Argentina’s abundant shale resources have attracted a growing number of major international companies since the beginning of this year—all of them interested in developing the prized Vaca Muerta shale formation; but mid-term elections are making everyone nervous, and a change in the current pro-business climate could mean bust rather than boom for shale.
Much is at stake. Vaca Muerta is thought to be a highly prolific basin, and even though it’s in the early stage of development, well performance there is already catching up with some U.S. shale plays.
A lot of investment would be needed for a play-wide development at Vaca Muerta, but attracting investment and luring more and more experienced drillers to the country hinges on Argentina’s energy, tax, and pro-business policies.
Currently, right-of-center President Mauricio Macri is betting big on welcoming more foreign investment into Vaca Muerta. He’s introducing various reforms to make doing business in Argentina more attractive to companies. Those firms were not keen on splashing hard-to-come-by capital into the Argentine energy sector under Macri’s predecessor, former leftist populist President Cristina Fernandez de Kirchner, whose main agenda was protectionist policies during her tenure as president between 2007 and 2015.
Macri is now facing a mid-term election on October 22, when voters can replace one-third of the seats in the Senate and half the lower house of Congress.
In that election, Macri’s ‘Cambiemos’ (Let’s Change) coalition will face Fernandez who said in June she was staging a comeback.
And her timing is strategic:
Between June 24 and last week, the Argentine peso was the worst performing emerging market currency, and government borrowing costs increased, in a sign that investors were nervous about a U-turn to protectionism and populism.
Last weekend’s primary election in the Buenos Aires province, home to around 40 percent of Argentinian voters, allayed some of those concerns, as Macri’s candidate tied with Fernandez. This was seen as a victory for the coalition of the current president, given the fact that polls had suggested that Fernandez would win.
Although investors may breathe a sigh of relief for now, analysts reckon that if Fernandez wins a Senate seat in October, it could derail Macri’s reform agenda. Moreover, Argentina’s slow economic recovery and last year’s recession are not helping Macri’s popularity or his reforms—which could be just the boost that Fernandez needs, according to FT.
Argentina is now out of recession and the IMF expects its economy to grow 2.2 percent this year, with inflation on the decline. In April, the IMF pointed to the “early signs of policy success” of Macri’s reforms to “eliminate pervasive distortions and imbalances in the economy.”
In the energy sector, Argentina is trying to boost its domestic shale gas output in an effort to reduce imports. The government has extended the pricing incentives for gas production through 2021. Producers will be paid US$7.50/MMBtu for their production by the end of 2018, and then the incentives would gradually decrease to US$6/MMBtu in 2021. This is higher than natural gas prices in most parts of the world.
Argentina has also scrapped a duty on oil product exports that has been in place for 15 years. Just last week, the government reduced tariffs on imports of used oil equipment. In this way, idle rigs in the U.S. can be moved to Argentina’s shale play.
Vaca Muerta has an estimated 308 trillion cubic feet of technically recoverable shale gas resources, and has been compared to the Eagle Ford in Texas in terms of depth, thickness, pressure, and mineral composition.
In an address during a visit to the U.S. in April, Macri said that chances for U.S. companies in Argentina are “huge”, adding that the big ones are already there, and the mid-sized and small ones should also go there.
According to a Wood Mackenzie analysis, the seven most advanced developments representing just 8 percent of Vaca Muerta’s acreage will see their combined production jump by 43 percent this year to 77,000 barrels of oil equivalent per day (boed). Output in 2018 is expected to be double the 2016 volumes and stand at 113,000 boed.
Between January and early May, companies committed US$3.5 billion in Vaca Muerta development, WoodMac said, but noted that “at least 15 times current annual capital levels” are necessary for a play-wide development.
“Production gains driven by drilling speed and completion intensity in the U.S. will materialize in Argentina, as more and more operators enter the play,” Elena Nikolova, Latin America Upstream Oil and Gas Research Analyst for Wood Mackenzie, said.
Now, with elections in just two months, whether more operators enter this play will in large part depend on whether Argentina’s domestic political scene and choices continue on the path of attracting foreign energy investment.
By Tsvetana Paraskova for Oilprice.com
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