Can Argentina’s Dead Cow Shale Patch Save Its Economy?

Like countries across Latin America, Argentina was hit hard by the COVID-19 pandemic. Infection and death rates surged despite the government in Buenos Aires implementing a strict lockdown. Those events severely battered an already fragile economy and fiscally challenged government. During 2020, Argentina's gross domestic product shrank by a stunning 9.9%. Despite GDP growth rebounding by an impressive 10.2% during 2021 Argentina finds itself mired in another economic crisis. Inflation is spiraling out of control seeing it weigh heavily on an already strained economy as well as weak government finances. For those reasons, there are fears that Argentina is on the brink of an economic meltdown which will force another sovereign debt default. A key driver of those headwinds is Argentina's soaring energy deficit, which during 2022 is expected to reach up to $6 billion, more than triple a year earlier. Those developments are occurring despite the successful exploitation of the Vaca Muerta shale formation, which has long been seen by Buenos Aires as a silver bullet for Argentina's economic woes. At the core of the brewing crisis is rampant inflation, which government data shows for August 2022 surged to a daunting annualized rate of 78.5%, the highest level in three decades. There are signs that inflation is continuing to spiral out of control despite aggressive attempts by Argentina's central bank to rein in soaring prices. Those measures include hiking the headline interest rate to 75%, which is the highest in two decades and the leading official interest rate globally. Economists predict that inflation in Argentina will reach an annualized rate of 90% by the end of 2022, which will cause poverty to surge higher and place extreme pressure on an already weak economy and government finances. The risk of Argentina defaulting on its sovereign debt, which has already occurred nine times since its independence from Spain, continues to rise. A series of recent events point to that risk continuing to rise. Soaring local bond yields, where the all-in rate surged past a whopping 70%, and large 2022 debt maturities coupled with dwindling U.S. dollar reserves is placing considerable pressure on the government's ability to meet its financial obligations. The growing lack of foreign currency reserves is so severe that Buenos Aires plans to move to restrict imports.

A runaway energy deficit is stoking inflation to multi-decade highs and ratcheting up the fiscal pressures impacting Argentina's economy. That is occurring despite the successful ongoing exploitation of the vast 7.5-million-acre Vaca Muerta shale formation which Buenos Aires has long viewed as a silver bullet for Argentina's economic woes. The geological body, lying in the Neuquen Basin in Northern Patagonia, has estimated technically recoverable resources of 16 billion barrels of shale oil and 308 billion cubic feet of shale gas making it the world's second-largest shale gas deposit. Since the pandemic oil and natural gas production in Argentina, because of drilling in the Vaca Muerta, keeps climbing to record highs. The rising volume of activity in the hydrocarbon rich geological formation is supported by not only higher oil and natural gas prices but also tax and regulatory reforms implemented by Argentina's national government.

During July 2022, Argentina's hydrocarbon production hit another record, surpassing that set a month earlier, pumping 577,446 barrels of crude oil and 4.95 billion cubic feet of natural gas per day, seeing total hydrocarbon output reach 1.46 million barrels of oil equivalent daily. Those numbers highlight that notable production growth of 13%, 7% and 9%, respectively year over year has occurred. It is soaring shale oil and gas production in the Vaca Muerta is driving those strong gains. Argentina's July 2022 unconventional oil output grew an incredible 47% year over year to 247,007 barrels per day, seeing it make up 43% of the country's crude oil output compared to 33% a year earlier. Unconventional natural gas production for the same month shot up by a notable 24% year over year to 2.8 billion cubic feet per day, meaning that shale gas now comprises 57% of Argentina's total natural gas output.

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Significantly expanding natural gas production is key to reducing Argentina's energy deficit. Soaring natural gas prices, which rocketed skyward by 117% since the start of the year, primarily because of the war in Ukraine and a lack of industry investment during the pandemic, are exacerbating Argentina's energy deficit. The economically crisis-wracked country is highly dependent upon energy imports, with a fifth of domestically consumed natural gas sourced from Bolivia and the international liquified natural gas market. During 2021, Argentina imported nearly 23 million cubic meters of natural gas per day, an almost 14% increase over 2020 with demand for the fuel rising sharply as the economy re-opened and recovered from the pandemic. Argentina experienced an energy deficit of $1.7 billion in 2021 and this will expand significantly during 2022. A combination of spiraling energy prices, primarily caused by Russia's invasion of Ukraine, and rising natural gas demand in Argentina could see its energy deficit balloon out to $6 billion, for 2022, or more than triple that reported a year earlier. It will weigh heavily on a fiscally challenged economy already experiencing significant stress and turmoil if that occurs. There is speculation that an energy crisis in Argentina will tip the country's crisis-prone economy into a financial catastrophe that would destroy already fragile government finances triggering yet another sovereign debt default while causing poverty to soar and civil unrest.

 Even the successful exploitation of the vast Vaca Muerta, the dead cow in English, shale formation, has done little to curtail the ballooning energy deficit. This is surprising because the development of the geological body is driving strong oil and natural gas production growth in Argentina. For July 2022, total hydrocarbon output hit a new record of 1.46 million barrels daily, which was a 9.4% increase compared to the same month a year earlier. That notable expansion in output can be attributed to crude oil production surging by 12.8% to hit a new monthly record of 577,446 barrels daily, seeing petroleum liquids production make up 39.6% of Argentina's hydrocarbon output compared to 38.4% a year earlier. A solid increase in natural gas production, which shot up by 7.2% year over year to a record 140 million cubic meters or 4.9 billion cubic feet daily, is the other driver of Argentina's rapidly expanding hydrocarbon output. 

Soaring unconventional oil and natural gas production, because of the successful exploitation of the Vaca Muerta, is responsible for that rapid expansion of Argentina's hydrocarbon output. Government data shows that shale oil production reached 247,007 barrels per day for July 2022, which was an impressive 47% greater than the 167,994 barrels per day pumped for the same month a year earlier. All-important shale gas output surged to a record 79.7 million cubic meters or 2.8 billion cubic feet per day, which was a notable 28% higher yearly. As a result, shale oil now makes up 43% of Argentina's total petroleum output compared to 33% a year earlier while shale gas is responsible for 57% of total natural gas production against 49% for the same period in 2021.

There are signs of solid production growth for the Vaca Muerta. Drilling activity is rising, with the Baker Hughes rig count indicating there were 53 active rigs at the end of August 2022, or two higher than a month earlier, seven more than the same period during 2021, and four-times greater than August 2020. Fracking activity is growing at a notable pace, and data from the Ministry of Economy shows a marked increase in the volume of wells completed. During July 2022, the volume of exploration wells completed expanded by 34% compared to June 2022 to 4,229, while the service wells drilled more than tripled month over month to 10,767. Argentina's focus on attracting further investment and further significantly expanding hydrocarbon production. A new natural gas pipeline connecting the Vaca Muerta to Buenos Aires, the country's most populous city, was recently commissioned. In August 2022, Argentina's controversial newly appointed Minister of Economy Sergio Massa stated that he will implement tax and customs benefits for energy companies to attract further investment and fast-track development of the Vaca Muerta.

By Matthew Smith for Oilprice.com

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