Argentina’s energy woes deepen despite discoveries
Despite the huge discoveries, don’t expect unconventional oil and gas to drag Argentina out of its energy-import problem just yet
The emergence of Argentina’s potentially vast unconventional oil and gas resources could not have come at a better time for the country. Although historically a significant regional oil and gas producer, output from Argentina’s conventional resources is in sharp decline, while strong economic growth and artificially low energy prices are driving consumption higher. Once a significant hydrocarbons exporter, Argentina faces a future as a net importer of oil and gas in just a few years.
The transformation has already happened in the natural gas market, which has still not recovered from the energy crisis of 2004. In that year, a severe domestic gas shortage forced the country to cut its exports to Chile and Uruguay and begin importing gas by pipeline from Bolivia. But what the government hoped would be a short-lived crisis has endured: Argentina has, in the intervening years, become ever more reliant on gas imports.
The transition has been abrupt. Gas consumption rose by 14.6% between 2004 and 2010, from 3.7 billion cubic feet a day (cf/d) to 4.2 billion cf/d, according to BP. In the same period, production has fallen by over 10%, from 4.3 billion cf/d to 3.9 billion cf/d. Argentina became a net gas importer in 2008 and in 2009 began liquefied natural gas (LNG) imports.
And although the country’s Central Bank expects economic growth to slow somewhat, from over 9% in each of the past two years, to around 6% in 2012, Argentina’s reliance on gas to meet about half of its primary energy demand means consumption growth is likely to remain strong. In February, a heat wave triggered a surge in gas demand, which hit record levels.
Taking the LNG train
The government, initially unwilling to acknowledge the depth of the gas-supply problem, has been forced to act quickly to boost import capacity. The 500 million cf/d Bahia Blanca floating LNG (FLNG) regasification vessel, opened in 2009 as a joint project between state-run Enarsa and Spain’s Repsol, was Argentina’s first LNG import facility. As domestic production continued to fall, however, Argentina quickly commissioned a second. The 500 million cf/d Escobar FLNG facility was inaugurated in June last year.
Argentina has plans for at least one more FLNG import terminal. Enarsa plans to open the Southern Cone LNG Hub in 2014. And in a tacit recognition that imported LNG will play a role in meeting gas demand for many years to come, the Argentine government signed a 20-year supply deal with Qatargas to supply the facility with as much as 5 million tonnes a year (667 million cf/d) of LNG – the country’s first long-term LNG contract.
In addition to increasing LNG import capacity, Argentina will significantly ramp up pipeline flows from Bolivia over the coming years. In March 2010, the government signed a revised gas-supply deal with its northern neighbour to gradually increase pipeline imports from around 270 million cf/d in 2010 to 980 million cf/d by 2021.
Bolivia’s reliability as a long-term supplier, however, was thrown into doubt last year, when it was forced to cut its proved gas-reserves estimates by 60%, from 24.54 trillion cf to 9.92 trillion cf, according to BP.
But while Argentina has scrambled to secure gas supplies, it has at least maintained its status as a net exporter of oil. It is not clear how much longer that status will last, however. Production in 2010 was 651,000 barrels a day (b/d), down by more than 25% from its peak of nearly 900,000 b/d in the late 1990s, according to BP.
Meanwhile, oil consumption has been rising by about 4% a year since the financial crisis in the early 2000s, rapidly catching up with demand. From just 400,000 b/d in 2003 consumption hit 557,000 b/d in 2010. Energy-focused investment bank Tudor, Pickering, Holt, & Company has forecast that Argentina will become a net oil importer as soon as 2014.
Heading for the frontier
Steadily declining oil output over the past decade indicates that the country’s mature basins are in terminal decline, making frontier exploration crucial to turning around the downward production trend. But companies have been reluctant to take exploration risks at a time in which price controls and a heavy regulatory hand allow only limited returns on investment. The Vaca Muerta shale’s huge resource potential has proved something of an exception, but the prospects look bleak for opening new conventional oil and gas exploration frontiers.
The country’s almost total lack of offshore exploration offers an example. The waters off Argentina’s vast coastline would seem to be ripe pickings for companies looking to bolster their offshore and deep-water portfolios, especially considering the exploration success seen in the Falkland Islands (Islas Malvinas), off the country’s southern coast, and to the north in Brazil. Instead, only a few wells have been drilled offshore Argentina.
A YPF-Petrobras-Pan American Energy consortium has led the offshore effort, having spent around $150 million on deep-water exploration in the Malvinas basin, near the Falkland Islands-Argentine maritime border. But in July last year, the companies said their first well came up dry. The following month, Enarsa put an offshore-focused licensing round on hold. The national oil company blamed tumultuous market conditions at the time for the delay, but many analysts said interest in the bidding round had been weak.
Price caps on Argentine oil and gas are primarily to blame for falling investment in conventional exploration and production. Although Brent is trading at around $120 a barrel, Argentine oil prices are much lower, at around $75/b. Gas prices, meanwhile, are below $3.00/million cf – on a par with depressed US Henry Hub prices, but well beneath prevailing levels elsewhere in the world. Oil companies argue that these prices make the Argentine market uncompetitive.
But the country’s immense unconventional oil and gas potential could help reverse its energy fortunes and make Argentina a significant oil and gas exporter. But those resources will take time, and many billions of dollars, to bring into production.
In the meantime, it’s unlikely the country’s conventional resources will offer much reprieve as the energy-import problem deepens – and costs rises. In 2011, Argentina’s fuel-import bill was $9.4 billion, twice the level seen in 2010.
Oil prospects revive Falklands spat
The UK and Argentina are locked in an escalating diplomatic battle over the disputed Falkland Islands (Islas Malvinas). As the countries prepare to mark the 30th anniversary of a brief, but bloody war over the islands in 1982, efforts to find and tap potentially lucrative oil and gas deposits around the islands are both hostage to the political conflict and fuelling rising tensions.
The anniversary was always likely to be contentious. Bitter memories of military defeat still run deep in Argentina and the country’s continued claims of sovereignty over the UK-controlled territory in the South Atlantic remains a powerful national rallying cry for the government of Christina Fernández de Kirchner.
The UK maintains that it is protecting the right to self-determination for residents of the islands, which it claims, and most polls show, overwhelmingly wish to remain British. The UK spends about £75 million a year defending the islands.
But the dispute has grown increasingly heated. Fernández has successfully mobilised regional support for Argentina’s claims over the islands by accusing the UK of colonialism and “militarising” the South Atlantic. In late December, Mercosur, the South American regional economic bloc, voted to ban Falkland Islands-flagged ships from their ports. Fernández has also made some headway garnering support at the UN for Argentina’s efforts to draw the UK to the negotiating table for talks over the fate of the islands.
The UK has refused, instead making its defence of the islands more visible. Prince William, a Royal Air Force pilot, has been deployed to the Islands for a six-week tour of duty. That was followed by news that the UK was sending HMS Dauntless, one of its most sophisticated warships, to the region in March.
The increased tensions have in part been fuelled by an offshore oil discovery. Last year, UK explorer Rockhopper made the first commercial find: the Sea Lion prospect in the North Falklands basin. It claims it could hold as much as 1.28 billion barrels of oil, with a more conservative mid-case estimate put at 1.09 billion barrels.
Sea Lion is the only significant discovery to date, but hopes remain high, with two other UK firms beginning exploration campaigns targeting potential resources of up to 8 billion barrels of oil equivalent in the South Falklands basin. Borders & Southern will soon drill two wells before passing the Leiv Eiriksson semi-submerisble to Falkland Oil & Gas for its own two-well campaign in the middle of the year.
Even if these exploration efforts are unsuccessful, Sea Lion alone could generate $10.5 billion for the Falklands, says Edison Investment Research, a consultancy. If the 2012 exploration programme meets expectations, it says, oil industry royalty and tax revenues could hit nearly $180 billion, transforming the local economy.
Exploration has, so far, not been effected by the diplomatic row. But as companies move into the more costly, and logistically and technologically challenging development phase, as Rockhopper is now, the Argentine government could make life difficult.
Rockhopper had $188 million available cash and financing at the end of 2011. But it estimates developing Sea Lion will cost $2 billion. As a result, it is searching for funding and farm-out partners to help develop the project. But it would be impossible for any firm with financial interests in Argentina to take part in the development, excluding a number of large financial institutions and oil majors. Moreover, any company considering investment in Argentina would likely steer clear of the Falklands.
Steps to isolate the islands by closing regional ports to Falkland-flagged vessels and pressuring Chile to halt a weekly flight between Santiago and the Falklands could also make the logistics of developing a large oil project very tricky.
Nevertheless, Rockhopper has received strong interest from US and UK firms, including Anadarko, Hess and Cairn Energy. That bodes well for oil development off the Falklands, but considering the emotions and potential revenues at stake, each step closer to production will raise tensions between Argentina and the UK still further. A return to arms is unlikely, but the stormy diplomatic waters around the Falklands could swell much further.