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Argentina's YPF says oil expansion hinges on fuel demand, price recovery

Highlights

Sovereign debt restructuring should improve financing

But pandemic has slashed diesel and gasoline demand

Pump prices are running below what's needed for upstream investment

Buenos Aires — Argentina's deal to restructure $66 billion in debts with private creditors will be key for reviving investment in oil and natural gas production, including in the giant Vaca Muerta shale play, but a recovery in diesel and gasoline demand and prices is as important, Guillermo Nielsen, chairman of state-backed energy company YPF said August 5.

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The debt deal, reached Aug. 4 after more than three months of tense negotiations, will open the door for more financing for oil projects, he said on Radio 10 in Buenos Aires.

"Yesterday was a key step for the country's economic recovery," Nielsen said. "Large companies can return to issuing debt on Wall Street."

Argentina fell into a financial and economic crisis in 2018 that has since worsened, leading the government to begin delaying debt payments last year and then default on bonds this year. This has raised concerns that, without a deal with the private creditors, oil companies would not be able to get the funding they need to boost output. Most of the projects to grow production are capital intensive, such as fracking in Vaca Muerta, one of the world's biggest shale plays, and squeezing more out of maturing conventional reserves with tertiary recovery techniques like polymer well injection.

"The Argentinian financial system is very small," Nielsen said. "All of the large companies need to fund themselves in volumes that are beyond what they can get in the Argentinian market, and so they have to go to Wall Street."

Indeed, YPF and BP-backed Pan American Energy, the country's two largest oil producers, have raised funds on the local market, but with repayment terms of less than two years, which is not considered enough time for financing large projects like pilots or development projects in Vaca Muerta.

Low oil demand limits cash flow

The next challenges for YPF to be able to ramp up its investment in oil production are for Argentina to emerge from a more-than-four-month-old lockdown for coronavirus pandemic and for the government to end a freeze on diesel and gasoline prices in place since August 2019.

YPF, the country's biggest oil refiner, finances much of its investment out of cash flow, which the lockdown and the price freeze have reduced. The lockdown, which began March 20 and has been extended to Aug. 16, caused oil demand to fall by more than half to as low as 200,000 b/d in April, according to most estimates. While it has since recovered as a loosening of the quarantine boosts road traffic — crude runs have grown in May and June — YPF's oil production has nevertheless taken a hit.

The company's oil production fell 6.4% to 216,752 b/d in June from 231,660 b/d the same month a year ago, which was sharper than a 5.2% drop in the country's overall crude production to 472,118 b/d from 498,043 b/d over the same period, according to the latest data from the Energy Secretariat.

"We must avoid what happened in previous years," Nielsen said. "If we cannot invest, then we end up importing oil and gas."

He said diesel and gasoline prices are "significantly" lower than what they should be, without providing specifics.

The average price of 95 RON gasoline has been at 79 cents/liter since April, one-third below the global average of $1.19/liter over that period, according to GlobalPetrolPrices.com. Over the same period, diesel prices have been 72 cents/liter, compared with a global average of $1.08/liter, data showed.

Nielsen said the oil sector has been in talks with the government on how and when to end the price freeze, but no decision has yet been made.

"The energy sector needs values to invest and continue producing," he said. "There is something worse than expensive gasoline, which is that there is no gasoline. Investments are needed every year to continue supplying the oil and gas market, and that has certain requirements."