ARGENTINA - Can a Dead Cow save the Country ?

Once more the Vaca Muerta shale oil and gas deposits in Patagonia are being touted as the solution to Argentina’s recurring economic troubles.

Vaca Muerta

There are reasons to be optimistic about Vaca Muerta. It is the second largest shale gas field in the world, and the fourth largest shale oil deposit. Over the last eight years production has surged from zero to 100,000 barrels per day (bpd) of oil and to 35m cubic metres per day (cmd) of gas. Only about 10% of the field has been developed, so there is a lot more to come. Thanks to Vaca Muerta, Argentina’s total oil production has gone from a 20-year low of 479,000 bpd in 2017 to 514,000 bpd last year. There has been a similar dramatic turnaround in gas production. Argentina is now once more able to cover its own energy needs and to consider exporting a surplus.
Developing Vaca Muerta at an accelerated pace could be key to plans by President Alberto Fernández and Guillermo Nielsen, the newly appointed head of the state-run oil company YPF, to steer a way out of the foreign debt crisis and get the country onto a more sustainable economic growth path. Mariano Gargiulo, a senior manager at oil industry company Baker Hughes, says that with enough investment Vaca Muerta’s production could increase five-fold over the next five years, taking exports from near-zero in 2019 to US$20bn by 2024, the last year of the current government’s term in office.
To get there the Fernández administration will have to overcome some big challenges. They relate to pricing, investment, labour, infrastructure, and politics. The shale hydrocarbon business requires very significant levels of investment. Typically, shale wells see a 70% decline in production after two years, so the business requires sustained drilling activity to keep production rising. For that to happen international oil companies need to make profits and have confidence that investment and pricing rules will be favourable and relatively constant. Under a succession of Peronist nationalist governments, Argentina has a long history of capping domestic energy prices in a way that has squeezed oil company margins. Even the centre-right pro-market government of Mauricio Macri (2015-2019) froze petrol prices last year amidst the country’s inflation and currency crisis. The new government has introduced a six-month price freeze and its future pricing policy is not yet clear.
The sheer size of the investment needed is daunting. One estimate is that for Vaca Muerta to reach its full potential, US$10bn-US$15bn a year needs to be spent on ‘fracking’, US$2bn is needed for pipelines, and US$5bn to build a liquefaction export terminal for natural gas/LNG. Companies already active in Vaca Muerta, such as Chevron, Exxon, Shell, Tecpetrol, and Total Austral, may require further reassurances over future hydrocarbons policy before green-lighting new projects. Labour costs and industrial relations are also an issue. Production costs have been falling, to an estimated US$56 a barrel in 2018 (a calculation which includes allowance for a 10% return on investment), but this is still higher than the break-even point of US$45 a barrel for US shale.
The industry has powerful unions. Lay-offs and efforts to cut labour costs are politically sensitive. Geopolitics also looms large. Mapuche indigenous communities say their rights to ancestral lands in Patagonia have been ignored. Bloomberg news agency says US officials, angry at Argentina’s decision to grant asylum to Bolivia’s former president, Evo Morales (2006-2019), have threatened to withdraw the Donald Trump administration’s cooperation for Vaca Muerta’s development. Argentine environmental campaigners have opposed a big increase in fracking. A sign of potential domestic political volatility came in December 2019 when mass protests against the use of cyanide and sulphuric acid in mining operations broke out in the province of Mendoza.

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