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Highlights

Vaca Muerta investment seen declining

Breakeven prices for new developments running above $50/b

Government may struggle to provide fiscal incentives as sovereign teeters on debt default

Buenos Aires — A tumble in international oil prices Monday may lead oil companies in Argentina to consider sidelining investment plans in the Vaca Muerta shale play, leading to expectations of slower production growth or a decline, experts said.

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"It really depends on the duration of the price decline," said Gerardo Rabinovich, vice president of the Argentine Energy Institute, a think tank. "If oil prices don't recover in one or two months, this will lead companies to delay or call off investment projects in Vaca Muerta."

Rabinovich expects international oil majors like Chevron, ExxonMobil and Shell, now drilling in Vaca Muerta, Argentina's biggest shale play, to redirect investment to fields outside the country where crude can be produced at a lower costs. Vaca Muerta's breakeven price for the most part is between $45/b and $50/b, he said.

"If the price is below these levels, no investment decisions are going to be made until there are signs that prices are going to recover to more profitable levels," Rabinovich said. "This shows that Vaca Muerta is not a highly competitive play in the world. It needs higher prices to work."

Indeed, Jose Luis Sureda, an oil industry veteran and former national secretary of hydrocarbon resources in Argentina, said the options for low-cost production are limited in Argentina. He said there are no fields in Argentina that can be drilled for less than $30/b.

Sureda expects companies will suspend oil projects and renegotiate rates with services suppliers in Vaca Muerta, and possibly lay off workers.

The extent and depth of the impact on investment depends on whether the government wants to try to sustain production growth by propping up local crude prices, a measure it has taken in the past. This could come by lifting a freeze on diesel and gasoline prices in place since August that cut crude prices to as low as $40-$45/b from above $60/b previously.

While domestic oil prices recovered to $55/b in January and February, Monday's rout has pushed them below $40/b again, putting new projects in Vaca Muerta at risk.

On Friday, Daniel Gonzalez, CEO of state-backed YPF, the country's biggest oil producer and developer of Vaca Muerta, said that at less than $50/b, it is harder "to make a final investment decision on a brand-new shale development, where you have the facilities, you have the learning curve."

The breakeven level needed for "a brand-new development is much higher than the one that we are seeing in the $30s for the existing blocks," Gonzalez added.

LITTLE WIGGLE ROOM

The government of President Alberto Fernandez, which took power in December, has little room to provide incentives because it is trying to not default on more than $100 billion in debts and the economy is in its third year of recession, curbing tax revenue.

Federico MacDougall, a business professor at the University of Belgrano, said the government could subsidize Vaca Muerta if ICE Brent, the international reference price followed in Argentina, settles at $48/b, but not much lower. That would be only a $2/b difference with the $50/b price widely seen as the lowest level needed to ramp up production from the play by widening fracking activity, he said.

"If at $50/b companies said they couldn't develop Vaca Muerta, this is going to halt investment," MacDougall said.

Adding to the problem, companies are still uncertain about the Fernandez administration's proposals for how to develop Vaca Muerta.

"The government has not come out with a concrete plan for the oil sector," Roberto Carnicer, head of Hub Energia, a consultancy. "There is a total lack of investor confidence."

While oil price fluctuations are common, this time Argentina has been caught "on poor footing" because of its economic and financial problems, including inflation of more than 50%, he said.

SLOWER PRODUCTION GROWTH, OR A DECLINE

Oil producers won't be able to offset the setbacks in Vaca Muerta by shifting their investment to conventional basins because those oil reserves are naturally declining at about 3% per year, Rabinovich said.

Before this, oil companies had been betting that Vaca Muerta would offset the declines in conventional basins, some of which have been in production for more than 100 years. The play, which came into production in 2012-13, is now producing more than 100,000 b/d of oil, fueling a forecast from the Energy Secretariat that it will lead a doubling of Argentina's total output to 1.1 million b/d of oil by 2030, allowing the country to ramp up exports to 500,000 b/d in 2030 from 80,000 b/d in 2019.

These targets could take longer to reach if prices remain low.

"If the international price of oil stays low for much time, investment plans won't revive and production will decline," Rabinovich said. "There is probably going to be a decline in production and reserves in the medium term."