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Interview

Richard Spies – CEO, Pan American Energy (PAE), Argentina

Retratos institucionales. SPIES RICHARD JAMES (CEO)

Richard Spies of Pan American Energy (PAE), Argentina’s largest private oil and gas operator, discusses the strategic importance of PAE to parent company BP, the company’s conventional and unconventional plays in Argentina, and the future of the country’s oil and gas industry.

How strategically important is PAE to BP considering that the latter owns some 60 percent of Pan American Energy?

I am proud to affirm that we have demonstrated potential in each and every area where we undertake operations.

As CEO, it is my responsibility to ensure that the global management board understands the continued relevance of an entity like PAE to the company’s overall portfolio of assets. At the end of the day, however, the figures speak for themselves. What I would point out is that PAE is roughly the same size (probably even a little bit bigger) than it was prior BP’s well-documented issues in the Gulf of Mexico. Today BP is a smaller company than it was before. So, BP has contracted and PAE is growing and, therefore, comparatively our weighting is more significant than ever before.

PAE in notable for being the largest private E&P Company in Argentina: enjoying a respective market share of 20 and 16 percent of oil and gas production. With a portfolio that straddles 4 different conventional and unconventional oil and gas basins, what would you define as your most performing assets?

I am proud to affirm that we have demonstrated potential in each and every area where we undertake operations. Our biggest operation is undoubtedly Cerro Dragón. It is mostly situated in Chubut, but it also extends out into Santa Cruz and accounts for some 90 percent of our total oil production. This also happens to be the largest oil producer field in the country. There is much to do in this space with a large volume of highly prospective resources still out there awaiting development.

In Neuquen, we are a smaller producer in Lindero Atravesado where we operate alongside YPF as a partner, but have nevertheless demonstrated a capacity to increase gas production. We are proud to have been able to realize systematic productivity gains across the entire field in the conventional realm for over 20 years. We’re talking about increases from 15 million cubic feet a day in 2013 and to 120 million cubic feet a day today. That’s quite a significant rise in space of only 2.5 years. Part of this derives from the fact that nowadays we are able to develop tight gas that we could not reach in the past, but it also stems from our willingness to build upon and apply our experiences and to constantly be on the look out for fresh optimizations. The strategy underway right now is to acquire acreage and expanding our footprint with a view to repeating those successes across other blocks deploying what has become a well defined and tried and tested process. The other objective is to make further inroads into tight gas development to the point where we are in a position to set about producing in Vaca Muerta.

There remain a lot of opportunities to exploit in Neuquen and Chubut as well as the extension into Santa Cruz. Simultaneously, alongside our partners down south (such as Total) in Tierra del Fuego, we are attempting to leverage further prospects in la Cuenca Marina Austral. We further possess a small portfolio of foreign assets in Bolivia and Mexico that we have agreed with our shareholders to continue to expand and develop.

Do these constitute the first steps in an internationalization strategy for PAE?

Well we have actually been in Bolivia since the very beginning of PAE.

Mexico constitutes a brand new endeavor and we will have to see exactly where that pathway leads us.  Possessing some geographically diverse assets can actually be a useful way of ensuring technological and know how acquisition. Certainly the liberalization of the Mexican oil and gas arena is an opportunity not to be missed and extending our footprint into these kind of areas chimes with our headline promise to our shareholders to be a truly Latin American entity.

80 percent of the conventional oil and gas fields in Argentina are mature including much of your own portfolio. You are also well underway with operations in the unconventional realm as well. How do you ensure that you acquire adequate technological capabilities to sustain your production and move into these new spaces?

I think we actually already possess a really rare capability in terms of operating oil and gas fields. Not only do we display a strong track record in secondary development, which is still ongoing, but we have also been forging ahead with some EOR pilots. Being able to draw upon BP’s own proprietary technology is obviously a bonus and one of our points of differentiation from any competitors. We can also call upon the experience of our other partner Bridas, which has been fairly active in US shale plays. This may well prove very useful when trying to unlock Vaca Muerta.

Not only do we display a strong track record in secondary development, which is still ongoing, but we have also been forging ahead with some EOR pilots.

We are always attentive to applying our learning from one block to our other assets. The block that we acquired in Mexico, for example, is in shale oil water and we possess an Argentinian block with similar characteristics so we ensure that there is a lot of cross pollination of ideas between the two sets of activity.

The area where I do not realistically see PAE venturing into any time soon is deep water. We recognize our limitations and our shortfall of experience in such operations and have calculated that we would do better to focus instead upon those areas where we have some existing skill sets to build upon and a competitive advantage to further assert.

And just how easy is it to acquire talent on the local market?

We actually fare pretty well compared to many countries because of Argentina’s lengthy history in oil and gas development. This heritage means that there are many technically qualified Argentines with hydrocarbons expertise that can be easily sourced from the local market. Another contributing factor to this talent pool is the country’s strong academic structures with well-reputed universities and institutes churning out new cohorts of graduates each year. Even the linkages between the industry and academia are strong so that students are receiving the right educational grounding to speedily and smoothly make the transition to becoming oil and gas professionals.

In January, PAE signed an agreement with YPF for USD 500 million worth of investment so as to develop unconventionals in Vaca Muerta. Could you expand on the current and future investments that PAE has in its pipeline?

We have been steadily expanding our acreage footprint in the Neuquen’s basin. We have one block called Bandurria Centro where we sport a 100 percent interest. We are now convinced that, having successfully developed tight gas in Neuquen alongside our conventional production in the south, that we can now credibly make the step up to operate efficiently in Vaca Muerta and lowering our production costs there.

Two years ago we were considering investing in Vaca Muerta, but the costs were prohibitively high. Today the cost estimations for the same type of well are less than half of what is was then. It is a strong reflection of improvements that we have attained in the past as well as changes underway across the industry. We have now resolved to try it. First we will go about it on an experimental basis. Once we have properly evaluated the economic results and determined the output, then we will be able to set the appropriate speed at which we will go about developing the basin.

The recent elevation of Mauricio Macri to the presidency has introduced a new style of politics. One of his first moves was the creation of the specific Ministry of Energy and the appointment of a former head of Shell Argentina as the new minister. How do you assess the future outlook of Argentina in the light of these fresh developments?

The mood has been to transition away from deploying energy policy strictly to secure a social agenda. That’s not to say that the Macri administration is unconcerned about the social outcomes, but rather that it strives to recognize social benefits through the application of a free market philosophy.

Over the past decade, natural gas prices were kept artificially low. Indeed, prices dropped so low that they actually undercut the cost of developing and exploiting the resource in the first place. This is how Argentina came to find itself in the curious scenario in which, though blessed with considerable amounts of its own reserves, the country was reliant on expensive LNG and pipeline gas from Bolivia!

The Macri government is keen to iron out these distortions. The true expense of LNG imports has to be properly reflected in the country’s pricing policies and domestic producers of gas should be permitted to properly compete at their true market price. Thus, the natural gas price of the industry is now gravitating towards the marginal price for the imports from LNG.

Obviously this comes as something of a shock for consumers who have grown habituated to a sustained period of abnormally low energy prices and suddenly they are becoming exposed to a high market base price. Nevertheless the government itself reaps the immediate effects of no longer having to fork out for exorbitantly priced foreign LNG. The industry itself is also being enticed back and even within the last couple of years there as been a slight but nonetheless noticeable uptick in production levels.

What would you say are the other idiosyncrasies of the Argentinian hydrocarbons market?

Domestic oil prices have been set in agreement with the government, and are markedly higher than the prevailing international oil price. In the Neuquen basin, we’re talking about a barrel price of around USD 67.  In Chubut, where most of our activities are situated it’s about USD 54,9 per barrel. Again the incumbent administration has made it clear that these figures are to be regarded only as transitional. Macri’s intention is to remove these subsidies gradually up to the point where there will be a convergence between the domestic and international prices.

We don’t yet know exactly when this will occur because of the current fluctuations in oil prices around the world. Obviously there has been a very steep oil price crash internationally that marked the end of a multi-year super-cycle and it is only now that everyone is beginning to witness a rebound. My guess would be that we can expect convergence some time next year, but this is only speculation. When the two respective oil prices are aligned then the government will let market forces take over and the price float accordingly. That is the declared objective and what companies like PAE need to ready themselves for. After so many years insulated from the international price dynamics, it is important to start building up our competitiveness again.

When the two respective oil prices are aligned then the government will let market forces take over and the price float accordingly.

In December 2015 the oil price in Argentina was reduced by a full 10 percent and, as you mentioned, it will be more price adjustments to come and PAE will have to thoroughly prepare itself. How are you going about adapting to these winds of change?

We have been working for a year and a half with some of our stakeholders, specifically with the labor unions, to look for different ways to render our operations more efficient. The labor unions are much more active and stronger in Argentina than other countries. And any one who is considering investing here should consider this factor. Successfully managing relations with the unions is one of the keys to survival out here.

A year and a half ago we struck up conversations, not only with the labor unions, but a broader range of stakeholders as well about the need to raise productivity and the mutual benefits that such a scenario would bring.

It was essential to make stakeholders understand that if we prove able to push down operating costs then we would be able to free up capital to allow us to continue to invest despite the inevitable impending decreases in barrel price.

This dialogue remains ongoing, and we are already witnessing incremental improvements in our efficiency and overall productivity. The different actors concerned are now at a last beginning to realize that this can be a win-win relationship for all concerned.

Better alignment with our contractors is another way to efficiently push down our operating costs. One example would be to hand contractors an incentive to be more productive whereby base tariffs are slightly reduced, but opportunities to earn higher performance linked pay is offered in return. That sort of arrangement actually suits the higher performance contractors very well and they appreciate that.

What do you consider the best way to go about negotiating with the Unions?

In dealing with the unions, experience has taught me that it is important to speak their language and understand their concerns and perspective. Their focus is about maintaining jobs for their members and ensuring that salaries remain tied to inflation. When managers speak about the need to make ‘efficiency gains’, then that scares them as they translate that as making lay-offs and reducing salaries. Instead we have to talk about ‘productivity’ and about producing more with less or the same resource inputs. We have to make them understand that productivity increases is actually the tool via which we can maintain investment levels and thus maintain jobs and salaries. It quickly becomes a virtuous cycle.

Equally important is to properly educate the labour force as to the realities of the situation. Two years ago fracking teams used to work a maximum of 12 hours per day and they never worked at night. In USA, by contrast, the shale operations remain active 24 hours per day. Efforts were thus made to enable union representatives to visit North American sites to witness first-hand how this generates more jobs and extra work. Nowadays 24-hour fracking is commonplace down here in Argentina as well.

Because we have a lot of development work still ahead of us in the south from a geological perspective, there is the opportunity for us to keep investing for years and years, but only so long as the economics work. No private business can continue to invest in losses indefinitely. This is why it is essential to have everyone sitting around the table and agreeing upon a cost structure that allows a reasonable return on investment and thus for the prolongation of further investment.

What are you key priorities looking forward?

Our core priority for this year is to continue to identify improvements in those operations that we are already running so as to be able to competitively face exposure to international prices in the future. It is vitally important to anticipate this change and be ready to compete under new rules of the game. The aim is to reach a state in term of improvements on productivity where we would be able to continue with our operations and still register reasonable returns on investment.

How difficult will it be for Argentina to solve its energy crisis?

It will certainly take several years of sustained effort to recover the position that Argentina once had. It is clear to me that this is nonetheless achievable.

It will certainly take several years of sustained effort to recover the position that Argentina once had. It is clear to me that this is nonetheless achievable. We certainly have the right kind of geological formations. We just need the politics to enable us to get down to business.

Where would you like to see PAE when we come back to Argentina in three years?

I would like to see PAE still developing Cerro Dragón, but this time with a higher rate of productivity. I would also envision us possessing two or three interesting oil and gas fields in Vaca Muerta. Most of all my goal is to raise our performance in Neuquen to the levels that we currently demonstrate in Chubut. That would be a great achievement.

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