Argentina’s gas-price conundrum
‘Unattractively low’ prices deter unconventional-gas development, as imports and subsidies rise
THERE is great potential for unconventional gas in Argentina, but “unattractively low” gas prices remain a stumbling block to development, says Wood Mackenzie.
A new report from the consultancy – Argentina: Unconventional dawn on the horizon – says the country has significant tight- and shale-gas resources. Although it does not give a reserves estimate, the US Energy Information Administration (EIA) claims Argentina could hold 774 trillion cubic feet (cf) of recoverable shale gas.
The country has 13 trillion cf of proved conventional natural gas. It produced 3.9 billion cf a day (/d) last year, while consuming 4.2 billion cf/d, according to Cedigaz. Even if the EIA’s shale gas estimates prove optimistic and the resource potential is significantly lower, unconventional gas would still be a game changer for the Argentine market.
“There’s huge unconventional potential across the country, largely for shale gas and mostly across the Neuquén basin,” said Wood Mackenzie analyst Scott Pearson, “but there’s something fundamentally wrong with the pricing system.”
Pricy price controls
An energy-price freeze established during the country’s 2001-02 economic collapse means Argentina's gas – sold for as little as $2.5/million British thermal units (Btu) – is among South America's cheapest. This compares with prices around $4/million Btu in North America and significantly higher prices for traded liquefied natural gas (LNG) of between $8-14/million Btu.
These prices controls are a deterrent to upstream activity and have forced the country to turn to imports to meet rising demand. The country's gas production has been in steady decline since its 2006 peak of 4.5 billion cf/d, dropping by 3% last year alone, forcing the country to turn to expensive LNG imports – nearly 70 billion cf last year. (According to reports, the country is paying as much as $13/million Btu.)
Argentina also imports gas by pipeline from Bolivia – 65 billion cf in 2010 – which is marketed for about $3.3/million Btu, despite an import price of around $7.70/million Btu. Pipeline and LNG price subsidies, could cost the government as much as $1.5 billion this year – a 30% increase over 2010, according to reports. Cuts in supplies to businesses have, meanwhile, become commonplace.
The government is now trying to encourage investment in gas exploration and may be willing to support development by offering prices as high as $6/million Btu, say some analysts. Under Argentina’s Gas Plus strategy, Brazil’s Petrobras has already been allowed to sell gas from development projects in Neuquén province for between $4-5/million Btu.
But Wood Mackenzie claims Gas Plus “has not yet had the encouraging effect the government would have hoped for”, and that “conditions are not in place for full-scale unconventional development”. Most deals are for short-term contracts only and operators sometime face “issues with being paid”, said Pearson, adding that none of the contracts in operation are secure enough.
“Unconventional gas requires a lot of investment and so needs steady prices,” he said, but that is not the situation now. And, said Pearson, it’s very difficult to change regulations in Argentina because individual provinces decide their own licensing and fiscal terms. To align the regulations for each province could be tricky.
Although the government is unlikely to risk derailing economic growth by loosening price controls or regulation, especially in the run-up to October’s presidential elections, companies remain eager to access the country’s potentially huge unconventional resources, which could relieve the country’s increasing dependence on gas imports.
But, Wood Mackenzie said hopeful new operators face problems accessing exploration acreage because of increased competition. Consequently, companies looking to enter the unconventional play may need to do so through mergers, acquisitions or joint ventures, said Pearson, as “everyone’s interested. It will be pretty difficult to access the play”. Much of Argentina’s prospective acreage has already been licensed.
A host of smaller operators, such as Pan American Energy, Azabache and Americas Petrogas, have flocked to Patagonia’s Neuquén basin this year. In January, ExxonMobil announced a venture with Spain’s Repsol to explore for shale gas in two Neuquén blocks, following Repsol’s December discovery of 4.5 trillion cf of shale gas.
Some companies, such as Apache, Total and Petrobras, are already drilling and producing tight gas in the Neuquén basin, which is sold under short-term Gas Plus contracts lasting one or two years.