ARGENTINA: FRUSTRATED EXXON-MOBIL PUTS ASSETS IN

C O N F I D E N T I A L SECTION 01 OF 04 BUENOS AIRES 001892

SIPDIS

SIPDIS

PASS NSC FOR MICHAEL SMART
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
PASS USTR FOR KATHERINE DUCKWORTH AND MARY SULLIVAN

E.O. 12958: DECL: 09/19/2017
TAGS: EINV EPET ENRG ECON VZ AR
SUBJECT: ARGENTINA: FRUSTRATED EXXON-MOBIL PUTS ASSETS IN
PLAY

REF: A. BUENOS AIRES 1819 AND PREVIOUS

B. 06 BUENOS AIRES 2598

C. CARACAS 1281

Classified By: Economic Counselor Doug Climan. Reasons 1.5 (b,d)

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Summary
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1. (C) After 96 years in Argentina, Exxon-Mobil is shopping
its refining and retail assets. Company officials call this
part of a region-wide "internal valuation exercise" that
follows Exxon's recent decision to exit the Venezuelan
market. It also reflects growing company frustration with a
complex and distortive range of GoA market interventions that
has made Exxon's Argentine operations only nominally
profitable. Potential buyers of Exxon assets include
prominent Argentine entrepreneurs (none with experience in
the highly technical refining sector),Brazil's Petrobras and
the GoA's own state-owned energy company ENARSA, perhaps in a
joint venture with Venezuela's PDVSA. Exxon executives
privately value the company's local assets in the US$ 1
billion range but acknowledge that the GoA has tools to
constrain sale prices, including via spurious environmental
liability assessments or by delaying required regulatory
approvals. In contrast with its local competitor Shell,
Exxon has maintained a low-key profile in dealing with the
Kirchner administration's heterodox energy sector policy. A
near-term Exxon departure from Argentina would be widely
viewed as a no-confidence vote in the economic policies of a
likely incoming Christina Fernandez de Kirchner
administration. End Summary.


2. (U) With 2006 gross Argentine revenues in the US$2.1
billion range, Exxon-Mobil (Exxon) is primarily a
"downstream" player in the domestic hydrocarbon market. It
runs a single refinery that cracks crude oil purchased from
local exploration and development companies (primarily
Chevron and Pan American Energy) and markets refined products
through a network of owned and franchised retail service
stations.


3. (C) In early September, media reports surfaced that Exxon
has engaged JP Morgan to explore the sale of its assets in
Argentina. While Exxon's official position remains to
neither confirm nor deny media reports of a pending sale,
company officials admitted privately to EconCouns that the
company's U.S. headquarters has mandated a region-wide
"internal valuation exercise" that reflects Exxon's recent
decision to exit the Venezuelan market (Ref C) and growing
frustration with GoA market interventions that make Exxon's
Argentine operations only nominally profitable.

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Tangled Web of GoA Intervention in Energy Markets
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4. (SBU) In the aftermath of Argentina's 2001/2 economic
crisis, Exxon's operations here have been affected by a
complex and distortive range of GoA upstream and downstream
hydrocarbon price controls. These include variable GoA
hydrocarbon export restrictions, legal requirements that
refiners fulfill local market demand before exporting, and
high export tariffs on unrefined crude which set effective
domestic price caps. (In May 2004, the GoA implemented a
variable hydrocarbon export tariff system whereby crude
export taxes jump from 25% up to 45% when the West Texas
Intermediate benchmark exceed $45/bbl.)


5. (SBU) The bottom-line impact of such GoA interventions and
controls on Exxon is that, although the company pays local
producers only US$ 40-45/barrel for domestic crude (vs.
global rates currently in the US$ 80 range),it is
constrained to sell refined retail products domestically at
rates roughly 50% below those of neighboring countries Brazil
and Chile. Further, since 2004 the GoA has variably
curtailed natural gas exports to Chile, a direct consequence
of a GoA domestic energy pricing policy that makes domestic
natural gas consumption considerably cheaper than alternative
liquid fuels. Exxon notes that such unilateral GoA export

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restrictions have created conflicts with Exxon's Chilean
customers, put Exxon in legal jeopardy, and damaged the
company's reputation as a reliable supplier.


6. (SBU) National refinery capacity limitations and domestic
supply/demand imbalances for refined hydrocarbons have
resulted in rolling diesel fuel shortages in Argentina over
the past few years. Like other Argentine downstream
refiners, Exxon has been forced by the GoA's re-introduction
of a controversial 1970s-era "Supply Law" to import scarce
diesel fuel and to supply it to local users at a loss. To
date, Exxon has been able to compensate losses on diesel
sales with profitable exports of surplus refined gasoline
products. (Export tariffs on refined products remain a
relatively low 5%, allowing Exxon to earn revenues on such
exports at close to world market values). One of the reasons
for an excess of gasoline supplies in the domestic market has
been a series of GoA price incentives to convert gas-powered
cars to run on compressed natural gas (CNG). Exxon estimates
that such conversions have decreased gasoline demand by
approximately 50% over the past six years. However, with
over 500,000 new vehicles now being licensed in Argentina
each year, market analysts project that surging local demand
for gasoline will force Exxon and other refiners to forgo
these profitable exports within two to three years.

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Exxon Argentina on the Block
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7. (C) The prospect of declining refined product exports,
combined with general uncertainty about whether and at what
pace the next GoA administration will ease government
intervention and rationalize energy market pricing (Ref B),
prompted Exxon to engage JPMorgan Chase to shop and value
Exxon assets in-country as a preliminary step to considering
a sale. According to media sources, the list of potential
local buyers being scouted by JPMorgan Chase includes the
same cast of characters identified earlier this year as
interested in purchasing a minority stake in Argentina's
largest and vertically integrated energy player,
Spanish-controlled Repsol-YPF (Ref E). Prominent among them
are Jorge Brito of Banco Macro; Eduardo Eurnekian, head of
the AA2000 airport concession; Marcelo Mindlin, head of the
Pampa Group (Ref A); the Wertheim Group; and the GoA's
state-run energy firm ENARSA.


7. (C) Exxon attributes leaks to the local media about its
asset valuation exercise and to "unprofessional" conduct by
JP Morgan Chase and ENARSA executives. They call local media
reports of a $200 million sale price laughable, and estimate
that Exxon's domestic assets are worth upwards of US$ 1
billion. However, Exxon executives acknowledge that the GoA
has any number of tools to constrain a sale price. These
include spurious environmental liability assessments and
delaying or manipulating required regulatory approvals from
the Planning Ministry Energy Secretariat, the Anti-Trust
Authority (CNDC),and the GoA energy sector oversight
regulatory entity (ENRE). As a case in point, Exxon
executives noted the GoA's blockage in 2007 of U.S.
investment firm Eton Park's purchase of a minority on
regulatory grounds via a negative CNDC opinion.

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Exxon's Non-Confrontational Style vs Shell's
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8. (C) Like a number of other multinational energy sector
players in Argentina, Exxon had filed an arbitration suit
under the U.S. Bilateral Investment Treaty to recover
financial damages resulting from the GoA's 2002 unilateral
"pesification" of retail gas prices. Subsequently, in 2006,
Exxon received an endorsement from ICSID to include
additional damages incurred following the GoA's 2004 decision
to curtail gas exports to Chile. Notwithstanding this ICSID
suit, Exxon has generally maintained a low-key,
non-confrontational profile in dealing with the Kirchner
administration's heterodox and often combative energy sector
policy. Local energy analysts contrast Exxon's style to that
of Anglo Dutch-controlled Shell, whose confrontational
approach has, over the past three years, earned it President

BUENOS AIR 00001892 003 OF 004


Kirchner's enmity. (At one point, Kirchner made a public
appeal to boycott Shell's retail gas stations, and the GOA
has issued heavy fines for supposed shortfalls of diesel fuel
at these stations, and more recently closed its only refinery
for 10 days on what many consider spurious environmental
grounds. Exxon executives estimate that the temporary
shutdown of Shell's refinery, required environmental
upgrades, and GoA-imposed fines to date have cost Shell
upwards of US$ 100 million.)

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Views of Energy Sector Players
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9. (SBU) Energy sector players in Argentina observe that the
Kirchner administration has made a strategic decision to
promote expanded direct state and private Argentine
participation at the expense of foreign multinationals. To
"encourage" foreign multinationals to cede control of energy
assets, they say, the GoA has used its formidable regulatory
oversight powers and heavy-handed market interventions to
limit these companies' freedom of action and profitability.
Over the past two years alone, energy majors CMS, Total and
Electricite de France have departed the Argentine market,
selling their assets cheaply to local interests (Ref A).


10. (C) Local energy analysts are watching developments
closely and will take any low-balling of Exxon's asset value
as a sign of overt GoA interference. Many question the
wisdom of allowing local players with no experience in the
highly technical refining sector to take over one of
Argentina's most important refineries. One possible outcome
could be a purchase of Exxon assets by recently created
state-owned energy company ENARSA. Given ENARSA's burgeoning
cooperation with its Venezuelan counterpart PDVSA, another
scenario could involve the Chavez administration seeking to
purchase Exxon's assets in a joint venture with ENARSA as a
means to gain a quick and strong retail presence in the
Argentine market. Recetly, considerable media attention has
focused on Brazil's Petrobras as an interested bidder on
Exxon assets. Since Petrobras already has a refining
presence in Argentina, GoA anti-trust approval could be a
possible barrier to such a bid.

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Exxon's Argentina Assets in Detail
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11. (U) Operating under the Esso brand name, Exxon-Mobil was
one of the first U.S. companies to establish operations in
Argentina, arriving in 1911. It built the first Latin
America refinery and was the first to process crude from
Comodoro Rivadavia, in the Province of Chubut in Patagonia,
whose oil fields were discovered in 1907. Today Exxon's
Campana, Buenos Aires refinery is its most important in Latin
America. With roughly 2,500 employees in Argentina (2,000 at
the Campana facility),Exxon maintains a broadly diversified
upstream and downstream presence here:

-- Downstream: The 88,000-barrel-a-day capacity Campana
refinery, 50 miles northwest of Buenos Aires, produces
unleaded gasoline, diesel, jet fuel, fuel oil, LPG and coke.
(Argentina' refining market is dominated by Repsol-YPF, with
six refineries. Petrobras has two, and Exxon and Shell each
have one). Exxon also has a strong marine fuels business
with a 21% market share, three jet fuel terminals at major
airports with a 20% market share and direct 15,000
barrels-a-day sales to industry and wholesalers. Exxon owns
a blending plant where produces 300,000 barrels-a-year worth
of lubricants and greases for on-sale in Argentina and other
Southern Cone markets. Finally, Exxon's 540 service stations
(90 owned directly, the remainder franchised) hold a 13%
domestic market share.

-- Chemicals: Intermediate hydrocarbon solvents (used in
coatings, agro-chemicals, insecticides and adhesives)
produced at the Campana refinery. Polymers sales feed the
Argentine tires and adhesive industry. Vinyls (imported from
Exxon Chile) feed the Argentine flexible PVC market.

-- Upstream: Exxon maintains interests in two onshore

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natural gas fields: a 51% stake in Sierra Chata in the
central Neuquen Basin, and a 23% stake in Aguarague in the
northwest. Exxon markets its natural gas to a variety of
local distribution companies, industrial users and
power-generation companies in Argentina and Chile, primarily
under long-term agreements.

-- Services: Exxon established a Buenos Aires Business
Support Center that employs more than 400 skilled workers and
provides back office services to affiliates in the Americas.

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Comment
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12. (C) Exxon's 96-year presence in Argentina has made its
local "Esso" brand emblematic of this nation's highly
developed automobile culture. Rumors that Exxon is shopping
its Argentine assets, after having braved almost century's
worth of Argentina's extreme economic volatility, have raised
many eyebrows. Beatrice Nofal, head of the GoA's investment
promotion entity, Prosper-AR, privately acknowledged a
possible Exxon departure as "an Argentine investment climate
public relations nightmare." A near-term Exxon departure
from Argentina would be widely viewed as a no-confidence vote
in the economic policies of a likely incoming Christina
Fernandez de Kirchner administration.
WAYNE