When Alberto Fernandez, Argentina’s new left-leaning president, entered into office December 10 the international markets were anxious to see whether the post-Macri era would result in an energy policy reversal, a switch back to the traditional Peronist line. Endowed with the second-largest shale gas and fourth-largest shale oil resources in the world, Argentina has struggled to realize the full potential of its non-conventional deposits. Without a doubt, 10 years ago there was no Vaca Muerta production whatsoever and yes, Argentina leads Latin America in shale production and shale has allowed it to reverse a seemingly terminal trend of output decline, yet initial plans were much more ambitious than that. Early indications from the Fernandez government suggest an unexpectedly business-friendly oil and gas policy, cognizant that Vaca Muerta might be Argentina’s way out of its financial quagmire.
Vaca Muerta shale, already producing more than 100kbpd of oil, is steadily replacing Argentina’s conventional output. Neuquén, home of the Vaca Muerta shale play, witnessed a sizeable 23 percent year-on-year increase in its oil production in 2019, attaining 160kbpd in December. This translates into a 30kbpd incremental output in 2019, meaning that a third of Argentinian production originates from there. Interestingly, roughly a third of the increases came from Bandurria Sur (located north of the Loma Campana) which has so far been the focal point of Western investment these past months – Royal Dutch Shell and Equinor signed up for a 30-30 percent stake in the field with YPF remaining the operator of the field with 40 percent.
The end of Macri’s tenure has seen the reversal of some of his most important reforms – capital controls were brought back and domestic crude prices in Argentina went on to become fixed by the government again. Vaca Muerta’s long-term prospects dwindled in 2018 when then-President Macri decided to retroactively revamp the subsidy system it had been using to compensate for the difference between fixed domestic gas prices and the market level. Up to the previous weeks the Argentinian shale narrative was dominated by stories about unsolicited lay-offs and reduced drilling rates, an understandable reaction as most drillers were expecting the government to continue with its erstwhile investment-seeking approach. Related: Peak Shale Could Spark An Offshore Drilling Boom
Fernandez has caught many Argentina analysts by suprise, picking relatively unbiased candidates for top oil sector jobs. Sergio Lanziani, nuclear engineer and former provincial Energy Minister with no direct oil experience in the Misiones province, was named the new Energy Secretary, whilst Guillermo Nielsen, previously working as a deputy minister of finance, became the new chairman of the state-owned oil company YPF. Despite Nielsen being the only Argentinian representative at the late January Davos WEF summit, he nevertheless managed to create buzz around himself. The new YPF CEO vowed that a new draft framework for Vaca Muerta will be presented soon with the specific purpose of attracting foreign capital – among others the draft is reported to allow for profit repatriation, a long-mooted step heretofore banned in Argentina.
The new setup of energy officials should oversee the proper launch of Argentina’s shale oil exports – early 2019 has seen a flurry of reports that the 34 degree API Medanito crude will rock the markets in H2 2019, yet little of that has actually taken place. The 25 degree API (0.2 percent Sulphur) Escalante remains Argentina’s flagship export grade – as it happens, the crude is very popular with Chinese refiners and has witnessed the occasional delivery to USGC refineries, too. The future contender Medanito was expected to lighten up as Argentina’s light shale production develops, with its density increasing well below the 40 degree API mark and its 0.5 percent Sulphur content should also sweeten. However, with inflation spiralling out of control in H2 2019, the interest rate set as high as 78 percent in September 2019 on the back of export tax increases, Argentina’s crude exports have been falling since July 2019.
Argentina still carries in it a lot of potential, political risks or potential economic downturns notwithstanding. The 2019 offshore licensing round was an unexpected confirmation of the Argentinian hydrocarbon market’s appeal – of the 38 blocks available 18 witnessed the awarding of an exploration permit, a truly high number given the under-appraised and underdeveloped nature of the nation’s offshore zone (no commercial discoveries so far). Western majors such as Total, Equinor, Shell or BP were attracted by the possibility of tapping into two new offshore basins (Malvinas, Argentina), with little drilling commitments (not until the 2nd phase of exploration) and using the 2014 Fernandez de Kirchner reform that stipulated lower royalty rates for offshore projects.
For a proper turnaround in market sentiment, Argentina must get back its things to normal – the national oil company YPF has been looking into ways of getting out of fuel price caps, to no avail so far. This evidently is closely intertwined with the general shape of Argentina’s economy, despite the immense resource bounty no sane investor would pour money into an economy that might be on the verge of another sovereign default, struggles with a 55-percent inflation rate and rounds of staff layoffs across all industries. Companies active not only in the Vaca Muerta play need to ramp up drilling, too – year-on-year drilling decreases point to the fact that Argentina’s economic malaise weighs down on drilling enthusiasm. Thus, the Argentinian government has made a step in the good direction – a multitude of further steps is needed to correct the country.
By Viktor Katona for Oilprice.com
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