Could Argentinian Politics Beat the Vaca Muerta?
Argentina’s Vaca Muerta is one of the few places in the world outside of the United States developing unconventional oil and gas. Since the first test wells proved in 2011 that hydrocarbons are indeed laced throughout the formation, the play’s promise has grown beyond traditional drilling methods.
But the ability to lure oil and gas from the ground is one thing. Paying for the privilege is quite another.
There is no doubt that geologically, the Vaca Muerta can compete with the best plays in the United States. In the oil window alone, the Neuquén province wells can deliver 125 barrels of oil equivalent per foot of lateral length, said Horacio Cuenca, research director for Latin America at Wood Mackenzie.
Production from a mere 8 percent of the basin’s acreage is on target to increase by 43 percent this year, topping 77 thousand barrels of oil equivalent per day (boepd), and then doubling its 2016 figures by 2018 at 113 thousand boepd, according to a Wood MacKenzie development study on the Vaca Muerta in May. The region could hit its peak by 2031 between 0.7 and 1.25 million boepd, the analysts said.
“The Vaca Muerta can compete – in terms of the single well economics, the resource price and the productivity of the well – with the best wells in the U.S. From the sub-surface perspective, and even from the single well economics, it is competitive,” Cuenca said. “But there are a lot of other issues there that will determine how fast production grows, how much that grows over time, and those are very, very tricky to forecast.”
To be sure, foreign majors, including the likes of Exxon Mobil Corp. and Royal Dutch Shell plc, are banking on the Vaca. Total S.A., along with Argentine companies, YPF and Tecpetrol, have an extensive presence in the country. This year alone, between $6 billion and $8 billion in capital investment has been announced for exploration and production (E&P) in the formation. By 2018, that figure is expected to be close to $15 billion, and in 2019, up to $20 billion could go toward oil and gas development there, according to Argentine officials.
“I don’t see why more investment wouldn’t happen, but it will all be determined over time by political stability and regulatory stability,” Cuenca said. “I think that’s the key.”
Indeed, a critical election is scheduled in October – essentially a referendum on President Mauricio Macri and his party, which has been pivotal in establishing an Argentina that more inviting to foreigners.
“There is always a perception of risk in companies’ minds of what will happen when the current administration ends: Is there going to be a change in the business environment again? Policies that you’ve seen in previous years might come back and that’s probably what’s going to probably be the biggest challenge for a lot more investment to come through.”
To fully understand the situation in Argentina, you have to go back to the era before the economic crash of 2001, said Mark P. Jones, the Joseph D. Jamail Chair in Latin American Studies at Rice University. That was before the collapse of the Argentine economy, and the nation was essentially self-sufficient in oil and natural gas supply.
“But because of government intervention in the energy market, the implementation of price controls, as well as some rather dubious government maneuvering within the energy sector, investment plummeted, and as a consequence, the production of natural gas plummeted to the point where Argentina now imports approximately one-quarter of the natural gas it consumes,” Jones explained.
The people of Argentina were unable to pay the price for energy consumption, which had been based on a dollarized economy. So, Jones said, the government froze energy prices.
“The difficulty was that they kept them frozen so that over time as inflation evolved, the prices remained fixed. The gap between the actual cost of producing and developing energy and what consumers were paying became larger and larger,” Jones said. “There were times when Argentina was paying between $18 and $20 per Mmbtu for gas they imported via LNG, while they were paying the domestic producers of natural gas a little less than $3 per Mmbtu at the wellhead. That clearly reduced the incentive for many energy companies to invest.”
As such, Cuenca said, “The first step of the development of the Vaca Muerta will be to restore energy self-sufficiency or at least energy autonomy to Argentina, as well as allow Argentina to return to being a natural gas exporter.”
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