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Argentina: All Hopes on Vaca Muerta

A historic agreement of $15bn investment for the exploitation of the shale oil and gas fields of Vaca Muerta has brought together the Argentinian government, some of the world’s biggest hydrocarbon companies, as well as the unions in an effort to re-establish Argentina at the top table of global energy exports.

“Bringing a new international player like Statoil into the country shows confidence in Vaca Muerta as a promising shale play and in YPF as a leading operator.”

Miguel Angel Gutierrez, YPF

January 10, 2017 marked a new milestone in Argentinian President Mauricio Macri’s efforts to rejuvenate Argentina’s attractiveness for foreign investments when his government announced that it had struck a historic deal aiming at a new rollout of the exploitation of the shale oil and gas field of Vaca Muerta. The multi-billion-dollar deal is part of Macri’s will to see action following his promises to make the Argentine oil and gas industry attractive for the international investor scene once more, as he puts it, “we have to give guarantees and provide certainty in order to attract investment.”

The deal holds a disruptive aspect, having brought multiple stakeholders to the table, including the government, various companies, as well as trade unions. In the past, the relationship between the unions and the oil and gas companies has been tumultuous, to say the least, and striking any deal unifying them seemed difficult, especially considering that the present deal requires some sacrifices from them. Indeed, the agreement comprises important cost reductions in production in order to make a more appealing investment situation for foreign companies. These reductions will come in the form of actual labor costs which will be lowered; likewise, the unions agreed to flexible contracts for their employees who will be working on the fields.

Moreover, the deal also comprises an agreement on the adjournment of export taxes for those companies participating in the exploitation. To add to this incentive, Macri has announced that gas prices will be subsidized and set at $7.50 per million Btu (MMBtu) while shale gas prices in the US are currently hitting a ceiling at $3.33/MMBtu. This price will gradually be adapted to reach $6.50/MMBtu by 2021, still almost twice the price valid in the US today.

Vaca Muerta itself lives up in scale to the magnitude of the $15bn deal. Indeed, the shale fields located in the Neuquén basin in west central Argentina are the second largest ever discovered. Not only do they hold an estimated 27bn BOE and 802tr cubic feet of natural gas, they are also relatively easy to exploit, as the composition of the soil in the area has produced layers that are more compact than those in the Eagle Ford Basin in the United States. Finally, exploiting such potential presents the opportunity for Argentina to back out of its dependence on energy imports, as Vaca Muerta could supply Argentina for decades and even give it the opportunity to move forward with its plans to become an energy exporter again, as it aims at servicing countries such as Japan and South Korea once production is underway.

The companies who wish to play a role in the agreement have come knocking at the door one after the other since January. At the front of the line is Argentina’s national energy giant Yacimientos Petroliferos Fiscales (YPF). It has since signed several agreements with foreign companies to pursue joint explorations of the Vaca Muerta fields such as Norway’s Statoil, for whom the venture into the hydrocarbons of Bajo del Toro—located within the larger Vaca Muerta area—will be its first project in Argentina. YPF chairman Miguel Angel Gutierrez says: “Bringing a new international player like Statoil into the country shows confidence in Vaca Muerta as a promising shale play and in YPF as a leading operator. We are pleased to expand the cooperation between both companies”. Further, YPF has also struck a deal with O&G Developments Ltd, an affiliate of Shell, to work on the Bajada de Añelo area in Vaca Muerta.

Total, Chevron and Exxon Mobil have equally demonstrated a lively interest in playing a role in Vaca Muerta, while Dow Chemical Co is reportedly intending to back out of a 2013 agreement with YPF as it is facing a major merger with DuPont Co by the end of August 2017 and therefore has to revise its priorities.

Despite the fact that this deal seems to be part of the long-awaited fulfilment of Macri’s promises to bring resurrect the Argentine economy, it has been criticized for its price control system, that many view as something more likely to come from his predecessor Cristina Fernandez de Kirchner, although Macri insists that such measures are “indispensable for attracting long-term investment.” In general, Macri’s industry-friendly undertakings in politics have been threatened by Kirchner’s announcement of a comeback during the mid-term elections that are coming up on October 22 and that hold the power to worry not only the current president’s party, which tied with Kirchner’s in some of the first face-offs this summer, but also international investors.

Nonetheless, the general expectations tend to be positive. While only two out of 19 concessions in Vaca Muerta are active today and Gutierrez expects the timeframe for new shale fields reaching post-pilot phases to be of two years, he firmly expects a positive evolution for YPF in 2018. “Without the agreement,” he says, “we would probably invest 20 to 30 percent less this year.

The Vaca Muerta deal will also somewhat rebalance the almost monopole-like holding YPF had on the Neuquén basin fields. In the first five months of 2017, companies had already committed $3.5bn to the Vaca Muerta development. All in all, the investment is forecast to reach $15bn in the years to come, $5bn being scheduled for this year. Hence, the expectation that the volumes produced in 2018 will represent twice those of 2016. Estimates of 113,000 BOE per day are therefore not overly optimistic but seem within the realistically expectable.

Writer: Anna-Luisa Vogt



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