Price liberalisation spurs gas-drilling activity in Argentina
A relaxation of wellhead gas-price controls has kick-started gas developments stalled by years of artificially low tariffs and government hostility to the industry, reports Robert Olson
FACED WITH declining gas production and soaring costs for imports, Argentina took action to liberalise gas prices late last year in an attempt to bolster domestic output. The so-called Gas Plus programme, announced in October, lifted price restrictions on gas from new fields, tight-gas deposits and blocks that have been idle since 2004.
Argentina relies on natural gas for more than half of its energy needs and demand has been soaring since prices were frozen in 2002. The price caps, which force producers to sell for as little as $0.50/m Btu have been blamed by the industry for a slide in domestic production that has forced the country to grow increasingly reliant on imports. Having peaked at 46.1bn cubic metres (cm) in 2006, Argentine gas production last year was down to 44.1bn cm according to Cedigaz's preliminary estimates.
To meet domestic demand, Argentina imports gas by pipeline from Bolivia – although available volumes are falling, from 1.85bn cm in 2007 to 0.89bn cm in 2008 – and has been forced to buy liquefied natural gas (LNG) to meet peak demand in the winter months. But even with the imports, rationing during winter has been common, imposing heavy costs on industry because of factory shutdowns and the substantially higher cost of alternative fuels.
Rising cost of imports
Energy industry officials note that the government was being increasingly squeezed by the cost of paying for the imports needed to make up for domestic shortfalls. Bolivia has steadily increased the price it charges for gas imports to around $6/m Btu, while LNG imports to the Bahia Blanca GasPort terminal near Buenos Aires cost as much as $20/m Btu last summer. Faced with a slowing economy and growing pressure on the federal budget, the government of President Cristina Fernandez has been forced to relax some of its tight control over the energy industry.
Under the Gas Plus programme, production from qualifying fields can be sold at market prices of around $4-5/m Btu. Government officials estimate the plan will boost domestic output by over 3bn cm/y by 2011. The initiative has encouraged new investments from companies ranging in size from local minnows to supermajors, particularly in the tight-gas sector, which is widely viewed in the industry as a potentially significant new source of domestic supply. Some industry experts claim tight gas could eventually account for 15% or more of domestic production, a figure comparable to unconventional gas production in the US.
Total expected to begin production of 1m cm/d of tight gas from the Aguada Pichana field, in Neuquen province, by the end of last month in one of the first new additions to supplies under the Gas Plus programme. Other companies that have signed onto the programme include Apache, BP's Pan American Energy along with Argentine companies Capex, Pluspetrol and Petrolera Piedra del Aguila.
Repsol, the local market leader, has contracted Schlumberger to help it develop a strategy for tackling tight-gas reserves in the Sierra Blancas portion of its large Loma de la Lata gasfield, the mainstay of Argentina's gas sector. In both the case of Loma de la Lata and Agua Pinchada, the field operators have known for years that tight-gas deposits lie beneath the conventional gasfields, but have not considered developing them until now.
The Gas Plus programme, along with a similar initiative for oil production, has been welcomed by the industry, but executives still view it with suspicion given the government's erratic track record in energy policy. "To us, it still looks like something they are doing because they were forced to, not because they wanted to," says an executive with a gas producer in Argentina. "This is a good step and a bit more business friendly, but they are still doing nothing to encourage investment in the fields that are already producing."
Indeed, despite the quick success in starting up new field developments the Gas Plus programme is unlikely to be enough to provide a long-term fix for Argentina's gas industry. Energy executives say uncertainty over the government's commitment to liberalisation makes most exploration efforts, particularly for natural gas, unattractive so Gas Plus is mainly likely to spur the development of known deposits. Existing fields continue to languish, as operators spurn all but essential capital spending because of low wellhead prices.
Apache, for example, said in February its capital spending was on hold at all of its existing gasfields in Argentina except those covered by the Gas Plus programme. And Repsol has said it has no plans to invest further in Loma de la Lata, saying it is a "waste of time and money" to try and slow decline rates at the field.
Repsol, which produced around 17bn cm of gas in Argentina last year, expects production from its existing properties to decline by 6-7% because of field maturity and the difficulty of making profitable investments in the properties resulting from price controls. Other producers are said to be facing similar decline rates.
But some producers are optimistic that the Gas Plus programme is the first step towards a full liberalisation of prices. Fernandez' government suffered a heavy defeat in mid-term congressional elections in July as voters spurned her confrontational style amid an economic slowdown.
And despite Repsol's troubles in the country, some investors are not deterred. The financial press was abuzz with talk in July that a Chinese or Indian state energy company was looking at taking a stake in YPF, or perhaps buying all of Repsol's 85% shareholding in the company for $15bn or more.