ambassador's visit to Apache facilities in Tierra del Fuego in
February (Ref C). Discussion focused on the outlook for Apache's
oil and gas operations in Argentina, in light of recent wage
increase negotiations and constrained domestic and export oil and
gas prices.

3. (U) Established in 1954, Houston-based Apache Corporation holds a
diverse portfolio of U.S. domestic and international oil and gas
exploration and production assets valued at $19.3 billion. It is
one of the worldQs largest independent oil and gas players, with
sizeable investments in Egypt, Canada, the North Sea and Australia.
Apache acquired its initial Argentine assets with its 2001 purchase
of Fletcher Challenge and its 2002 merger with Anadarco. In April,
2006, Apache purchased Pioneer EnergyQs oil and gas exploration and
production assets in ArgentinaQs Neuquen, San Jorge and Austral
basins for roughly $675 million. Beyond its Pioneer acquisition, in
September 2006 Apache purchased roughly $430 million of Pan American
EnergyQs production and exploration assets in Tierra del Fuego
province's Austral Basin.

4. (SBU) Austral basin assets were particularly attractive to Apache
given GoA income tax and oil/gas export tax exemptions in place to
promote investment in this difficult environment. However, in
October 2006, the GoA issued a "re-interpretation" of this tax
exemption law which, according to Apache, not only revoked the
exemption but did so retroactively. Apache claims the value of
their Tierra del Fuego investments have declined by 30% as a
consequence of this GoA move (Ref B).

5. (SBU) Argentina-wide, Apache currently operates 102 oil wells,
67 gas wells, and 22 water injection wells with a total daily
production of 4300 barrels of oil/day, 180 million cubic ft of
gas/day; and 1300 barrels of liquid petroleum gas/day. Oil
production is sold to domestic refineries. 60% of gas production is
sold domestically and the rest is exported to Chile. Apache employs
78 full time employees and 220 full time contract employees, all of
whom belong to the petroleum union.

--------------------------------------------- ------


Apache: "Model" Investor in Challenging Environment
--------------------------------------------- ------

6. (SBU) According to Johnston, Apache has been a model corporate
citizen in Argentina, investing $100 million in new production in
2006 and expecting to invest a further $150 million in 2007.
Natural gas production from assets acquired in 2006 from Pan
American have risen 20%. However, Apache says it is constrained by
price ceilings imposed by the GoA on domestic sales of gas and by
high GoA tariffs on hydrocarbon exports (Ref A): Apache sells its
gas at an average price of about $1 per million cubic feet (13-15%
of world market prices) and faces rapidly increasing labor costs.
To avoid a planned strike, Apache granted its production employees a
roughly 40% bonus in December 2006. On top of this, the petroleum
employees union recently negotiated a 30% wage increase with the
GoA. The union has indicated that it will seek another raise
following the presidential election. Apache also noted that
protests by indigenous Mapuche tribe groups in Neuquen province are
blocking the extraction of 5 million cubic ft/day of gas.

7. (SBU) In spite of low profit margins relative to Apache's other
operations worldwide, company executives told Ambassador they are
determined to press forward with ambitious development plans. These
include completing over 1,800 square kilometers of new seismic
testing in Tierra del Fuego, mobilizing two drilling rigs, two work
over rigs and drilling up to 15 new wells Q more than the previous
operator drilled in the past 10 years Q at a total cost of $143
million. As a consequence, the size of Apache's Tierra del Fuego
operations will soon equal those in the company's more mature
Neuquen province fields. Apache execs contrasted their expanded
recovery operations with those of Argentina's largest, vertically
integrated oil and gas major, Spanish-owned Repsol-YPF. Repsol,
they said, was not investing significantly in new oil and gas
development and is a "poor" operator, in term of recovery
efficiency. They regretted that Repsol was unwilling to "farm out"
some its less productive assets to aggressive recovery companies
like Apache. They noted that current GoA interests in maintaining
good relations with Spain and in having Argentine interests purchase
a minority stake in Repsol (Ref D) would likely provide that company
some cover for its poor performance and under investment.

-------------------------------
Corporate Social Responsibility
-------------------------------

8. (SBU) Apache execs noted their successful corporate social
responsibility efforts in Egypt building over 200 one-room school
houses for girls and noted that they were exploring similar
initiatives here in Argentina. Ambassador offered the guidance of
our Public Affairs and Commercial sections to help identify
charitable endeavors that would be appreciated in Tierra del Fuego
and Neuquen and bolster Apache's public profile in these provinces.

----------------------- -----------------------------------
Meetings with Kirchner and Tierra del Fuego Governor Elect
------------------------ ----------------------------------

9. (SBU) Later that day, Apache executives met with President
Kirchner, Planning Minister De Vido, former Economy Minister Miceli
and former Secretary of Industry (and current Economy Minister)
Peirano. Kirchner praised Apache's aggressive investment strategy
in Argentina. Country Manager Johnston reported that, when Apache
raised its girls school project in Egypt, Kirchner responded that
Apache "should find gas and the GoA will build the schools."

10. (SBU) That same evening, Apache met with governor-elect of
Tierra del Fuego, Fabiana Rios. When Rios expressed concern at
hydrocarbon company environmental management in Tierra del Fuego,
Apache explained that the company had expended an additional $10
million in a $40 million 3D seismic testing program to import
ecologically friendly "shot-hole" drillers from Canada and Texas in
order to avoid surface scarring. Apache contrasted this upbeat
meeting with Rios to their previous difficult interactions with


current governor Hugo Cocarro (Ref C). Before departing Argentina
July 11, Apache executives held a final meeting with Central Bank
Governor Redrado, who told Apache that, while Planning Minister De
Vido would leave government after October elections, "his voice will
still be heard."

-------
Comment
-------

12. (SBU) Apache's substantial 2006 investment in Tierra del Fuego
exploration and development assets and its 2007 commitment --
despite earlier adverse tax rulings -- to further expand its
operations there won Apache senior management a meeting with
President Kirchner. The President's comment on Apache's social
responsibility proposal ("you find the gas, we'll build the
schools") was instructive: The Kirchner administration's populist
rhetoric positions the government as protecting the Argentine people
from private sector interests driven by profit. Embassy will
continue to support U.S. investor corporate social responsibility
efforts to highlight U.S. investor interests in building solid long
term relationships with their Argentine host communities.
WAYNE

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