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Norwegian energy giant Statoil ASA (STO - Analyst Report) intends to join hands with Argentine state-controlled energy company YPF SA to develop the Latin American country’s massive energy reserves.

The companies are in talks for a potential joint venture to develop YPF's shale reserves. YPF is seeking to raise funds after the country's regulatory body expropriated a controlling stake in the company from Spanish oil firm Repsol.

Argentina – holding the third position in the world with respect to shale gas reserves after the US and China – needs huge foreign investment and technology to tap those resources and bring them into production. However, the South American nation remains barred from the global credit markets and faces lawsuits from Repsol nationalization.

As per the U.S. Energy Information Administration, Argentina’s shale reserves hold 774 trillion cubic feet of gas and 23 billion barrels of oil equivalent. These are mainly in the Vaca Muerta rock formation and are equally prolific like Eagle Ford, Haynesville and Marcellus in the US.

In September, U.S. energy giant Chevron Corporation (CVX - Analyst Report) signed an agreement with YPF to explore unconventional energy in Argentina. The deal is likely to close in the first quarter of 2013. Additionally, YPF is expected to close a deal with Bridas Energy Holdings Ltd. before the end of this year.

For Statoil, we have a favorable outlook on its long-term production growth, given the company’s growing upstream presence in the emerging basins of the Barents Sea, West Africa and the deepwater U.S. Gulf of Mexico. We also believe that the growing share of natural gas in Statoil’s Norwegian Continental Shelf volume mix and its extensive interests in infrastructure assets enable it to play a leading role in the European natural gas market.

Recently, Statoil, in its effort to maximize yield, has significantly enhanced oil recovery at its Peregrino field through the use of new technology. The company currently estimates augmented production volumes from the field in the range of 300 million to 600 million barrels. In February 2012, it made a high-impact Pao de Acucar discovery in BM-C-33, along with its partner – state-owned Petroleo Brasileiro SA or Petrobras (PBR - Analyst Report) – and Pepsol Sinopec, the operator. The company holds a key position as a long-term operator.

Although management said that it would deliver a compound annual production growth rate of around 3% between 2010 and 2012, the company was cautious about the uncertainty arising from gas value over volume, start-up and ramp-up, and operational regularity. Thus, it remained skeptic about its growth target. The company expects its 2013 production to remain somewhere around the 2012 level.

Statoil holds a Zacks #4 Rank, which is equivalent to a Sell rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock.

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