Chevron is taking quite a gamble snuggling up with Argentina

Chevron is making a mistake in Argentina

Despite all the legal, political, and business risks, Chevron has unapologetically doubled down on Argentina with a partnership

 with the state-controlled energy company YPF.

Chevron is taking quite a gamble snuggling up with Argentina. The U.S. oil giant confirmed this week it is officially partnering up with Argentina's (now) state-controlled energy company, YPF, in a bid to help the firm develop the South American nation's potentially vast deposits of oil shale, which, according to some estimates, could have the third-largest such reserves in the world.

But while the potential payout from the field could mean huge profits for Chevron (CVX) down the road, it may not be worth all the accompanying drama. That's because the fields in question are currently subject to a nasty ownership dispute between Argentina and Repsol, the Spanish energy firm. By essentially siding with Argentina, Chevron is not only alienating itself from the other energy companies, it is also potentially putting billions of dollars in future revenue up in jeopardy.

There is an unwritten code among the big energy companies -- "It's always us vs. them." In this case, "us" refers to the large privately controlled energy companies, such as BP (BP), Chevron, ExxonMobil (XOM), and Repsol, while "them" refers to the energy-rich nation-states and their state-controlled energy companies. In practice, the saying means that if a privately controlled energy company is screwed over by a nation in some way, be it by expropriation, the ripping up of contractual agreements, or through a surprise hike in royalty rates, the other energy firms promise not to try and capitalize on the others' misfortunes. This has helped the privately controlled energy companies retain their dominance amid a tricky political economic backdrop.

So it came as a bit of a shock to the industry when Chevron announced last fall that it had signed a memorandum of understanding with YPF to hunt for oil shale in Argentina's energy-rich province of Neuquen. That's because only a few months prior, the Argentine government, under the direction of President Cristina Fernandez, "renationalized" YPF, which at the time was controlled by the Spanish energy giant, Repsol, and known as Repsol YPF. The grounds for the expropriation were dubious, but Argentina isn't really known for its adherence to international law -- or to contractual agreements of pretty much any kind. This is the nation that, after all, has defaulted on its debt seven times, three of which occurred in the last 30 years.

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