Exploration and production of Argentina's vast shale gas resources has been tepid, amid an unattractive business climate and populist price controls, but Ed Morse, global head of commodities research at Citigroup, says he sees promise for the South American country to develop its massive reserves.
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Despite a recent history of resource nationalism, Argentina has such domestic demand for gas that its government may have no choice but to incentivize foreign companies to invest on better terms, Morse said Wednesday.
"I'm semi-optimistic," he said at a forum on Latin American shale gas hosted by the Inter-American Dialogue in Washington. "There is such an urgent need for the gas at home that it may just be that the spoils can be shared enough to make it attractive."
Argentina contains some 2,732 Tcf of potential shale gas, with about 774 Tcf technically recoverable, ranking the country third in the world in shale gas reserves behind the US and China.
State-owned energy firm YPF on August 29 signed its first shale partnership with Chevron to invest $1.5 billion in drilling more than 100 wells on a 5,000-acre tract of Vaca Muerta, Argentina's largest shale play. They hope to boost output to 50,000 b/d of crude and 3 million cu m/d of associated gas by 2017.
But even though Argentina has a developed domestic gas market and export facilities, investment has been hampered by populist government policies and resource nationalism, said David Mares, a professor at the University of California-San Diego and a fellow at the James A. Baker III Institute for Public Policy.
In a paper he wrote for the Inter-American Dialogue, he called Argentina's current government policy "erratic at best," noting that the government had offered oil and mining companies tax breaks amounting to $461 million in 2011 but withdrew them in early 2012.
In addition, Argentina has imposed price caps on the domestic gas market, prompting companies to cut back on E&P and forcing the country to become a net importer of gas in 2008. Argentina imported some 100 Bcf of LNG in 2011, Mares estimated.
"In order to move forward, operations must be profitable for foreign investors," Mares said at the forum. "You have to create an environment in which companies are willing to come in and invest their technology in your place. Some of the specifics of shale make it more likely that can happen in a risky political environment, because the returns are fairly quick on a shale gas well, but there are still a number of issues there."
He compared Argentina's gas sector to Venezuela's oil sector, which has seen crude production plummet due to nationalistic policies.
"Venezuela has the largest [proven] oil reserves in the world, but production is falling," Mares said. "Companies haven't all left, but they're investing just enough not to be booted out until the current set of policies looks more credible. These markets need to be understood not just in terms of what the potential is, but what the policies are for developing those markets."
But Morse said he sees some encouraging signs for Argentina. He said the "pendulum has shifted on resource nationalism" to be more favorable to private investment. For example, the country in recent years has cut its energy subsidies and in August 2012 raised well-head prices by 300%.
The government has announced a plan to raise well-head prices up to $7.50/MMBtu, which Morse said could be enough to attract some smaller, independent E&P companies, particularly those based in countries not subject to stringent transparency and disclosure rules.
"I think there are enough companies and enough money in the world that people will be attracted to a $7.50/MMBtu price," he said. "We're seeing the allure of the resource base, and there's nothing like that to attract the wildcatting mentality."
--Herman Wang, email@example.com
--Edited by Derek Sands, firstname.lastname@example.org