Throughout the 2010s Argentina’s shale deposits were universally listed alongside the US shale gale, denoting the many similarities Vaca Muerta shares with Eagle Ford in particular and Texas’ shale deposits in general. Providing another layer to the juxtaposition, Argentina’s shale-rich Neuquen Province has historically been the main production hub of the Latin American country and has witnessed its first production flow as early as the mid-1920s. The deposit’s thermal maturity (between 1-2.5% Ro), organic content, pressure gradient – similarities abound yet there is also one incongruence that has played out to Argentina’s detriment. This year’s oil price crash seems to be taking a substantially higher toll on Vaca Muerta, laying bare the frailty of the much-lauded shale play.
Argentina found itself confronted with the COVID-19 contagion a bit later than Europe’s largest nations – in fact it is assumed that the first Argentinian case was brought in early March by a traveller from Milan. The rapid spread of coronavirus compelled the Fernandez government, having assumed power only a couple of months before that, to mandate a nationwide lockdown on March 20. Despite six rounds of lockdown relaxations, Buenos Aires still cannot lift the restrictions imposed onto its economy; moreover, as the daily infected toll still hovers around 2-3 000 cases authorities were forced to curb inter-regional movement within Argentina, potentially delaying the bounce-back of motor fuels’ demand.
Joining the list of those whom the COVID-induced recession hit at the worst imaginable time, Argentina seemed on the brink of breaking the tedious tradition of hyperinflation and shedding constant fears of defaulting again. Analysts have expected a breakthrough for 2020 – after 3 consecutive years of economic contraction, the IMF assumed a 4.4% GDP hike this year, all the while labelling Buenos Aires’ debt burden unsustainable. Then came COVID-19, to which Argentina’s initial response followed the traditional Latin American dilemma – the government was swift enough to shut down social interaction and acted laudably to enforce it yet has succumbed to the temptation of introducing pandemic-related fiscal spending. It is against this background that the Argentinian government has failed to make a payment to the worth of $503 million on delayed interests late May. Related: Turkey’s Latest Geopolitical Gamble Could Result In Catastrophe
Graph 1. Argentina’s Crude Exports in 2017-2020 (thousand barrels per day).
Source: Thomson Reuters.
The January-March 2020 period delivered very promising results for Argentina’s shale sector. Nationwide oil production reached 519kbpd in March, spearheaded by drilling in Vaca Muerta which by that point has increased a hefty 30% year-on-year. Since Argentina routinely exports only some 70kbpd of the crude it produces, demand for the crude produced depended on the downstream segment being able to digest it and it has failed spectacularly. The profitability of downstream operations inevitably shared upstream’s torment. Refinery utilization rates have dropped year-on-year more than 10% (from the average 73-74% in H1 2019 to around 60% in H1 2020), with April hitting the absolute lowest ebb of less than 50%.
The sudden demand decline resulted in the closure of two refineries across the country - one of them the 25kbpd Plaza Huincul Refinery next to the oilfields in Neuquen, the other being the 110kbpd Buenos Aires Refinery. The unforeseen nature of the fuel market crunch engendered another round of boundless discussions whether Argentina should move back to a minimal price for the crude produced there but with downstream margins pressurized to the maximum Buenos Aires will not take such a radical step, especially with the nationalized YPF controlling a bit more than 50% of the fuel sales’ market. As a result of the abovementioned developments, Argentina’s oil output dropped to 450-460kbpd as of May, aggravated by an almost complete cessation of fracking operations in Vaca Muerta.
Since Argentina’s budget would not be able to weather an even more prolonged lockdown, the Fernandez administration would have to open up the economy by July-August. Judging by several utterances from Argentina’s Energy Secretariat, Buenos Aires expects the upstream sector to shrug off the 2020 price drop by mid-2021 and, albeit with great pensiveness, considers the current year as a great opportunity gone awry. At least in terms of workers’ physical safety oil and gas drillers at Vaca Muerta and other Argentinian shale assets are relatively safe compared to the capital – the totality of the Neuquen province has had less than 500 cases from the onset of the pandemic.
This is bad news for YPF which had posted a net loss of $700 million in 2019 and is highly unlikely to generate anything else than that in 2020 amid Argentina’s economy dropping 10% year-on-year.
The breakeven level for full-scale Vaca Muerta projects, assumed to be in the low-$40s per barrel, is still attractive enough to generate enough majors’ interest. Not even recent seismic developments – Shell suspended operations at its Bajada de Añelo acreage in early June, hinting at the potentiality of similar events in the future – will take a toll big enough for the idea of Argentinian shale to persevere. However, it is going to be a tour de force in diplomacy and patience for the Fernandez government: if it manages to avoid a default on the $85 billion debt it has amassed and to nudge the nation’s economy to open up as soon as it can, Vaca Muerta is going to be big again in a couple of years. Just not now.
By Viktor Katona for Oilprice.com
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