After more than a decade of dwindling energy production Argentina is back on the radar for IOCs, though lower costs and long-term political stability are necessary catalysts for investment, Charles Newbery reports from Buenos Aires
At a conference in Buenos Aires last month, some of the most used words among participants were “opportunity” and “Vaca Muerta”.
The government of President Mauricio Macri organised the Argentina Investment and Business Conference to drum up interest in the economy. In his opening address, the president said he wanted to convince corporate leaders that “you are in the right place at the perfect moment”.
He was speaking to CEOs invited to speak at the event, including BP’s Bob Dudley, Coca-Cola’s Muhtar Kent, Dow Chemical’s Andrew Liveris and Siemens’ Joe Kaeser.
These industry leaders will now decide whether now really is the time to take a punt on Argentina. After 12 years of populist rule, investment has sagged. The previous governments of Cristina Fernandez de Kirchner and her predecessor and late husband, Nestor Kirchner, intervened in private business with price caps, tax hikes, export restrictions and other measures that crimped profits and made it hard to plan business.
The result in the oil industry was that about 750 wells had been drilled in Vaca Muerta since its discovery in 2010, far less than the annual 1,400 that were drilled in US shale plays over much of the past decade.
The scale of what is on offer is clear. “This is an opportunity,” said Paolo Rocca, CEO of Techint Group, a steel giant and leading oil and gas producer in Argentina. “A country that is underinvested is an opportunity because you can get in and unleash the potential.”
Improving business conditions
Since taking office in December, Macri has ended capital and currency controls, trimmed the tax burden and devalued the local currency. He has also widened access to capital by wrapping up a 15-year debt default.
The reforms are starting to show signs of slowing 40% inflation and returning the economy to growth after nearly five years of stagnation.
Macri’s administration is focused on doing policies, not getting re-elected. “That’s unusual,” Dow’s Liveris said. “That’s a tipping point moment.”
He noted that Argentina not only had unconventional resources but also talented workers to put them into production.
This was a driver for Dow to enter into a partnership with Argentina’s state-run YPF in 2013 to develop shale gas in Vaca Muerta with a US$350 million spending commitment. The company has since agreed to plough another US$500 million into the El Orejano project in 2016-17, with plans to invest a total of US$2.5 billion to put it into mass production.
The block will feed gas supplies into the company’s polyethylene plants in Bahia Blanca, Buenos Aires Province, where it is considering an outlay of US$5.5 billion to expand capacity.
Others firms are following suit. BP’s Dudley said more testing would be done at a field in October to determine what Pan American Energy’s (PAE) next steps are. BP owns 60% of PAE. ExxonMobil, Royal Dutch Shell, Total and other companies are also in the pilot production phase to test potential.
Teofilo Lacroze, the president of Shell Argentina, said he was optimistic about the prospects on its five blocks in Vaca Muerta. “The development of unconventional resources is going to bring a surplus in oil and natural gas production to Argentina in the future,” he told the conference.
Vaca Muerta holds an estimated 300 tcf (8.5 tcm) of gas resources, three times that of the Eagle Ford shale in the US. In addition, it is in a region that has good water supply, infrastructure to process gas and move it to market and is sparsely populated. “There are not many constraints on the surface,” said Techint’s Rocca.
There still are challenges, though. On the operational side, oil executives highlighted the need to bring down drilling and completion costs.
YPF, working in partnership with Chevron, is on track to push these down to US$10 million per well by the end of 2016. The cost per well was US$11 million in the second quarter of this year and US$17 million three years ago, YPF’s chairman, Miguel Gutierrez, said at the event.
The reduction has come by sourcing its own sand as proppant, as well as through batch drilling and other techniques, he said. More can be done with improvements in labour efficiency and productivity, he added. With its first pilot, Shell is learning how to drill more efficiently, while at the same time assessing how new technologies can help to drive down costs, Lacroze said.
However, he said that to speed up the learning curve, companies must work closer together, as well as with the government and unions. “The multiplying effect of all of this is giant,” he noted.
With estimated investment of US$20-25 billion per year needed to put Vaca Muerta into the mass production phase over the ten-year period, more than 60,000 jobs will be created and growth of three to four percentage points of GDP, Lacroze said.
Argentine Energy Minister Juan Jose Aranguren also called for more collaboration and the entry of more companies to develop the play.
To attract the next wave of players, his department is preparing projects to improve infrastructure capacity to cut costs. A dedicated highway is planned for handling the oil traffic between the port of Bahia Blanca and the heart of the Vaca Muerta play in Neuquen, a southwestern province. A freight railway is also planned.
Aranguren said the goal was to cut drilling costs to US$7-7.5 million per well, quickening the development pace.
The pedigree of attendees at last week’s conference suggests there is strong investor interest in Argentina, though this is contingent on a stable political outlook.
Macri and his Cambiemos coalition, led by his own Republican Proposal (PRO) party, have so far been able to hold out against the Peronist movement, which has been hobbled by several corruption cases and is struggling to find a charismatic leader to take the place of Cristina Fernandez de Kirchner. But the ruling coalition is still under pressure.
In a recent note to clients, Walter Molano, head of research at US-based BCP Securities, warned that Macri must move quickly. While Argentina has huge natural resources and the financial markets are betting on the government’s success, the president has so far failed adequately to communicate his vision to the population, and his popularity is starting to wane.
“The population is demanding results from those they elected to office,” Molano said. “The midterm elections are only a year away, and at the current pace, Macri’s PRO movement will be trounced.”