US ELECTIONS: Could a policy shift on US oil push investment to Argentina?

When US Democratic nominee Joe Biden suggested that he could stop issuing drilling permits for federal lands and waters if he wins the presidential election, concerns rose of a decline in the country's oil production, and where else producers could look for growth.

Argentina?

On paper, it makes sense. Argentina has Vaca Muerta, a huge shale play in northern Patagonia that was the first to come into production outside North America. A few other plays, largely unexplored, could be boons as well.

Argentina, too, has been producing oil for more than 100 years, so it has the culture, workers and service companies in place, plus the infrastructure. Majors like Chevron, ExxonMobil and Shell, plus a handful of independents like Mexico's Vista Oil & Gas, are already developing Vaca Muerta, and some are boasting that it is as good as the Permian Basin - maybe better.

"The resource is super rich," Miguel Galuccio, Vista's chairman and CEO, has said.

Galuccio was one of the first to lead the full-scale development of the play as CEO of YPF, Argentina's state-backed energy company and biggest oil and gas producer. Now at Vista, he has said that Vaca Muerta could lure companies for new sweet spots as they run out in the US.

Oil export potential

Another draw is the opportunity for near-term oil production and export growth. Projects are under development or planned to add 360,000 b/d of pipeline capacity to take more crude from Vaca Muerta — it now produces 120,000 b/d — to export terminals on the Atlantic in Argentina and the Pacific in Chile, an outlet for production growth given that Argentina already supplies its own 500,000 b/d of average demand.

Vaca Muerta's light crude exports have been growing this year, as producers take advantage of a decline in local demand during a lockdown for the COVID-19 pandemic to sell mostly to the US, with some to Brazil and Chile. The results? Buyers are asking for more, and this is driving up the price, Sean Rooney, president of Shell Argentina, has said.

A suspension in the 8% export tax has helped to drive the exports as well, a sign of how the government can spur Vaca Muerta's growth with the right policies, analysts and executives have said.

But will it?

"If they can create a healthy business environment, foreign investors will come," said Andrés Abadia, senior international economist at Pantheon Macroeconomics in Newcastle upon Tyne, UK. "But if they don't do that, it will be impossible to gain their trust."

Argentina's president, Alberto Fernandez, has been struggling to pull the country out of a financial crisis now in its third year, which pushed the country into its ninth debt default earlier this year.

While it has successfully restructured $66 billion in foreign debts since, the economy is suffering perhaps its worst contraction on record, at more than 12%, according to most estimates. Inflation is above 40%. Capital and price controls are in place, the corporate tax burden is among the highest in the world, and international reserves have fallen so much that the central bank has tightened already strict access to dollars — individuals can only buy $200 per month — so that companies have been asked to delay dollar debt payments.

The left-of-center government has said it it is preparing legislation to promote shale oil investment, such as with tax breaks and benefits, but this has been delayed by the economic crisis.

Carlos Germano, a political analyst in Buenos Aires, said it is becoming harder to do business in Argentina.

"There is no predictability because the rules change all the time," he said. "There are more doubts than certainties."

Majors to stick it out

The exceptions could be the majors, which tend to have the free cash flow to continue investing in volatile markets

When asked if one major would, an executive there, who asked not to be named, said a project is planned for full-scale development in Vaca Muerta early next year. If the tests show that the block is viable and Brent, the international oil reference price followed in Argentina, is at a profitable level, it will happen.

"Vaca Muerta should work at $45/b," the executive said.

With Brent now at less than that, this shifts attention to improving efficiency and productivity to reduce costs, an effort that "has no end in shale," the executive said.

Most companies have set a breakeven target of less than $40/b.

While the majors can keep investing, albeit at perhaps a slower pace, the independents that need to raise capital to operate in such a rocky market will think twice about going into debt, said Jose Luis Sureda, an oil industry veteran and former national secretary of hydrocarbon resources.

A help could come if the government extends the 0% export tax and takes other steps to improve business conditions, such as by allowing exports to be made under long-term contracts, he said. That would widen sales beyond what is now a fully supplied 500,000 b/d market, he added.

"We have to have the world as our market in order to develop Vaca Muerta," he said.

There is a sense of urgency to make this happen. Alejandro Monteiro, the energy minister of Neuquen, home to 60% of Vaca Muerta, said he expects global competition for oil to stiffen in the post-pandemic oil market, meaning that Argentina must create conditions to reduce operating costs.

"We need to prepare ourselves for this new reality," he said.