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Buenos Aires — Fracking activity in Argentina's Vaca Muerta shale play recovered in June from record lows in April and May, but re-imposed stay-at-home orders have put oil and gas production, demand and price recovery all at risk.

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The number of frac stages in the play, one of the world's biggest, rose to 196 in June from about 25 in May after falling to zero in April, according to data compiled by Houston-based services company NCS Multistage.

Shell and Chevron accounted for 148 and 48, respectively, of the frac stages, the data shows.

The recovery, while limited to two companies, comes after the government loosened an economic lockdown started March 20 to contain the spread of the novel coronavirus. This slashed oil demand to as low as 200,000 b/d, less than half the average, in mid-April, forcing producers to suspend wells as refiners cut run rates to less than 50% of capacity, and a plunge in global oil prices and demand cut export profits.

Oil production fell 9.2% year on year in April to 490,600 b/d, and gas output tumbled 11.3% to 116.7 million cu m/d, according to the latest data from the Energy Secretariat. It was the steepest drop since oil production began recovering from a two-decade slump that bottomed out at 479,000 b/d in 2017 to reach 519,255 b/d in August 2019.

Gas output peaked at 144.4 million cu m/d in August 2019, up from a 16-year low of 113.7 million cu m/d in 2014, the data show.

The number of frac stages is still far from the 430 in March and a record 712 in February 2019, NCS data show.

Uncertain outlook

There are risks that fracking activity could slow again. The government has extended the lockdown until July 17 and put Greater Buenos Aires, home to a third of the 45 million population and most of its industry, back under strict stay-at-home orders.

Oil production likely will continue to hurt more than gas output, given demand has fallen more steeply during the pandemic because of less road traffic and grounded air travel, said Daniel Kokogian, a director of Argentinian producer Compania General de Combustibles.

By comparison, gas demand has been steadier and should increase during winter, which runs from June to August, he added.

Pricing incentives

To help revive investment, the government has set a $45/b reference oil price, above the $30-40/b breakeven in Vaca Muerta projects already in development. And the government is now considering setting a $3.50/MMBtu fixed price for gas, in line with Vaca Muerta breakevens. The government has used such incentives in the past to encourage oil and gas investment.

Still, Dominique Marion, head of the Argentinian operations of France's Total, the country's second-biggest gas producer, said key during this period of low prices and demand is cutting costs.

"We have to lower our breakevens," he said July 1 during an Energy Forum videoconference. "We are focusing our investments on the most profitable projects to generate cash during the crisis."

There is a sense of urgency to rebuilding production in Vaca Muerta. If the government does not implement the $3.50/MMBtu price stimulus by August, Jose Luis Sureda, an oil industry veteran and former national secretary of hydrocarbon resources, warned a decline in production could push up gas imports.

Indeed, Marcelo Mindlin, president of Pampa Energia, the country's fifth-largest gas producer, said stable pricing is key for the development of Vaca Muerta, which holds more gas than oil.

"Vaca Muerta needs a long-term price path," he told Telam, the state newswire.

Horacio Turri, executive director of Pampa Energia, also warned of rising gas imports.

"If there is no change in pricing incentives, it is very likely that next year we will have a very large shortage," Turri said during the Energy Forum. "There is a short-term opportunity that must be resolved from a regulatory point of view in the next two months, and if that happens, it is very likely that we will have a lot of work and investment to do against the clock for us to reach the winter of next year" with enough supplies.

In a June 24 report, Wood Mackenzie warned Argentina's decision to freeze gas tariffs during the pandemic and through the end of 2020 could reduce gas supplies.

Some "40% of production is from steep-declining unconventional fields," Mauro Chavez, principal analyst for Latin American gas at Wood Mackenzie, said in a statement. "This indicates that supply shortfalls will be steep and swift."

He warned that Argentina may have to hire a second LNG regasification terminal as soon as next year, and that imports could surge to $3 billion in 2022 from $400 million in 2019.