With presidential elections looming next October, international investors eyeing Argentina's potentially prolific shale gas plays are biding their time. Cristina Kirchner is now well into her last term, marking the end of a government that has heavily regulated the energy industry and imposed economic restrictions that discourage foreign investment. But while anxious for a new administration to take power, investors must realize that some of the important reforms taking place today will set the stage for conditions in the energy sector for years to come.
Argentina's nascent shale industry represents one of the most promising frontiers for unconventional oil and gas development outside of the US. According to recent studies, the country boasts the second largest shale gas and fourth largest shale oil deposits in the world.
Multinational companies, such as Chevron, ExxonMobil and Total, as well as local players including Pan American Energy and Pluspetrol, have already started planning and operations within Argentina. But despite this level of international interest - as well as a substantial increase in activity by state-owned YPF - output is still far below the levels needed to make Argentina's shale industry profitable or to have significant flow-on effects for the national economy.
Related: South America: The World's Next Unconventional Frontier?
A new hydrocarbons law approved by Argentina's congress in the early hours of Thursday morning will establish a fresh regulatory framework intended to accelerate investment in the country's shale resources. The deal - which was hammered out during intense negotiations between the governors of Argentina's oil-producing provinces, the federal government and YPF - will build on a 1994 constitutional reform and other laws and decrees that regulate the industry and give ownership of Argentina's natural resources to the country's 23 provinces.
The law aims to simplify investment standards and streamline processes for the oil industry. It requires the provinces and the federal government to jointly establish a uniform model for bidding terms and conditions for new permits and concessions. Lawmakers also responded to some of the industry's concerns by shortening exploration license periods, extending production terms and introducing a special type of concession for unconventional resources. The framework also creates fiscal incentives while limiting the taxes and royalties that provinces can levy on oil and gas ventures. Other benefits include the right to export a percentage of oil and gas production and to maintain associated export proceeds abroad.
Argentina's opposition parties argue that a reform of this scale and importance to the economy should have been passed by the next administration. They also criticize the bill's failure to revise environmental regulations, particularly given concerns over the safety of hydraulic fracturing. Others complain the new framework disproportionately benefits large oil and gas companies and adversely affects provincial rights. While some of these concerns will surely be taken up by the next president, the current reforms will help create incentives for investors that could fuel a long-term expansion of the oil and gas industry.
Related: Soros Signals Argentina's Shale is Biggest Place to Be
Yet even as these reforms take root, the next government will have to address broader challenges, both at home and abroad. These include the lack of stability in the regulatory framework, restrictive economic policies, and declining commodity prices that could continue to hinder the large-scale development of energy resources. Furthermore, growing macro imbalances pose financial constraints for oil and gas companies in Argentina. Complex foreign exchange controls, trade restrictions, and heavily regulated and subsidized domestic energy prices have deterred exploratory and drilling activity -- even in highly promising areas such as Neuquén Province's Vaca Muerta field.
Similar to many other countries with shale reserves, Argentina must also navigate the technical challenges and development costs associated with shale oil and gas. The country lacks many of the features that facilitated the rapid development of the shale industry in the United States, including private land and mineral rights ownership, technology innovation, and a favorable macroeconomic framework.
Developing shale resources is no doubt a long-term game and commercial volumes will likely flow only well after the political transition in Argentina takes place. The next administration, whichever party comes to power, will likely implement new policies favorable to shale and the industry more broadly. But this week's reforms represent a significant first step.
By Juan Cruz Diaz and Lisa Viscidi
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Juan Cruz Díaz is Managing Director of Cefeidas Group an international advisory firm based in Buenos Aires, Argentina. At Cefeidas, Mr Díaz advises investors, corporations,… More
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