Argentinian crisis puts shale in limbo
Election winner faces a surfeit of problems capitalising on Vaca Muerta potential
Argentina is heading towards a general election on 27 October with near certainty that the reins of power will return to a Peronist government—headed by a partnership between presidential frontrunner Alberto Fernandez and former president Cristina Kirchner.
Sitting president Mauricio Macri's hopes of extending his tenure for another four years were dealt a severe blow by the national primary, which qualifies candidates for the October poll. A lack of confidence in the government's ability to restore economic stability saw Macri record just 32.1pc of the vote compared with 47.7pc for Fernandez, which would almost certainly be enough to win the election outright.
Investors are concerned that Fernandez would return the country to the market-unfriendly policies of the previous Kirchner government. The result of the primary triggered a loss of more than 25pc to the value of the peso. The government was quickly forced to appeal to the IMF for permission to delay its repayments of its record $101bn loan and to restrict purchases of dollars.
Conflicting statements from Fernandez' Judicialist Party about the future of Vaca Muerta shale has similarly rattled investors' nerves. First, there was a reassuring message. "One of [Fernandez'] advisors, Guillermo Nielsen, said that they aim to stimulate Vaca Muerta shale production by providing a legal framework that puts the area in an equal standing to unconventional resource areas in the US," says Ignacio Labaqui, senior analyst at macroeconomic research analyst Medley Global Advisors.
But, in a speech to the Spanish parliament in Madrid, Fernandez struck a different tone. "There is no point in having oil if, in order to extract it, you have to let multinationals come and take it away," he said.
Former minister of energy Juan Jose Aranguren, a political opponent, called a Buenos Aires radio station to say the statement was reminiscent of Venezuela, which once produced nearly 3.5mn bl/d of oil but now produces less than 1mn bl/d.
Argentina has only recently committed itself to an ambitious raft of upstream targets. Last year, the country released an Energy Plan, aimed at doubling both crude and natural gas output by 2023—a target of 1mn bl/d and 8.4bn ft³/d respectively. Argentina aspires to further boost this to 1.5mn bl/d and 14.1bn ft³/d by 2030.
The bulk of this growth was expected to come from the unconventional Vaca Muerta resources. YPF, the state-controlled energy company, holds 40pc of total acreage and has shouldered most of the development work to date—the company is the largest shale producer, responsible for 75pc of total output.
"Argentina will remain a country on the edge of default, with suspicion among many energy companies that, at the first hint of revenue or economic crisis, the Fernandez government will not hesitate to break contracts" Jones, Baker Institute
YPF plans to boost production by 5-7pc annually. The firm aims to ramp up output from its three main projects before the end of the year: Loma Campana (a joint venture with Chevron), La Amarga Chica (with Malaysia's Petronas) and Bandurria Sur (with US services firm Schlumberger). Loma Campana is expected to increase production from 40,000bl/d to over 50,000bl/d, La Amarga Chica from 10,000bl/d to 20,000bl/d and Bandurria Sur from 5,000bl/d to over 10,000bl/d. Combined, total investment stands at over $1.5bn and there are plans for 780 wells across the three projects by 2023.
The firm has significantly reduced costs in the shale play. Loma Campana, the first commercial project in the region, has cut development costs by 50pc since 2014, to $9/bl oe, while opex has similarly fallen 54pc over the same period to $5.50/bl oe. The ambition is to reduce this even further to $8/bl oe and $6/bl oe in opex by 2023.
Improvements in technology have also increased efficiency. Horizontal drilling at Loma Campana has boosted estimated ultimate recovery from 300,000bl per well to 1mn bl per well. Estimates of ultimate recovery have increased by 35pc over the period 2016-18, and drilling time for a 2,250m lateral well cut to just 29 days—from a previous spell of 53 days for a horizontal well of 1,000m. Argentinian financial consultant TPCG says YPF is now targeting 23 days by 2020.
The question is whether YPF can replicate the successes of Loma Campana across its other projects and compete economically with international shale. The development cost of horizontal drilling in La Amarga Chica still stands at $12/bl oe, while logistical costs for frack sand across the Vaca Muerta remains at $180-200/t, compared with $35-40/t in the Eagle Ford shale play.
The unfolding economic crisis will likely dampen Argentina's hopes of fulfilling its upstream targets in the near-term, particularly for natural gas. "For at least the next year or two, Argentina will be facing an economic crisis," says Mark P. Jones, a fellow in political science at Rice University's Baker Institute thinktank.
"This combination will give pause to large-scale investments with a medium to long-term time horizon that are necessary to deepen natural gas development in Argentina, such as LNG facilities to export natural gas to global markets, petrochemical plants to take advantage of the country's vast natural gas supply, and railways, roads and pipelines that are needed to drill and to ship natural gas to market."
The expansion of the Vaca Muerta is chiefly hamstrung by a lack of pipeline infrastructure. As of 2018, crude evacuation capacity stood at just 650,000bl/d and gas capacity at 5.8bn ft3/d. The government plans to rectify this situation and, in July, issued a tender for a $2bn gas pipeline linking Vaca Muerta to the town of Salliquelo, outside Buenos Aires, aimed for completion in 2021.
YPF also says it will push ahead with plans to develop a $5bn LNG plant to boost export capacity beyond the Tango floating LNG facility in Bahia Blanca. "In all likelihood, this project will move forward, but it may get delayed," says Pavel Molchanov, senior vice president and equity research analyst at US bank Raymond James.
Interest from international companies may be similarly affected by the current economic turmoil. This year, ExxonMobil announced it was targeting 55,000bl/d from phase one of its development in the Bajo del Choique-La Inverno block. US independent ConocoPhillips also stated it was partnering with Germany's Wintershall Dea in the Aguada Federal and Bandurria Norte blocks.
$9/bl oe — Loma Campana development cost
But moving projects from the pilot stage into development has been slow. Of 34 concessions granted, only five have reached full development and 13 concessions are due to expire between 2019-21.
Of the 13, according to a report from US thinktank the Institute for Energy Economics and Financial Analysis (IEEFA), only five have so far delineated investment plans: La Amarga Chica, Bandurria Sur, and Shell's Sierras Blancas, Cruz de Lorena and Coirón Amarga Sur Oeste projects.
Following the 11 August primary, the government also decided to freeze crude and fuel prices for three months. Initially, the currency exchange rate for crude transactions was capped at ARS45.19/$ but was later increased to ARS46.69/$. The government also issued a subsidy for producers that bolstered the exchange rate to ARS49.50/$.
The province of Neuquen threatened to challenge the decision in federal court, claiming a loss of royalties, although it has since withdrawn its action.
YPF said in an investor call it would reduce capex by $100-120mn/month while the freeze remains in place. The move will cost oil companies "$120mn less Ebitda per month, or 3pc less Ebitda per month", says Guido Bizzozero, senior analyst at Argentinian financial firm Allaria Ledesma & Cia.
"For the time being, Argentina will remain a country on the edge of default, with a high country risk rating. There is suspicion among many energy companies that, at the first hint of revenue or economic crisis, the Fernandez government will not hesitate to break contracts and/or intervene directly in the energy market to these companies' detriment," says Jones.