Argentina’s Subsidy Not Enough To Boost Production

(GlobalData, 29.Jun.2020) — Adrian Lara, Senior Oil & Gas Analyst at GlobalData, commented on announcements from Argentina’s government to implement a new plan for subsidizing oil and gas production in face of the current Covid-19 crisis.

“The impact of COVID-19 in Argentina has resulted in lower oil refining inputs and placed additional pressure on the sustainability of the country’s natural gas supply. The government’s plans for a subsidized price of US$45 per barrel of oil and US$3.5 per mmbtu of gas carries no certainty of effectively incentivizing production in a significant manner, and, in particular for natural gas, the subsidized price seems to be enough just to avoid a steep cut in production but insufficient for sustaining larger developments that require new drilling campaigns and associated infrastructure.

“The winter months of June to August have the highest natural gas consumption of the year and at the same time upstream producers have reduced their production by an unusual 490 mmcfd, with approximately half of this output reduction is from assets in the unconventional Neuquina Basin. This situation is making additional imports of liquefied natural gas (LNG) a likely solution to complement domestic supply. How large in volume and permanent these LNG imports will become will depend on the sustainability of domestic supply levels. With the current subsidy for gas, the government may possibly avoid a steep cut in production, however, it is not likely to stimulate enough for producers to grow production as they have done with previous subsidy plans. The current subsidy for gas is at a good relative level, given the lows of international benchmarks during the last three months, but it is much less than what has been offered in previous plans, which reached values as highs as US$7.5 for new production.

“In any case, the current subsidy plan is still being defined and is expected to be finalized in a couple of months. This means that any new production derived from its implementation will still be several months away. It seems that, in the meantime, Argentina’s natural gas demand will have to rely on increased LNG imports.

“For Argentina, the definitive incentive to grow and sustain natural gas supply still requires less government intervention and gradual steps towards increased price liberalization. Unconventional production remains the main bet in the country for full autonomy in oil and gas production and the current pandemic crisis will likely slow down its development. The wider unfavourable economic outlook of Argentina can risk delaying its full development for possibly another decade”.

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