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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Can Argentina’s Oil Industry Help Stave Off An Economic Crisis?

  • Argentina is once again in the grips of an economic crisis, with its economy expected to see meager growth in 2023 or even a contraction.
  • Despite the economic gloom and doom, Argentina’s oil and gas sector is providing some positivity as production continues to grow.
  • The Vaca Muerta shale formation has long been seen as a silver bullet for Argentina’s economic woes, but it is far from the only bright spot in the country’s oil industry.

Argentina, which with a 2022 gross domestic product of $632 million is Latin America’s third-largest economy, is once again in the midst of a deep economic crisis that emerged during the 2020 COVID-19 pandemic. The severity of the crisis is illustrated by the country defaulting on its sovereign debt in May 2020 for the ninth time in its history. Despite GDP growing by a notable 10% during 2021 and then 5% in 2022, rampant inflation, which recently topped 104%, weak government finances, and a soaring current account deficit are all weighing on the economy. As a result, the economy will expand by a meager 0.2% during 2023 and could even contract. For these reasons, Buenos Aires views the growing hydrocarbon sector as a solution with the vast Vaca Muerta shale formation seen as a silver bullet for Argentina’s considerable economic woes.

 

While Argentina’s economic outlook is especially gloomy, the energy patch keeps pumping record volumes of crude oil. For March 2023, data from Argentina’s Ministry of Economy shows that petroleum production hit a new monthly high of 631,103 barrels per day, a nearly 1% increase compared to the month prior and a notable 12% higher year over year. That ranks Argentina as Latin America’s fifth largest oil producer and the country’s proven reserves of 2.48 billion barrels endows it with the region’s fifth largest reserves. Natural gas production is also rising, reaching an average of 4.5 billion cubic feet per day during March 2023, or nearly 10% greater than a month prior and 3% higher year over year. That is, however, still lower than the record of just under 5 billion cubic feet per day reported for August 2022.

Activity in Argentina’s energy patch is growing with the development of the Vaca Muerta shale formation located in the Neuquén Basin being the key driver of steadily rising hydrocarbon output. It is national oil company YPF, nationalized in 2012 by then President now Vice President Cristina Fernandez de Kirchner who seized 51% of the company from Spanish energy major Repsol, which is spearheading the formation’s development. For 2023, YPF announced plans to invest $5 billion, with $2.3 billion earmarked for shale development, which is a notable 19% increase over the $4.2 billion spent a year earlier. That considerable capital will be used to expand drilling operations which it is anticipated will lift YPF’s 2023 production by 8.4% year over year to an average of 245,000 barrels of oil equivalent per day. YPF plans to double oil output and lift natural gas production by 30% over the next five years.

Foreign energy investment is not only growing because of firmer oil prices but also due to President Fernandez implementing a package of tax and customs benefits for foreign energy companies operating in Argentina. That will go a long way to significantly boosting Argentina’s overall production volumes. According to Buenos Aires, energy supermajor Shell has invested $2 billion in Vaca Muerta-related projects including the crucial $100 million 125,000 barrel-per-day pipeline connecting the Vaca Muerta to refineries west of Buenos Aires.

There is growing speculation that Argentina possesses considerable offshore oil potential with some analysts believing the country could replicate Brazil’s offshore oil boom. It is here that Norwegian energy supermajor Equinor has partnered with YPF for the Argerich offshore drilling project. After clearing a series of legal hurdles, Equinor will commence drilling in the CAN 100 Block later this year. There is also the $700 million Fenix natural gas project in Tierra Del Fuego, which is being exploited by a consortium led by French supermajor TotalEnergies. It is anticipated that the operation will produce first gas during 2025 with output projected to peak at 10 million cubic meters daily over a 15-year period.

Argentina is on track for oil production to reach an expected one million barrels per day by 2026. That will give the Buenos Aires coffers a solid boost and repair Argentina’s fragile balance of trade by bolstering energy exports as well as reducing vital natural gas imports. This will go a long way to mitigating much of the fiscal and economic pressures being felt in Argentina but will not resolve the fundamental drivers of the country’s frequent financial crises until structural changes are made to the economy.

By Matthew Smith for Oilprice.com

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