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Financial Times: S America problems hit Repsol

By Mark Mulligan in Madrid
Published: January 27 2006 02:00
Shares in Repsol YPF plunged nearly 8 per cent yesterday after the Spanish oil and gas group announced a 25 per cent cut in its proven reserves and warned of reduced profits this year.
The company partly blamed last year's increase in production royalties from 18 per cent to 50 per cent in Bolivia, where it was forced to write off 659m barrels of oil equivalent (boe) of gas – half of its total there. However, it also admitted that “new information” about gas deposits in Bolivia and Argentina had forced it to reassess the probability of extraction.
In Argentina, it said production difficulties and contractual uncertainties had led to a 20 per cent downward revision of its booked oil and gas reserves. As a proportion of total proven reserves, the Repsol downgrade eclipsed that of Shell, which two years ago admitted to overstating reserves by 20 per cent.
Although some downgrade in the troubled Southern Cone of South America was expected, analysts were surprised by the scale of the revision at Repsol. In a note, CSFB also raised the prospect of “further downgrades in Bolivian reserves”, referring to political uncertainty.
Repsol last revised down its proven reserves a year ago, when it announced a 4.1 per cent cut, to 4.93bn boe, because of problems in Trinidad and Tobago and in Argentina. That followed a radical revamp of the company, aimed at streamlining its unwieldy structure and decentralising its decision-making. The number of corporate and business divisions was halved.
Yesterday's move, which followed a year-long review of the company's reserves, was likely to add to uncertainty about Repsol's future.
With its stock market discount and troubled upstream business, the company has long been seen as a takeover target given its profitable refining and service station activities. However, its exposure to Latin America, which accounts for about 75 per cent of reserves, anddifficult shareholding structure acts as a deterrent.
Antonio Brufau, chief executive, said yesterday the company was confident of improving its poor reserve replacement rate, which was running at less than 20 per cent before the announcement. However, he warned that production levels would drop slightly, from 1.3m to 1.18m barrels a day by 2009, and that “between €160m and €170m” would be wiped off net profits this year.
However, the discounted book value of its Argentine and Bolivian gas reserves meant the write-down on assets would be contained at “less than €50m”.
The company has frozen €400m of planned investment in Bolivia pending talks with the administration of Evo Morales, the new socialist president.
The shares, which were suspended until early afternoon, closed down 7.7 per cent at €22.88.

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