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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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Oil Could Save Argentina’s Struggling Economy

The pandemic, social unrest, and substantial fiscal pressures in Buenos Aires are all weighing heavily on Argentina’s petroleum industry and the burgeoning oil boom underway in the Vaca Muerta shale play.

Those factors along with general concerns over Peronist President Alberto Fernandez’s management of the economy and hydrocarbon sector sparked considerable concern among energy industry participants. Fernandez assumed the top office in Latin America’s third-largest economy in December after beating business-friendly center-right reformist Mauricio Macri in Argentina’s October 2019 presidential election.

Peronist politicians including Fernandez’s vice-president former president Cristina Fernández de Kirchner, who nationalized YPF by seizing a majority share from Spanish energy major Repsol, have a long history of meddling with the Latin American country’s oil industry. Those concerns were magnified by Buenos Aires defaulting on its sovereign debt during May 2020 at the height of the pandemic, the ninth time in Argentina’s history. That along with the pandemic causing the economy to contract by 10%, one of the worst declines in South America outside of Venezuela, makes it more important than ever for Buenos Aires to successfully exploit the vast hydrocarbon wealth of the Vaca Muerta. The 8.6-million-acre shale formation, which is regularly compared to the prolific U.S. Eagle Ford shale play, is estimated to hold technically recoverable light tight oil resources of 20 billion barrels and 350 trillion cubic feet of natural gas. Those numbers underscore why successive Argentine national governments, since the de Kirchner administration have viewed it as a silver bullet for the country’s deep-seated economic woes.

The successful exploitation of the Vaca Muerta will make Argentina a leading regional hydrocarbon producer. That will significantly reduce the country’s dependence on Bolivian natural gas and the risks posed by that Andean nation’s declining production. Industry consultancy Rystad Energy believes Bolivia’s declining natural gas production coupled with growing domestic demand will lead to a supply shortfall in Argentina by 2025. That will force Latin America’s third-largest economy to find alternative natural gas supplies, particularly as domestic consumption keeps expanding at a solid clip. The successful development of the Vaca Muerta will also ease the pressure on Argentina’s fragile economy by not only reducing energy imports but bolstering oil export earnings and GDP. 

Related: Peak Gasoline Demand Forecasts Aren't Scaring Big Oil

National oil company YPF, which is the driving force behind the exploitation of the shale formation, narrowly avoided a hard debt default earlier this year when $413 million of note fell due in March. That set alarm bells ringing in a cash-strapped Buenos Aires, where because of a lack of U.S. dollars it was unable to fund YPF’s note redemptions threatening the national oil company’s 2021 drilling campaign in the Vaca Muerta. Nevertheless, YPF was able to avert the liquidity crisis by renegotiating its bonds with creditors generating $630 million of debt relief, thereby freeing up capital to fund its exploration and development operations in the Vaca Muerta. YPF has committed to spending $2.7 billion during 2021 with $1.3 billion earmarked for drilling 180 exploratory wells in the Vaca Muerta and another $800 million budgeted for well development, notably through implementing secondary and tertiary recovery methods. That will significantly boost oil and natural gas reserves as well as production. The tempo of activity in the Vaca Muerta continues to rise. The July 2021 Baker Hughes Rig Count shows there were 46 active rigs at the end of the month, which was one more than the prior period and four times greater than July 2020.

Source: Baker Hughes and U.S. EIA.

When that is coupled with brisk fracking activity during June 2021, where 985 shale fracturing processes were executed, it bodes well for further reserves and production growth.

Related: Chinese Oil Demand To Crash By 1 Million Bpd On Covid Surge

Government data (Spanish), disappointingly, shows June 2021 crude oil output declined 3.64% compared to a month prior to 485,773 barrels, although this was still 2.89% higher year over year. Natural gas production, nonetheless, continued climbing reaching an average of 772,944 barrels of oil equivalent daily which was 1.35% higher month over month and nearly 1% than for the same period a year earlier. As a result, Argentina’s total June 2021 hydrocarbon output of nearly 1.26 million barrels of oil equivalent per day was 0.64% less than May but 1.58% greater than a year earlier.

Source: Argentina Ministry of Economy and U.S. EIA.

The province of Neuquén, where the Vaca Muerta is located, was responsible during June 2021 for 37% of Argentina’s crude oil output and 59% of natural gas production. That along with the rising tempo of drilling and fracturing activity along with other operations in the Vaca Muerta indicates that Argentina’s hydrocarbon production will continue climbing.

This will also occur because higher oil prices make developing projects in the Vaca Muerta more appealing for foreign energy investors, particularly when the formation’s high breakeven prices for new developments are estimated to be well over $50 per barrel. The Vaca Muerta’s average breakeven price is forecast to fall as further infrastructure is put in place and drilling expertise, as well as technology, improve. YPF’s senior management believes it could fall to below $30 per barrel, which would make it a highly profitable shale oil play in a world where Brent is selling for $70 or more per barrel.

The crude oil produced in the Vaca Muerta possesses characteristics that make it popular in a world where the push to decarbonize the global economy is gaining substantial momentum and big oil is striving to become carbon neutral. The oil produced in the Vaca Muerta is light and sweet with it blended to create Argentina’s Medanito crude oil variety. This crude oil variety, which is Argentina’s key export grade, has an API gravity of around 34 to 35 degrees and 0.43% sulfur content, making it less carbon-intensive and costly to refine into high-quality low emissions fuels. Those lighter sweeter crude oil grades are growing in popularity among refiners because of a growing focus on cost reduction and the push to significantly reduce carbon as well as other emissions in a post-Paris Agreement world. It is expected that as light, tight oil production expands in the Vaca Muerta the API gravity of the oil produced will increase with sulfur content falling lower, making it even more popular among refiners, leading to higher exports.

By Matthew Smith for Oilprice.com

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