(S&P Global Platts, 28.Dec.2018) — Argentina has set a target of doubling its oil and natural gas production over the next five years but analysts and executives warned that it may take longer as political instability threatens to slow investment.
Mauricio Macri, the country’s market-friendly president, faces reelection in October, and so far the polls suggest it could be a tight race. A recent poll by Synopsis, a consulting firm, found that Macri's popularity was recovering in December from a low patch in November, putting him in position to beat most candidates for a second four-year term.
That is better than November polls, which suggested he could lose against Cristina Fernandez de Kirchner, who ruled from 2007 to 2015 with a fiery brand of populism that cut investment in the oil sector, leading to a decline in production and a surge in imports.
Her party still has a core of 25% of the votes, and another 22% could cast their ballots for her, according to another poll taken by Poliarquia Consultores.
For Macri to win, the key is to pull the country out of recession and lower inflation from nearly 45%, while keeping the peso stable after a 100% devaluation in 2018.
Carlos Melconian, an economist and former president at Banco de la Nacion Argentina, the country’s biggest bank, said there is a chance he could win. While the sour economy won’t play in Macri’s favor, he said that in the past five congressional and presidential elections, “people voted against populism in four of them.”
However, that may not be enough to spur investment to meet the government’s goal of doubling the production to 1 million b/d of crude and 260 million cu m/d of gas in 2023.
Vaca Muerta though has the resources to drive this growth.
“The geology in Vaca Muerta is as good or better than the majority of US plays,” Ryan Carbrey, a senior vice president of shale research at Rystad Energy, a consulting firm, said.
That led Argentina-based Tecpetrol to launch the fastest investment in the play, a $2.3 billion, three-year project to ramp up gas production to 15 million cu m/d in 2019.
“The area of Vaca Muerta is three times that of the Permian,” the largest producing basin in the US, Carlos Ormachea, Tecpetrol’s CEO, said. “The thickness of Vaca Muerta is three times that of Eagle Ford,” another big US play.
“The potential is huge,” he said, adding that the play holds 300 Tcf of gas, or almost 200 years of consumption in Argentina. “Vaca Muerta is clearly an export project for Argentina, and it has the potential to be a key factor to mobilize other resources. It can be a driver for picking up the growth in the country and a way to increase productivity for the whole economy by lowering the cost of energy.”
But to put the play into larger development, Ormachea said drilling costs must come down 20% to be in line with those in the US, which Argentina will have to compete with for investment and in export markets.
“We still are far from being competitive with the US,” he said.
Federico Tomasevich, a president at Puente, a leading investment bank in Argentina, said the country has “a major competitiveness problem,” and this could make it harder to bring down costs.
Argentina has a benchmark interest rate of 60%, the highest in the world, according to Trading Economics. The central bank is keeping the rates so elevated to limit pressure on the exchange rate, helping to stabilize the currency, a key measurement of confidence in the government.
The trouble is that the monetary policy has stalled investment by making it harder and costlier to raise project financing.
“With this interest rate, it is not difficult for companies to compete, it is impossible,” Tomasevich said.
Still, Nicola Melchiotti, a country manager for Italian energy major Enel in Argentina, said there is room for optimism that the government will “fix the economy” so interest rates can come down in 2019. “It is a question of execution capabilities, more than ideology,” he said.
Javier Gonzalez Fraga, the president of Banco de la Nacion, said the key for the Macri administration is to cut inflationary expectations “closer to 20%, not 30%” in 2019. “This will make it possible for interest rates to come down, and will reactivate consumer demand sometime in the second quarter,” putting Macri in better position to win the election, he said.
Dante Sica, the country’s minister of production and labor, said that as the economy recovers, this should revive investment.
“We are seeing that investments in energy are continuing,” he said. “In the next few months, a lot of the investments that were put on hold are going to slowly start up again.”
Indeed, Malaysia’s Petronas agreed in December to push ahead on a $2.3 billion project in Vaca Muerta in partnership state-backed YPF, Argentina’s biggest oil and gas producer. They aim to produce 60,000 b/d of oil equivalent by 2022, a more than six fold increase from this year.
Related Story: Shell Argentina Says Output From Three Vaca Muerta Projects To Reach 70 Mboe/d By 2025
The country’s energy secretary, Javier Iguacel, said another five full-scale development projects are poised to start in 2019, putting production on track to double as his department has forecast.
Miguel Gutierrez, YPF’s chairman, said oil companies think in the long term, and the shale resource is good enough to look beyond the immediate wobbles, adding that his company plans to increase investment in 2019 from $4.2 billion in 2018.
“The prize is very big,” he said.