Fuel for Thought: Long a promise, Argentina’s Vaca Muerta is finally showing signs of big growth

At a recent oil conference in Argentina, one of the most-bandied about words was "potential." That and Vaca Muerta. The possibilities for oil and natural gas production growth in the shale play, executives said, is "fantastic," "gigantic," "immense," "magnificent" and so forth.

There are reasons to be rosy. Vaca Muerta is one of the world's biggest shale deposits, and the extraction costs have dropped close to the levels in comparative formations in the United States. This spurred forecasts at the conference that Vaca Muerta could help nearly double Argentina's oil production to 1 million b/d by 2026, allowing exports to surpass 500,000 b/d by then, up from less than 100,000 b/d now.

Gas production, now at 130 million cu m/d, could surge even more to make Argentina a rival to Australia and Qatar in the LNG market at a time when demand is growing for gas in the energy transition to net-zero carbon emissions by 2050.

The trouble is that all this talk of potential has been heard before. Vaca Muerta's geology may be great, but the conditions for doing business in Argentina are far from that, executives said at the conference.

To be sure, the chance of losing money in Argentina, when measured by its country risk premium, is now at about 1,700 points, according to J.P. Morgan Chase's EMBI+ emerging market bond index that takes into account such factors as the economy, politics and public finances. That is six times greater than the risk in neighboring Brazil, which produces five times more oil and has ample offshore potential for growth.

Even so, a few advances have been made over the past year or so in Argentina to fuel this new optimism that the country, long dogged by economic crises, is once again – or finally – on the right track to speed up the development of Vaca Muerta.

A big advance came last month when the International Monetary Fund approved a new loan program for Argentina, gaining the country more time to pay the $44 billion it owes. The agreement includes a series of fiscal and monetary targets that should help stabilize the economy and widen access to international financing.

It's needed. The economy, which fell into its latest upheaval in 2018, is struggling with more than 50% inflation, 37% poverty and dangerously low international reserves. The government has responded with capital, price and trade controls, but these have made it hard to run businesses, curbed profit potential and prompted some companies to pull out.

Latin America-focused GeoPark left this year, while China's Sinopec and US-based ConocoPhillips did so last year, and US-based Schlumberger sold out of its Vaca Muerta acreage the previous year. While the likes of Mexico's Vista Oil & Gas, Equinor and Shell have taken advantage to increase their stakes; they say their bets are for long-term growth.

In the meantime, the poor conditions are keeping a lid on overall investment, led by two widely cited deterrents.

One is that the government is keeping crude prices artificially low at about $60/b domestically, nearly half of the around $110/b for Brent, the international reference price followed in Argentina.

The second is the capital controls designed to limit the flight of dollars from the economy. In effect, companies can bring money in but they can't take it all out, not even to pay dividends, import equipment or service their debts.

The result is that oil companies are limited, for the most part, to investing out of cash flow as few international banks or investors want to risk the billions of dollars need to speed things up.

"It's like we're going one mile per hour" when compared with US shale development and Vaca Muerta's potential, said Horacio Marin, managing director of exploration and production at Tecpetrol, Argentina's third-biggest gas producer.

Looming bottlenecks

There's an urgency to step up investment. Vaca Muerta, which came into development in 2012-13, now accounts for 39% of the country's 571,000 b/d of oil output and 52% (along with tight plays) of the 130 million cu m/d of gas, according to Energy Secretariat data.

"If we don't do anything with infrastructure, production will hit a ceiling in the next couple of years," said Rodolfo Freyre, vice president for gas, power and business development at BP-backed Pan American Energy, the country's second-biggest oil producer and fourth for gas.

Horacio Turri, executive director of exploration and production at Pampa Energia, the country's fifth-biggest gas producer, said Argentina faced a similar dilemma at the end of the 19th century in agriculture. Its vast farmlands could produce heaps of food to meet global demand, but to make that happen a huge railway network had to be built. And that is exactly what happened, helping make Argentina a breadbasket for the world and, for a few decades, one of the planet's strongest economies.

"The railways of the 19th century are the gas pipelines of the 21st century that we need to be able to monetize this resource by going out into the world to compete in sales," Turri said.

If the energy transition lasts 50 years, "we would need to multiply by 10 the production in Vaca Muerta," he added.

A few advances

This is where progress is being made. Oldelval, an oil pipeline operator in Vaca Muerta, plans to invest $500 million over the next few years to double its transport capacity to about 500,000 b/d. At the same time, a 100,000 b/d pipeline to Chile from Vaca Muerta is being revamped to start operations as soon as this year.

The prospects for the gas business have also started to improve. A little over a year ago, the government created an incentives program that has boosted wellhead prices to more profitable levels of around $3.50/MMBtu, leading to a rise in production to 130 million cu m/d from a recent low of 114 million cu m/d in April last year. While production is still shy of the 140 million cu m/d of average demand that peaks at 180 million cu m/d in winter, Vaca Muerta can fill this gap with a lot of extra supplies for exporting, executives said.

To make this happen, the government this year launched a three-year project to build a pipeline that can carry up to 44 million cu m/d to expand domestic sales and exports, beginning with Brazil and Chile.

The first stage of the line, with 11 million cu m/d of capacity, is due to come into operations by mid-2023.

Marcos Bulgheroni, the CEO of Pan American Energy, said exports to Brazil alone could increase to 40 million cu m/d from minor amounts today. But the biggest growth, he said, will come with LNG.

At the conference, he proposed setting up a consortium to build a liquefaction terminal with 13 million tons per year of capacity, an investment of up to $15 billion, that would help Argentina increase exports at a time when buyers are looking for new sources other than Russia.

Transportadora de Gas del Sur, a gas pipeline operator, may be the first to get such a project underway. CEO Oscar Sardi said he expects to have the plans in place by the end of the year for the project, a partnership with US-based Excelerate Energy. The liquefaction plant, he said, would be built in modules, each with a capacity of 4 million cu m/d, allowing Vaca Muerta producers to start selling LNG as estimates suggest that global demand will nearly double by 2030 from this year.

"We either start this or we'll miss the chance," Sardi said.