Vaca Muerta Development Teeters on Virus

Vaca Muerta Development Teeters on Virus
The rush to develop Argentina's giant Vaca Muerta shale field was already wobbling when the Covid-19 pandemic struck.

The rush to develop Argentina´s giant Vaca Muerta shale field was already teetering when the Covid-19 pandemic struck in March but tight measures to control the virus, gutting demand, as well as a collapse in oil prices may have finally pushed it over.

Oil companies began slowing investment last year after the government reinstated a freeze on oil and fuel prices to protect Argentineans from galloping inflation.

President Alberto Fernandez, who took office in December, had been looking to heavy investment in the oil industry to help lift the country of its economic torpor, especially in the giant Vaca Muerta field.

Geologists have compared the field with the U.S. Permian Basin and estimate that it could one day produce one million barrels of oil per day.

But amidst uncertainty over the government’s policies for the sector and ability to repay its record $57 billion bailout from the International Monetary Fund, spending has tumbled.

The number of rigs operating in Neuquén province, home to the largest part of the giant formation, fell from 43 in August to 29 by the end of last year.

Despite the slowdown in investment, however, production has continued to rise. In February, driven by rising output from Vaca Muerta, oil production in Neuquén hit a fourteen-year high of almost 167,000 barrels a day.

But with the country under a strict nationwide lockdown, in force since March 20 and recently extended in major cities until April 26, the oil industry is facing a precipitous collapse in demand.

In a video published late last month, the CEO of state-owned YPF, the country’s largest oil producer and refiner, Daniel Gonzalez, warned that gasoline sales had tumbled as much as 70% while sales of diesel were down 50%.

As a result, the company’s refineries are operating at between 30% and 40% of normal levels. With storage capacity quickly running out, companies are now being forced to cut production as much for logistical as well as economic reasons.

Last week YPF announced it had halved production at its Loma Campana block, its flagship operation on Vaca Muerta, while Vista Oil & Gas, the field’s second largest producer, has closed all eight wells at its Bajada del Palo Oeste block.

Other operators including Royal Dutch Shell, Total and Pan American Energy (owned by BP) are taking similar measures.

The slump in production and investment will have a devastating impact on employment in a sector which last year ministers had touted would generate 500,000 new jobs.

Instead the industry has furloughed around 20,000 workers in recent weeks. Approximately three-quarters were employed by small businesses that cannot afford to keep paying them.

San Antonio Internacional Oil and Gas, Argentina’s largest oil services company which last October helped YPF drill the country’s first multilateral well, is trying to renegotiate debts of around $105 million owed to local banks. Around 3,700 jobs are at stake.

Others, including the local arms of Halliburton and Schlumberger, are launching early retirement schemes for their Argentinean staff.

In response to the worsening, producers and labor unions have called for a minimum price (of between $40 and $50 per barrel) to keep the industry going through the slump. But with the government already struggling to pay its lenders and welfare spending surging, that looks difficult.

This week’s deal to cut global oil production by almost 10% should provide some relief. With prices heading back above $30 per barrel, YPF and other producers could begin to export some crude oil if the government accedes the necessary export licenses, energy lawyer Carlos Alfaro told Rigzone.

However, current international oil prices would keep part of the oil industry on its feet, but enough not to realize Vaca Muerta’s massive potential.

“As far as investment is concerned, I’d say both 2020 and 2021 have now been written off,” Gerardo Rabinovich, vice-president of the General Mosconi Argentinean Energy Institute, stated.

“We know the resource exists and it is of high quality, but we don’t have the prices,” he added.

Tom Azzopardi is a freelance journalist based in Santiago, Chile. He has written for a range of publications, including AP, Bloomberg Law, Daily Mail, The Economist, Mining Journal, The Northern Miner, and The Times.


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teri green  |  May 06, 2020
Thanks Tom for the article. What are your thoughts that once the pandemic is over that demand will go up? Thanks, Teri, Atlas Biomechanics

Tom Azzopardi
Rigzone Contributor