| BUENOS AIRES
BUENOS AIRES Two months before Argentina's president seized control of the country's biggest oil firm from Repsol (REP.MC), the Spanish company said it would cost $25 billion a year to develop a world-class shale find in Patagonia.
It is money Argentina does not have and could struggle to get its hands on without deep-pocketed partners prepared to tolerate President Cristina Fernandez's increasingly volatile and unorthodox policies.
YPF's (YPFD.BA) takeover has fueled investor concern about energy policy in Latin America's No. 3 economy, but the sheer scale of the Vaca Muerta (Dead Cow) shale resource may prove tempting to risk-resilient companies that see potential in the government's oft-stated goal of reversing flagging output.
A U.S. Department of Energy report shows Argentina holds more natural gas trapped in shale rock than all of Europe does -- a 774-trillion-cubic-feet bounty that could transform the outlook for Western Hemisphere supply.
It put Argentine shale gas reserves several times higher than previous estimates, behind only China and the United States, where shale drilling is already key to energy supplies.
"Oil companies are constantly operating in turbulent environments, in problematic countries," local energy analyst Victor Bronstein said. "If they think there's a business opportunity, that there's a possibility of resources, they'll dive in."
But even before Fernandez moved on April 16 to seize control of YPF, state-centric policies including price controls in the local market, export taxes and subsidies for consumers have been blamed for sluggish investment in the sector.
Developing the shale haul and ending the industry's "lost decade" will hinge on deep reform, analysts say.
"It's good that the state resumes control of YPF, something it should never have lost," former economy minister Roberto Lavagna said. "Now we need to talk about the most important issue; where are we going to get the necessary money ... to achieve energy self-sufficiency?
"We need huge investment and far-reaching changes to the energy policies of recent years," he said.
Mammoth amounts of capital will have to be raised to bring Vaca Muerta's resources on stream -- a big challenge for a country that has yet to return to global credit markets a decade after staging the biggest sovereign debt default in history.
"It's going to be difficult to get the funding," said Mark Routt, a senior consultant with KBC Advanced Technologies in Houston, Texas. "Argentina is going to have to look for government-government relationships, particularly with China."
About 40 percent of China's investment in Latin America in 2010 went to Argentina, almost all of it in energy, and Beijing's political influence -- plus their capital -- could help Chinese companies gain a footing.
YPF's nationalization scuttled years of planning by China's state-owned Sinopec to buy Repsol's controlling 57-percent stake, sources say.
Besides money, Argentina will need foreign operators' technological expertise to develop the shale fields, something Routt said Chinese companies have gained in Canada.
If Argentina's government is serious about boosting production -- its principal justification for the takeover, it will likely have to pursue further changes to YPF's ownership structure, Barclays Capital said in a briefing note last week.
"The best way to boost production would be via a significant investment plan, but under the current (YPF) ownership structure this would likely be difficult, because none of the owners have the capability to invest heavily," Barclays Capital said.
"The only hope, in our view, is that a deeper-pocketed company ... will enter into the ownership structure following the possible exit of Petersen," it added.
Such conjectures have fueled speculation about the future of Argentina's Petersen Group in a state-controlled YPF and whether it could be bought out.
The Petersen Group, owned by the Eskenazi family, relies on dividends from YPF to service the loans it took on to buy its 25 percent stake from Repsol, and a default cannot now be ruled out, some analysts say.
A spokesman for the group said it was not considering the sale of its stake and that its loan deals "remained in force".
"We're analyzing different financial alternatives along with the group of foreign banks that support us," he added.
Before the expropriation push, YPF had 15 companies interested in joint ventures in Vaca Muerta, which could hold 22.8 billion barrels of shale resources -- enough potentially to double Argentina's oil and gas output within a decade.
Argentina's shale has proved irresistible even for the likes of ExxonMobil (XOM.N), which sold its Argentine service stations and refining interests a few years ago before returning to invest in shale.
Even long-time government foe Shell (RDSa.L) -- which Fernandez's late husband and presidential predecessor, Nestor Kirchner, once urged Argentines to boycott over prices -- has bought a property.
"In general investors are concerned, but there are people that see this as a massive opportunity," a New York-based Latin America energy specialist said, asking not to be identified.
"If the government really wants to arrest the decline in oil and gas reserves and production, there is a lot of money that will need to be invested. There will probably be some very good partnership and farm-in opportunities," he said. "Even the oil majors will not run from this."
High commodities prices and a shift to the left in many countries have spurred resource nationalism in Latin America.
Venezuelan President Hugo Chavez has nationalized almost all the OPEC nation's oil industry during his 13 years in power.
Several big foreign companies have still forged joint ventures with state oil giant PDVSA to develop the vast Orinoco extra heavy crude belt.
"Taking a step back, the evidence from recent episodes of resource nationalism does not suggest that FDI (foreign direct investment) suffers heavily post-expropriation," London-based Capital Economics said, adding that the YPF move had "clearly done nothing to improve Argentina's tarnished reputation".
The country's top energy official, Planning Minister Julio De Vido, told Congress last week "many companies have already shown interest" in teaming up with YPF, heading straight to Brazil to court state-run giant Petrobras (PETR4.SA) and arranging a frenetic round of talks with oil executives.
President Fernandez, a close Chavez ally, is billing the YPF takeover as a fresh start for Argentina's industry -- a way to right YPF's controversial privatization in the free-market 1990s after 70 years as a fully state-owned company.
"We're the only Latin American country that doesn't manage its own oil firm," she said as she announced the nationalization. "We're not inventing anything new here."
(Additional reporting by Guido Nejamkis in Buenos Aires, Edward McAllister in New York, Charlie Zhu in Beijing and Daniel Wallis in Caracas; Writing by Helen Popper; Editing by Dale Hudson)