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Macri win heralds new era for Argentine energy

Mauricio Macri, mayor of Buenos Aires, swept to a surprise victory over rival Daniel Scioli in Argentina’s presidential election on 22 November, setting the country’s energy future in a new direction

In recent years, international oil companies, including Chevron, ExxonMobil, Shell, Total and others, have grabbed a foothold in the vast Vaca Muerta shale oil and gas field, one of the largest so far discovered outside of North America.

But they have been slow to invest, choosing instead to wait for a raft of policy changes they say is needed to make Argentina a more profitable place to do business. Those changes could be about to come.

Economic overhaul

Macri has promised to overhaul the economy by applying free-market principles. Crucially, for energy investors, the president-elect plans to lift the capital controls that make it difficult for companies to repatriate profits and bring specialist shale equipment in and out of the country. He has also pledged to repair Argentina’s broken ties with international capital markets.

Developing Vaca Muerta’s shale riches will cost tens of billions of dollars a year, a sum that won’t be available to companies working in Argentina as long as it remains to be considered as a pariah for international investors.

Reaching deals with bondholders that pushed the country into default in July 2014 as well as coming to an agreement with the remaining holdouts that refused debt restructuring offers from the country’s 2001 default will be a priority.

Macri, though, has not been specific on energy policy. He is yet to deal specifically with the measures Cristina Kirchner put in place in which she tried to encourage shale investment.

Argentina’s domestic upstream has effectively been operating in a parallel existence in which the global oil price crash never happened. Domestic crude prices are fixed at around $75/b and gas produced from new fields is guaranteed $7.50/m Btu.

Short-term solutions

These measures have helped stave off the worst of the oil price fall for Argentina’s producers, but they aren’t a sustainable long-term fix.

“Drivers are the ones subsidising oil and gas drillers,” says Ana Paula Ares, a managing partner at Quo Advisors, a consultancy. “I would expect that there will be a normalisation of oil prices.”

The future of state-run YPF is also in flux. Kirchner nationalised Repsol’s controlling stake in the company in 2012, a move that Macri says he won’t reverse, but he will have to decide who will run the company.

The new president has left open the possibility that highly regarded chief executive Miguel Galuccio, who took over the job following the state takeover, could stay in place.

That would ensure a measure of continuity at YPF, which has performed better than most analysts had expected, though Macri may want to put his own mark on one of the country’s most important companies.

Vaca Muerta provides key

Given YPF’s stranglehold over Vaca Muerta acreage, the company’s success will be vital to Argentina’s broader shale achievements.

The kind of radical change Macri has talked about, though, will be difficult to push through Argentina’s fractured political system.

The new president won by a narrow margin and his coalition does not hold a majority in Congress, which may limit his ability to operate. At the same time, many of the economic liberalisation measures he is advocating are likely to inflict even more short-term pain on an already struggling economy before delivering the promised benefits, which could sap public support once the election victory afterglow fades away.

If successful, Argentina’s energy potential could be seismic. Wood Mackenzie says that Vaca Muerta shale production will double by 2018, which would lift output to around 90,000 boe/d, as drilling expands and costs come down.

That would put Argentina on the road back to energy self-sufficiency and the new president’s challenge will be to finish the job.

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