In Argentina, politics threatens oil production growth again: Fuel for Thought

As Argentina stands on the verge of regime change, the question for oil companies is whether politics or the geology of Vaca Muerta, one of the world’s biggest shale plays, will prevail.

Oil companies are used to dealing with geopolitical risk, often operating in volatile regions when the resource potential is high enough. Argentina holds some of the world’s largest shale oil and natural gas resources and has a 100-year-old industry with plenty of infrastructure and talented engineers and fieldworkers.

When conservative businessman Mauricio Macri won the presidency in 2015 after 12 years of populist rule, optimism swelled.

Macri scrapped many of the capital, currency, pricing and trade controls of his predecessors, and investment surged in Vaca Muerta, a huge shale play in the southwest. Oil and gas production recovered from more than a decade of decline.

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Macri said national production could double between 2023 and 2018 to 1 million b/d of oil and 260 million cu m/d in of gas, allowing exports to surge from virtually zero to 500,000 b/d and 80 million cu m/d over the same period, then continue to increase.

That now seems less likely.

Macri suffered a crushing defeat in the August 11 primary election to his Peronist predecessors, led by Alberto Fernández and his running mate, the former two-term president Cristina Fernández de Kirchner. Macri's chances of winning a second four-year term in the October 27 general election have dimmed.

This isn’t surprising. Argentina fell into a financial crisis in 2018, pushing the economy into recession and doubling the inflation rate to 55% this year, the fourth-highest in the world. Business closures have risen. So, too, have poverty and unemployment.

Risk and reward

In the end, will geology trump politics? A banker, who asked not to be named, didn’t hesitate to say that politics would win.

The risk of doing business in Argentina has shot up on the anticipation of a return to populist rule, making it harder to finance such a capital-intensive industry. Argentina’s benchmark interest rate is running at nearly 84%, the highest in the world, and economists warn a sovereign default is probable yet again.

The country defaulted on $100 billion in 2001, then the world’s largest for a sovereign.

Even so, Ernesto López Anadón, president of the Argentina Oil and Gas Institute, said it has yet to be seen if politics will sideline Vaca Muerta’s growth, which is being led by Argentina’s state-backed YPF and global majors like Chevron, ExxonMobil and Shell.

Companies, he said, have put investment on hold since the election and Macri’s subsequent freeze on diesel and gasoline prices, which has cut the domestic price of crude to $49.50/b until mid-November, far less than the $60/b plus for Brent Crude, the international reference price followed in Argentina.

However, López Anadón said there is an understanding among the leading political coalitions that Vaca Muerta’s development is crucial for long-term economic growth and as a new source of dollars—not just the traditional agriculture exports—to cover state spending, pay the national debt and replenish central bank reserves that have tumbled 35% over the past five months.

If Vaca Muerta is not developed, it’s a “failure” for the country, López Anadón said.

“I think that the geology is going to win,” he said, before adding, “But I’m not sure if this is a hopeful wish.”

What's next?

His hesitation stems, in part, from the uncertainty of what the energy policies could be if Fernández becomes president. The candidate has said little so far, but on a trip to Spain early this month he said: “It makes no sense to have oil if the multinationals take it.”

This swelled concerns of a return of the interventionism that led to the re-nationalization of YPF in 2012 from Spain’s Repsol.

This wouldn’t surprise Gerardo Rabinovich, vice president of the Argentine Energy Institute, a think tank.

“We shouldn’t expect anything different from what they did from 2003 to 2015,” he said. “We don’t know what they will propose. We only know what they have done in the past.”

Fernández has since softened his stance, saying on television in Argentina that Vaca Muerta’s development is key for the country, adding what many Peronist leaders have said throughout the years: it is preferable to use the resources as a cheap and abundant source of energy to develop local industries, than to export commodities.

Divided front

While Fernández still has to win the election, names are emerging of potential nominees for energy. One is Guillermo Nielsen, a moderate economist who was the national secretary of finance from 2002 to 2005.

Nielsen, who is respected in oil circles and was a speaker at a Vaca Muerta seminar closed by Macri in June, has proposed using incentives like tax breaks to develop Vaca Muerta in half of the 15 years that it took the US.

But he may not have it easy. Peronism straddles the left and the right, a perennial source of internal conflict and jockeying for power.

Fernández is a moderate, but on the left is Fernández de Kirchner and her son, Máximo Kirchner, a congressman, who both wield a lot of power and have energy advisers who have suggested putting local companies at the helm of developing Vaca Muerta, for example, or controlling corporate profits.

“There is going to be a clash between the pragmatic centrists of Peronism and the ideological left,” and this could slow the development of Vaca Muerta, said Federico Mac Dougall, a business professor at the University of Belgrano in Buenos Aires.