For a decade, successive Argentine governments in Buenos Aires have enacted a range of policies aimed at reducing energy imports and exploiting the Latin American country’s vast hydrocarbon potential.
While crude oil and natural gas production have steadily expanded since 2011 when former president and now vice-president Cristina Fernandez de Kirchner nationalized energy company YPF, it is struggling to reach the targets desired by Buenos Aires.
The vast Vaca Muerta shale oil and natural gas basin is situated in the Neuquen Basin in northern Patagonia. The geological formation is estimated to contain the world’s second largest shale gas deposit with estimated recoverable resources totaling 308 trillion cubic feet of natural gas and 16 billion barrels of crude oil. The ruling Peronist’s crushing defeat in Argentina’s September 2021 midterm congressional primaries is putting considerable pressure on President Alberto Fernandez to resolve the country’s myriad economic troubles. It is the development of the Vaca Muerta shale play which is perceived by Buenos Aires as a silver bullet for Argentina’s economic woes, notably rampant inflation, vulnerable current account, and a weak economy, where GDP shrank by 10% last year.
After implementing a series of policies during a disastrous 2020 to attract investment in Argentina’s hydrocarbon sector Fernández, in early September 2021, sent a bill to congress seeking further hydrocarbon sector reforms. This, Buenos Aires hopes, will attract greater investment in the Vaca Muerta thereby driving greater drilling activity and spending on urgently needed hydrocarbon infrastructure.
While the performance of Argentina’s burgeoning energy sector has been steadily improving since the start of the pandemic in March 2020, there is still a long way to go before its full potential is harnessed. Data from Argentina’s Ministry of Economy shows that total crude oil output for Latin America’s third-largest economy reached an average of 508,228 barrels per day for August 2021. That was nearly 1% lower than a month prior but a notable 7.6% greater than for the same month in 2020. Natural gas output also climbed averaging 840,773 barrels of oil equivalent per day, a 2.3% increase month over month and 6.4% higher than a year earlier.
Source: Argentina Ministry of Economy and U.S. EIA.
That saw total hydrocarbon production for August 2021 rise by 1.2% month over month and 6.8% year over year to 1.35 million barrels of oil equivalent per day.
The Baker Hughes rig count is a good proxy measure of industry activity. By the end of August 2021 there were 45 operational drill rigs in Argentina, which while one less than a month earlier was more than three times greater for the same period in 2020.
Source: Baker Hughes and U.S. EIA.
This along with solid fracking activity points to a strong operational recovery in Argentina’s energy patch, although it has yet to reach pre-pandemic levels, especially in the Vaca Muerta formation which is poised to compete against U.S. shale plays.
Nevertheless, there is a need for further reforms by Buenos Aires to attract urgently required capital from foreign energy companies to bolster exploration, drilling, and fracking operations as well as ultimately hydrocarbon production.
A key deterrent for foreign energy investors is Argentina’s strict capital controls which prevent capital from leaving Latin America’s third largest economy as part of the government’s strategy to stabilize rampant inflation and a volatile exchange rate. Those regulations act as a considerable impediment for foreign energy companies because they prevent them from removing profits from Argentina and limit the amount of capital they can borrow to invest in hydrocarbon projects. The impact of those rules on energy investment in Argentina can be seen during the term of Fernandez’s predecessor Mauricio Macri. Early in his term Macri did away with those controls only to reinstate them later as Argentina slid into economic crisis. That saw private energy companies scale back operations causing investment and ultimately production to decline, further magnifying the economic crisis underway in Argentina which eventually led to the country’s ninth sovereign default.
Restrictions aimed at shoring up foreign currency reserves, notably US dollars, further complicate matters for foreign oil companies operating in Argentina. Those controls were responsible for nearly causing national oil company YPF, which is 51% owned by the Argentine government, to default on $6.2 billion of notes earlier this year because it was unable to access sufficient US dollars to meet repayments.
Fernandez’s bill proposes implementing reforms aimed at addressing those issues. This includes increasing approvals for hydrocarbon exports and opening access to foreign exchange markets all in a bid to increase access to capital as well as boost investment. These proposed reforms are part of Fernandez’s plans to significantly expand Argentina’s oil and natural gas production by exploiting the vast hydrocarbon resources of the Vaca Muerta shale play.
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There are signs that oil and natural gas production from the Vaca Muerta is poised to expand at a solid clip. According to energy industry consultancy Rystad Energy, the Vaca Muerta’s well productivity is climbing making it competitive with some of the best U.S. shale plays.
Unlike the major U.S. shale oil basins where well productivity, in most cases, has plateaued, efficiencies continue to be realized in the Vaca Muerta as further discoveries are made, wells drilled and infrastructure is established. That along with the geological formation’s low natural gas to oil ratio points to breakeven prices in the Vaca Muerta, which are estimated to be $45 to $50 per barrel, falling significantly as the shale play is further developed.
National oil company YPF, which is the driving force behind developing the Vaca Muerta, anticipates the average breakeven price falling below $30 per barrel, making the shale play a highly competitive and profitable operation. For that to occur, Buenos Aires will need to reduce onerous regulation and capital controls, shore up confidence among foreign energy investors, and create greater financing opportunities.
By Matthew Smith for Oilprice.com
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