The administration of Argentina’s President Alberto Fernández is growing increasingly desperate to restart the burgeoning oil boom which was underway before the COVID-19 pandemic hit. Argentina has been one of the worst affected countries in South America, despite moving early and decisively to curb the spread of the virus through a nationwide lockdown. This is because the Latin American country was already facing a major economic crisis, sky-high inflation, and fiscal weakness. Many of the pro-business reforms undertaken by Fernández’s predecessor Mauricio Macri, including unwinding complex subsidies, had little positive effect and were partly responsible for tipping the frail economy back into crisis. By 2018, Macri was forced to go to the IMF and ask for a bailout package, which at $57 billion was the largest loan ever given by the institution. Then in May 2020, Buenos Aires once again defaulted on its sovereign debt, the second time it has done so this century. Those developments coupled with a rapidly devaluating peso, soaring inflation, which despite falling by almost 2% month over month was an unnerving 46.6% for September 2020, as well as the fallout from the pandemic have hit Argentina’s economy hard. The IMF predicts Argentina’s GDP will contract by 12% during 2020, underscoring the urgency with which Buenos Aires needs to reinvigorate the hydrocarbon sector and boost the economy. The Vaca Muerta shale, a late Jurassic to early Cretaceous age geological formation located in the Neuquén Basin in Patagonia, is considered by the government to be a silver bullet for its vast economic problems. It is estimated by the U.S. Geological Service to hold over 14 billion barrels of oil and 38 trillion cubic feet of natural gas, underscoring the tremendous hydrocarbon wealth waiting to be unlocked. The oil and natural gas boom in the Vaca Muerta, which was already facing headwinds, was effectively stopped by the March 2020 oil price crash and the COVID-19 pandemic. For April 2020 Baker Hughes rig count data did not show any operational drill rigs in Argentina and by the end of September there were only 16 drill rigs, less than a third of the 55 drill rigs for that month in 2019. While activity, as highlighted by the number of operational drill rigs, is well below pre-COVID-19 pandemic levels, the recent uptick indicates that a tentative upswing in activity is occurring.
President Fernández has introduced several measures to attract investment and stoke activity in Argentina’s energy patch and notably the Vaca Muerta. During May 2020, Buenos Aires implemented a minimum domestic sale price of $45 per barrel for as long as Brent remains under that price. If the international benchmark oil price exceeds $45 per barrel for 10 consecutive days, then it is voided and oil is sold at market. The national government also eliminated the 8% export tax on crude oil and refined products for as long as Brent price is below $45 per barrel. In the latest developments, Argentina’s Energy Secretary Dario Martinez stated that Buenos Aires has committed to a four-year $5.1 billion subsidy program for drillers to promote exploration and production in the Vaca Muerta shale play. This, it is hoped, will attract the additional investment required to significantly boost oil and natural gas output.
Despite the notable month over month uptick in operational rigs, Argentina’s September 2020 oil output fell 0.44% to an average of 470,347 barrels daily, while natural gas rose by a paltry 0.6% to 794,936 barrels of oil equivalent daily. That indicates activity in Argentina’s oil patch remains muted. A key reason for this is the high breakeven costs, with it estimated that operations in the Vaca Muerta breakeven at $45 to $50 per barrel Brent, with new developments requiring over $50 per barrel to breakeven. A key issue for Buenos Aires is that many other jurisdictions in South America have far lower breakeven prices and are perceived to be more stable with lower geopolitical risk. This includes Guyana and Brazil where production, according to the National Resource Governance Institute, breaks even at $35.70 and anywhere from $28.45 to $45.50 respectively. The 2012 nationalization of oil company YPF by former president and now vice-president Cristina Fernández de Kirchner still weighs on Argentina’s reputation among foreign investors.
Data from the Argentine government shows the domestic oil industry, after excluding national oil company YPF, has attracted $4.1 billion in investments so far for 2020, which is $683 million less than the full year of 2019. With two months remaining for 2020 that investment could increase, especially after the latest measures announced by Buenos Aires. Those numbers highlight that the outlook for Argentina’s oil industry is mixed. Higher investment is a positive sign, as is the steadily rising rig count, but oil and natural gas production remains weak. Buenos Aires is seeking to boost investment in Argentina’s hydrocarbon sector by $5 billion and significantly reduce the dependence on natural gas imports, which according to Reuters could save $5.6 billion and boost urgently needed tax collection by $2.5 billion. Those numbers underscore the considerable economic benefits for Argentina if activity in the Vaca Muerta can be lifted, leading to higher oil and natural gas production. According to an article published by Argus Media the Nequen provincial government drilling in the shale rich province, where the Vaca Muerta is located, will return to pre-pandemic levels by March 2021. This is difficult to believe unless there is a sustained oil price rally and Brent reaches $60 per barrel next year. That is unlikely, particularly with the return of COVID-19 hard lockdowns in Europe, which see many institutions forecasting an average oil price of less than $50 next year. This includes the World Bank and the U.S. EIA predicting oil will average $44 and $47 per barrel respectively during 2021.
By Mathew Smith
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