Only two years ago analysts were hailing Argentina’s emerging shale oil boom, which many believed would be the next major petroleum frontier in Latin America. The vast Vaca Muerta, or Dead Cow in English, shale formation, which skirts Argentina’s semi-arid Patagonian steppe, is compared to the smaller prolific Permian shale. The EIA estimates that the formation has technically recoverable resources of 16 billion barrels of oil and 308 trillion cubic feet of natural gas. The Vaca Muerta is an enormous resource, ranked as the world’s second-largest gas shale deposit. If executed appropriately, its tremendous hydrocarbon wealth will address many of Argentina’s deep-seated economic ills.  By 2011, the exploitation of the Vaca Muerta had become a top priority for Argentina’s fiscally challenged government. During 2012 President Cristina Fernandez’s administration seized a majority stake of YPF, Argentina’s largest oil producer, from Spanish integrated energy major Repsol. The rationale for the nationalization was that Repsol was failing to adequately exploit the Vaca Muerta’s substantial hydrocarbon wealth, which could be used by Buenos Aires to head-off an emerging energy deficit and financial crisis. This event alarmed the international community, sparked reprisals from Spain and for many international energy companies confirmed Argentina’s pariah status.

Consequently, foreign investment inflows plunged, accelerating the deterioration of oil and natural gas production which was crucial to heading-off another economic crisis. These events indicated that Argentina could possibly never unlock the full potential of the vast Vaca Muerta shale because it wouldn’t receive from foreign petroleum companies the capital and technology required. As energy imports soared pressure grew on Argentina’s already fragile economy, forcing Buenos Aires to contemplate other measures to bolster urgently needed fiscal revenues and Argentina’s rapidly declining hydrocarbon output. By 2017, oil production had fallen to a multi-decade low of 479,633 barrels daily.

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Pro-business Mauricio Macri’s 2015 ascension to the presidency triggered hope among international financial markets that Argentina had finally come-in from the economic cold. Macri embarked upon a steady process of implementing market friendly reforms which he hoped would bolster confidence in Argentina and foreign investment. Those measures, coupled with the Vaca Muerta’s considerable hydrocarbon potential, attracted the attention of foreign energy majors including ExxonMobil, Chevron and Royal Dutch Shell as well as a raft of smaller oil explorers and producers. That started the transfer of vital technology and capital required to exploit Argentina’s considerable unconventional petroleum resources.

As those measures, including the removal of energy subsidies and relaxation of capital controls, gained momentum there was an enormous influx of investment into the Vaca Muerta. By 2018, foreign investment had soared to $11.9 billion, the largest amount in six-years. The Vaca Muerta is estimated to have received around $4 billion of investment during 2018, underscoring the emergence of Argentina’s growing unconventional oil boom. 

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By the end of 2018, the Latin American country’s vitally important oil reserves had soared a remarkable 24% year over year to 3.4 billion barrels, driven chiefly by significant unconventional hydrocarbon discoveries. That sees Argentina ranked fourth by petroleum reserves in South America behind Venezuela, Brazil and Ecuador. For 2019, total hydrocarbon production, which was 38% weighted to crude, reached almost 1.4 million barrels daily or 4.6% greater than a year earlier and 9% higher than 2017.

Those developments point to the Vaca Muerta’s considerable potential, but Argentina’s dream of using it as a silver bullet to solve its troubled economy and energy woes is fading fast. Even before the March 2020 oil price crash, which has caused petroleum investment to sink across Latin America, Argentina’s nascent shale boom appeared in trouble. Another economic crisis, driven by rapidly building debt, spiraling depreciation of the peso and sharp contraction of GDP, brought Macri’s reformist pro-business agenda to an abrupt halt.

Consequently, crucial foreign investment plunged to $6.2 billion during 2019, almost 50% lower than a year earlier. The fears of energy companies were amplified by Peronist Alberto Fernandez’s October 2019 presidential victory which saw former President Cristina Fernandez, the architect of YPF’s nationalization, appointed Vice President. Alarmed energy investors moved to the sidelines despite Fernandez’s reassurances to the petroleum industry and formulation of policies to protect the industry.

These events along with the March 2020 oil price crash saw energy majors around the globe slash spending, including the key investors in the Vaca Muerta. Chevron announced 2020 capital spending cuts of $2 billion impacting on the higher cost operations. Integrated global oil majors Shell and Exxon also wound down investment in Argentina. In March 2020, Argentina’s state controlled YPF declared it would reduce 2020 spending by 20% compared to a year earlier to $2.8 billion. The outbreak of the COVID-19 pandemic and the lockdown established by Buenos Aires has magnified the fallout causing activity to decline further. 

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In response to the growing crisis, YPF in April shuttered half of the oil production at Argentina’s second largest oilfield, Loma Campana, located in the Vaca Muerta and 50%-owned by Chevron. According to Baker Hughes data, there were only six active rigs in Argentina at the end of June 2020, less than an 11th of the 68 operating at the end of the same period last year, indicating that drilling activity has collapsed. 

There has been a sharp impact on Argentina’s petroleum production. Daily average oil and natural gas output for the first six months of 2020 was just under 1.3 million barrels daily or 6% lower than the full-year average for 2019. In a double whammy for Buenos Aires state controlled YPF, Argentina’s largest oil producer, is bearing the brunt of the crisis. For June 2020, YPF’s oil and natural gas output plummeted by a worrying 16% year over year to 426,527 barrels of oil equivalent daily, creating further financial pressure for the company.

These developments are profoundly impacting Argentina’s economy, weighing heavily on government finances and a fiscal system already reeling from extreme debt, rampant double-digit inflation and a heavily devalued currency. To prevent petroleum production from deteriorating any further Fernandez’s administration implemented steps to prop-up Argentina’s oil industry. These include setting a minimum domestic Brent sale price of $45 per barrel and reducing exports taxes on oil as well as refined products to zero. The catch for oil companies operating in Argentina is that they must maintain the tempo of activities, including production, at 2019 levels.

Those measures are not having the desired effect. Despite June 2020 oil production growing 2.5% compared to a month prior, natural gas declined 2%. High breakeven costs of $45 to $50 per barrel, sharply weaker oil prices, coronavirus restrictions and a lack of export demand are making oil companies take a wait and see approach which is preventing investment. For as long as those factors exist, Argentina’s petroleum output will be significantly weaker sharply impacting exports and fiscal revenues. It is for these reasons that Buenos Aires’ announcement it had reached an agreement with foreign creditors to restructure its sovereign debt, to avoid another hard default, couldn’t have come at a better juncture. This gives Fernandez’s administration desperately needed breathing space as it tries to resolve the significant headwinds afflicting Argentina’s oil industry.

By Matthew Smith for Oilprice.com 

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