Fuel for Thought: Argentina puts fresh focus on developing Vaca Muerta, but concerns abound

After a bout of financial turmoil in Argentina last month, the government has restored calm in the markets and turned its attention once again to the development of Vaca Muerta, a shale play with global oil and natural gas export potential. Is it time to step up investment in the play in northern Patagonia?

Chevron, ExxonMobil, Shell and other international companies have reported that Vaca Muerta is as good or even better than Permian Basin, the most productive shale play in the US.

The challenge, of course, is not below the ground, but above it.

Argentina has been in and out of economic crises for decades, defaulting three times on its debts over the past two. The political party now in power – and from 2003 to 2015 – is trying to shore up public finances, rebuild the economy from an expected 12% contraction this year, and rein in 37%-plus inflation.

But some of its measures to do this, such as capital and price controls, have deterred investment in Vaca Muerta, leading to decline in overall oil and gas output.

While the government, which took office nearly a year ago, has restructured $66 billion in international bonds to pull out of the latest default, a lack of confidence in its ability to end a financial crisis, now in its third year, sparked a run on the peso in October. This drove international currency reserves to dangerous lows, making it harder to lift the controls, in particular on moving money in and out of the country, even for companies to pay dollar debts.

Jorge Colina, an economist at the Argentine Institute for Social Development in Buenos Aires, said companies want to invest in Vaca Muerta for its wealth of resources, but they are holding out because the capital controls prevent them from sending profits out of the country, such as to fund other projects in other parts of the world.

The result: most companies have been waiting for the past year or so for the conditions to improve and, more recently, for global oil demand and prices to recover from a plunge at the start of the COVID-19 pandemic.

Sean Rooney, head of Shell in Argentina, said in an American Chamber of Commerce in Argentina webinar last month that Vaca Muerta "is not developing in line with its potential" largely because frequent changes in regulations and controls on energy prices, including caps on diesel and gasoline prices, are hampering long-term investment plans.

Indeed, oil production fell 4.5% to an average of 482,015 b/d in the first nine months of 2020 from 504,648 b/d a year earlier, while gas dropped 7.3% to 126.1 million cu m/d from 136 million over the same period, according to data from the Energy Secretariat.

Fear of shortages

The decline has raised the risk that natural gas shortages will boost imports of gas as well as of diesel and fuel oil for power plants in 2021, which would reduce foreign currency reserves even further after having already tumbled 48% since April 2019.

"Argentina cannot have another energy deficit because it doesn't have the dollars to import," Sergio Berensztein, a political analyst, said at the El Cronista Energy Summit last month.

The government appears to understand this. In May, it removed the 8% tax on oil exports, encouraging new drilling and an increase in exports, and this month it launched a four-year incentives program for gas with prices that are expected to run above breakevens. The goal is to revive output in order to avert shortages, reduce imports and eventually increase exports.

Santiago Tanoira, vice president of gas and energy at YPF, the country's state-backed energy company, said at the Nov. 18 Ambito Debate energy seminar that the incentives are a step in the right direction.

"What is very probable is that companies are going to start drilling for gas again" after more than a year of little activity, he said. "I think it is going to be positive."

Capital controls

Even so, more must be done, oil executives say.

At online conferences and seminars, they've been calling for less intervention in the business. In particular, they want the controls on moving money in and out of Argentina and the caps on diesel and gasoline prices to be lifted so that they can step up drilling to be in a position to take advantage of an eventual recovery in local global energy demand after the pandemic.

"We need to use the international price of oil, which is what we know how to deal with," a senior executive at a international producer said on the condition of not being named. "When politics is involved in pricing, it is hard to make plans based on what the price could be in the future."

He said that a policy of promoting oil exports, such as with existing zero percent export tax, would also drive investment growth as long as it is kept in place over the long term.

The potential is huge. Vaca Muerta can export three times more than the 500,000 b/d that the country consumes, he said.

That potential is even greater for gas as the energy for the shift from fossil-based to zero-carbon energy.

Vaca Muerta's huge resources would be enough to attract companies looking for new spots for growth if it weren't for the financial volatility and interventionism, said Roberto Carnicer, a veteran energy analyst at Hub Energía, a consultancy.

"We have incredible potential to go out and compete in the world" with oil and gas, he said. "But we tend to fail when it comes to developing our resources."