Argentina remains the most viable prospect for shale production outside of the United States. The Vaca Muerta in Neuquen Province has been labeled the Eagle Ford of South America, because of the comparable geology of the two plays and its potential to be as prolific as parts of South Texas. The country’s desire to attract outside investment has paid off with state-owned YPF establishing joint ventures to help it exploit reserves in the play. This February, for instance, YPF inked a major deal with Shell to launch a new pilot gas project in the area, ceding operatorship of the project to Shell, a break from its practice in the past.
Risks for companies operating in Argentina have fallen considerably in recent years, but the political environment, which has been in flux for decades and has a rich populist history, could throw a wrench in energy development at any time. The mid-term elections in October are the next big flashpoint. They will ratchet up the tension surrounding the country’s economy and natural resources, which include the shale fields in the Vaca Muerta. Opposition parties are poised to sharpen their differences with President Mauricio Macri, building off of protectionist rhetoric and disillusionment with the economy after a recession hit the country last year.
The most important seat in the upcoming election will be for the senator of the province of Buenos Aires, the area of the country with the highest population.
The most important seat in the election will be for the senator of the province of Buenos Aires, the area of the country with the highest population. If Esteban Bullrich, the candidate from President Macri’s party Cambiemos, does poorly, it would embolden the president’s critics and serve as a bellwether for the presidential election in 2019. “This could undermine efforts by the current administration to unlock private investment including in the oil sector,” Lisa Viscidi, Director of the Energy, Climate Change and Extractive Industries Program at the Inter-American Dialogue, told The Fuse.
Macri, since taking office in 2015, has lifted controls on currency and capital, sliced export taxes, and brought the country back into international financial markets—reforms that outside investors have found attractive. The economy contracted last year by more than 2 percent, but GDP should rise by 2.2 percent in 2017, the IMF says, as a result of increased consumption and more public investment. Growth should be similar in 2018, amid more private investment and a recovery in exports.
“Under the previous administration, investors were deterred by protectionist policies such as exchange rate and export controls as well as difficulty in accessing capital due to Argentina’s history of default and ongoing dispute with bondholders.”
Despite the improving economic conditions, there is still a wave of discontent throughout the country, with backlashes from unions and industries that are in favor of a protectionist agenda. This environment will help the opposition and potentially threaten oil and gas outlays.
The upcoming mid-term election in October has large implications for not only the country’s industry, but also U.S. firms that specialize in fracking equipment and want to do business in Argentina. Macri is in favor of pro-business policies and sees the energy sector as one place to attract outside investors. Under his predecessor Cristina Fernandez de Kirchner, who is running for the Buenos Aires Senate seat in October, Argentina renationalized YPF as part of her efforts to tighten state control of the economy.
“Under the previous administration, investors were deterred by protectionist policies such as exchange rate and export controls as well as difficulty in accessing capital due to Argentina’s history of default and ongoing dispute with bondholders,” said Viscidi.
Macri’s ideology and approach are starkly different than his predecessor’s. He has been openly courting U.S. firms to bring their skills, expertise, and equipment to Argentina. At the Center for Strategic and International Studies (CSIS) earlier this year, Macri told the crowd: “We went from exporting to importing energy, only for wrong policies, because Argentina is full of natural resources. And we have access now to a world-class reserve in non-conventional shale gas, shale oil—especially shale gas that we have to develop.” He added: “I think the chances are huge for your [American] companies. The big ones are already there. The middle one and small ones, not yet. I think that they should go there. And that should also help to continue increasing this strong economic relationship now in long-term basis.”
The country’s protectionist history has made it difficult to fully welcome outside investment. As U.S. companies want to muscle their way into the Argentine market, local businesses are lobbying to keep import taxes on equipment that could be used in shale fields. They believe such a move by the government “will destroy their livelihoods.” For some outsiders, though, the country’s reforms aren’t moving fast enough. Richard Spies, chief executive of Pan America Energy, an Argentine subsidiary of BP PLC, told Reuters: “We need that equipment that’s idle in the United States moved down here to facilitate the developments that are coming in Vaca Muerta.”
Shifting its position in the global energy market
As other countries are hampered by low prices, regulatory obstacles, local opposition, and technological challenges with regards to shale, Argentina is in a good spot to exploit its reserves and boost its standing in the global energy market. Even though it has 802 trillion cubic feet of unproved, technically recoverable shale gas reserves, it is a net importer of gas. In crude and other liquids, its production is at a modest 600,000 barrels per day.
As other countries are hampered by low prices, regulatory obstacles, local opposition, and technological challenges with regards to shale, Argentina is in a good spot to exploit its reserves.
The government has made serious energy policy errors in the past, making the likelihood of missteps in the future seem high. The fallout from the financial collapse of 2001 and subsequent measures to support the economy, such as price controls on energy, caused investment to deteriorate significantly. This had other major implications for the country’s energy security: It switched from being an exporter to an importer of expensive LNG.
Now, it has a chance to reverse its energy fortunes. If the outlook for shale comes to realization, the country could become an exporter of both gas and crude. “The government wants to return to self-sufficiency,” said Viscidi, “but the hope is also that there will be enough oil and gas for export.”
With the Vaca Muerta, its shale oil prospects are rosy. According to consultancy Wood Mackenzie, Argentina’s tight oil production should rise from current levels of around 77,000 barrels of oil equivalent per day (boe/d) to possibly as high 1.25 boe/d by 2031. The government is expecting investment in the Vaca Muerta to be a massive $20 billion in a couple of years.
Political stability, though, is the missing ingredient. Macri’s reforms are unlikely to be fully blocked or overturned, but they could dampen investment. Woodmac labels another economic crisis as the biggest threat to upstream companies operating in Argentina. The consultancy adds: “Major challenges are the high level of government intervention and complex regulations, along with the volatile currency.”
“Major challenges are the high level of government intervention and complex regulations, along with the volatile currency.”
Argentina needs all the investment it can get. Industry operating in the country is confronting high drilling costs, above-ground constraints, and infrastructure bottlenecks, not to mention relatively low prices. So far, investment has been modest and output is expected to be flat this year. In order for shale production to take off, higher spending levels will be necessary—and the upcoming election could determine what levels of investment the country will see.