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Can Argentina Replicate The U.S. Shale Boom?

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Via Oilprice.com

Drillers in Argentina have sought for years to replicate the success of the U.S. shale boom in its huge oil and gas deposits in the Vaca Muerta shale play.

The reality is, up until now, success has come in fits and starts, not only because of the fracking challenges and insufficient infrastructure to export oil and gas from Vaca Muerta to international markets, but also because of government policies and the on-and-off economic crisis in the South American nation.

Now, with a new Argentine president swearing in this week, exploration and production at the Vaca Muerta formation may be revitalized again and, according to the incoming president’s draft plans for incentivizing development, the shale play could become an important stream of commodity export revenues that could help heal Argentina’s finances.

Vaca Muerta, Spanish for ‘dead cow’, has been dubbed the ‘Argentinian Permian’, although its geologic properties have been compared more appropriately to the Eagle Ford.

But so far, higher costs, regulatory uncertainty, and insufficient infrastructure have hampered a U.S.-style shale revolution in Argentina.

First, investors and drillers were spooked by the interventionist energy policies of former president Cristina Fernandez de Kirchner, who ruled Argentina for nearly a decade until 2015.

Then conservative Mauricio Macri tried to revitalize Vaca Muerta, but Argentina’s economic crisis over the past two years forced his government to impose capital controls. Earlier this year, Argentina froze oil and fuel prices for 90 days, giving Big Oil a reason to reduce drilling activity in the Vaca Muerta formation in the second half of 2019. Related: Why Venezuela’s Production Rebound Is So Significant For Oil Markets

There have been signs of success in the shale play, which has been one of the few bright spots in shale gas production outside the United States, but it hasn’t come even close to replicating the U.S. shale revolution.

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Developers are turning their attention to exporting natural gas and to tapping more oil in the Vaca Muerta formation. The first oil and natural gas exports this year signaled that the years of development and the billions of dollars may finally start to pay off and make Argentina a net oil and gas exporter again.

Argentina could become a major LNG supplier to Asian markets because Argentina’s peak LNG potential in the southern hemisphere’s summer coincides with strong demand in Asia in the northern hemisphere’s winter, Wood Mackenzie said earlier this year.

Argentina has the potential, but its new President, left-leaning Peronist politician Alberto Fernandez, who is swearing into office on December 10, needs to lay the foundations for attracting more investment and drilling into Argentina’s prime shale play. Fernandez’s Vice President will be the former president Cristina Fernandez de Kirchner. This hasn’t been interpreted as a good sign from the industry because of Kirchner’s past interventionist policies in the energy sector.

But this time around, Alberto Fernandez is calling the shots. And according to the picks he has made for energy secretary and for the head of state-controlled oil and gas group YPF, and to a draft plan he is said to be preparing, the oil industry may have a reason to be optimistic about the future of Vaca Muerta and profits from the shale play.

Fernandez and team are discussing a kind of ‘Vaca Muerta bill’ to protect investments in the shale play from capital controls and price freezes, and to introduce significant tax benefits for developers, according to local media. Fernandez has picked Guillermo Nielsen to lead YPF and Sergio Lanziani to lead the energy ministry, which was downgraded to secretariat under Macri. Related: Oil Prices Fall On Bearish EIA Data

Nielsen was one of the first people on Fernandez’s economic team who stressed the importance of Vaca Muerta and called for placing the shale play on equal fiscal terms with the U.S. shale plays.

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“We seek to put Vaca Muerta on an equal footing with the Permian and Marcellus,” Nielsen has said, according to local media.

The current US$5 billion-US$6 billion total annual investment in Vaca Muerta needs to rise to as much US$15 billion to US$20 billion to tap the full potential of the shale formation, industry sources tell Latin America expert Agustino Fontevecchia.

While tax incentives and stable and predictable energy policy could bolster Vaca Muerta drilling, the area needs additional investments into midstream infrastructure and LNG liquefaction and export facilities, if the shale play were to rival any region in the U.S. shale patch.

If Argentina’s new president offers attractive fiscal and investment terms for international companies, they could be willing to sink more money into a vast resource potential. But the investment climate will also depend on how the new administration will tackle Argentina’s recurring recessions and economic crises.

By Tsvetana Paraskova for Oilprice.com

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