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Argentina delays Vaca Muerta gas pipeline project due to financial crisis

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Financial crisis has made borrowing rates 'unreasonable'

At least four groups are eyeing the project

More pipeline capacity is needed to further develop Vaca Muerta gas

Mar del Plata, Argentina — Argentina's Energy Secretariat extended the deadline for bidding for a $800 million project to build a pipeline for moving natural gas out of Vaca Muerta, a key for increasing output and exports from the country's biggest shale play.

The deadline has been extended to March 31, 2020, from November 4, the secretariat said in a statement late Tuesday.

This is the second delay in the project since it was announced earlier this year. The two-stage project calls for investing $2 billion to build a 1,000-km line for transporting gas from Vaca Muerta, in the southwestern Neuquen Basin, to near Buenos Aires, where more than a third of the 44 million population lives and much of the power and industrial capacity is installed.

The first stage, at $800 million, is to build about 15 million cu m/d of capacity out of the total of 40 million cu m/d, helping to reduce liquefied gas imports and those of diesel and fuel oil for power generation.

The delay is for two reasons, Carlos Casares, the deputy secretary of hydrocarbons and fuels, told S&P Global Platts late Tuesday on the sidelines of the Reserves Production and Development Congress in Mar del Plata, Argentina.

The first is that the construction of an additional section of the pipeline was added to the project, meaning that the bidders needed more time to prepare, he said.

Argentina's two big pipeline operators, Transportadora de Gas del Sur (TGS) and Transportadora de Gas del Norte (TGN), had been planning to build that section, but the country's financial crisis, now in its second year, has made it harder to raise financing. Local borrowing rates were running above 60% in pesos and more than 10% in dollars, reducing potential returns on any investment.

On top of this, a new, left-leaning government will take power December 10, raising concerns about how any potential changes in energy policy and pricing could affect investments in projects. Incoming President Alberto Fernandez has not said much about what he plans to do, other than that he is in favor of developing Vaca Muerta -- and also concerned about alleviating the hardship of the more than 35% of people living below the poverty line and others struggling as the inflation rate tops 50%.

Casares said these political concerns didn't weigh directly on the decision to extend the bidding deadline for the pipeline project, but he said two potential bidders -- China Gezhouba Group Company and China Petroleum Pipeline Engineering -- expressed concerns about the financial crisis.

"There is no credit available at reasonable interest rates for investing in Argentina," Casares said, citing the companies.

The other two potential bidders are TGS and Tecpetrol, the biggest gas producer in Vaca Muerta and part of Techint Group, a leading global maker of steel pipes.

GAS GLUT

The new line is needed to deal with bottlenecks that started hitting this year, as surging production from Vaca Muerta maxes out pipeline capacity. The country is producing about 140 million cu m/d, in line with average domestic demand that runs from 100 million cu m/d in the summer months to peak of 180 million cu m/d in winter.

This means that to expand production from Vaca Muerta not only is more pipeline capacity needed, but more outlets for the product, Daniel Gerold, head of G&G Energy Consultants, said in a speech at the conference.

There is room to increase production to compensate for dwindling conventional gas production as reserves mature, but the big growth will come from exporting.

"With a reasonable price of gas and regulations to favor investment, Argentina has the possibility of having more gas than it demands," he said.

The secretariat has forecast that the country's overall gas output could double to 260 million cu m/d in 2023 from 2018, taking exports to more than 80 million cu m/d in 2023 and growing from there as the country builds liquefaction capacity. YPF, the state-backed energy company, started shipping its first LNG from a floating terminal this year, and plans to export the equivalent of 2.5 million cu m/d.

But without the pipeline and export capacity, Gerold warned that producers were going to have to hold off on projects to increase gas production, slowing potential export growth as producers shifted from gas to oil, which has ample capacity for increasing production and exports.

"The market is rapidly shifting to oil," he said.

-- Charles Newbery, newsdesk@spglobal.com

-- Edited by Pankti Mehta, newsdesk@spglobal.com